Wednesday, March 10, 2021

Just Released: Annual Report 2020 of the Council on Ethics for the Norwegian Government Pension Fund Global



I am delighted to pass along the  2020 Annual Report of the Council on Ethics for the Norwegian Government Pension Fund Global.The Annual Report includes brief articles on specific topics from the Council’s work. The report also includes a summary of the Council’s recommendations to Norges Bank that have been published in 2020. The Council on Ethics Annual Report 2020: Council on Ethics Annual Report 2020. Etikkrådets årsmelding for 2020: Etikkrådet årsmelding 2020.

 Of particular interest this year is the somewhat tentative engagement by the Ethics Council in the area of surveillance and human rights.  The section on Surveillance (Report pp. 18-19 follow).  Also valuable is the Ethics Council's forward movement on climate change (2. 23).  In both cases the Ethics OCuncil has been cautious and their approach follows a public administrative organ model. The standard to be adopted is narrow: "For the Council, the question will often be what the company knew about the way its products or services were being used."With respect to climate related issues, "The Council concentrates its efforts on extremely large individual emissions or business sectors and processes which, by their nature, generate high emission levels. "

Lastly, the Report's discussion of corruption is worth reading.  It is also reproduced below. One of the most interesting aspects of that discussion is the way in which it uses corruption as a means of focusing on capacity building for states deemed to have weak or fragile governance (p. 26). Here the combination of private sector activity to build capacity in public sector institutions is interesting.



 Surveillance technology 

In 2019, the Council began assessing whether com-panies in the GPFGs portfolio may contribute to serious human rights abuses through the development and sale of surveillance equipment. In January 2020, the Council issued its first recommendation to exclude a company on these grounds. The recommendation relates to the company Hikvision, which has attracted considerable international attention for its sale of surveillance equipment to the authorities in Xinjiang, China, whose inhabitants have been subjected to mass surveillance. The information thus obtained is used to select individuals for detention in internment camps.

In September 2020, the Council received a letter from Norges Bank stating that this case would not be considered on its merits by its Executive Board because the GPFG was no longer invested in the company. In line with its previous practice, the Council therefore withdrew its recommendation and published it on its website. Other companies that the Council had begun to examine with regard to this issue left the portfolio before the Council had concluded its assessment. This applied particularly to Chinese companies. The Council’s investigations are therefore now concentrating on companies domiciled in other parts of the world. One element that it is nevertheless important to take away from the Hikvision case is that companies’ products or services may be included as part of states’ mass surveillance systems. For the Council, the question will often be what the company knew about the way its products or services were being used. In the Council’s view, what the company knew when the contract was signed is not, by itself, decisive. The company must also respond to new information that becomes known after that point in time.

In 2020, The Council has commissioned two reports to learn how companies in the GPFGs portfolio can contribute to human rights abuses enabled by surveil-lance technology. The first report describes how various surveillance systems work, and paints a broad picture of the different ways companies can be involved in such human rights abuses. The report raises challenging human rights issues about how far states can go in surveilling their own populations. The right to private life is not absolute – but at what point does restrictions on this right cross the line? There is no hard and fast rule, and each state have a margin of appreciation as regards what measures are considered necessary. The Council will therefore largely focus on cases where the information obtained by means of companies’ systems has been used to commit norm violations that can never be justified, such as arbitrary detention, torture and even murder. This is also in line with the Ethics Commission’s assessment in NOU 2020: 7 “Values and responsibility” (p. 181). At the same time, the Council does not rule out the possibility of circumstances in which the information gathering process itself, and not the way the information is used, is so intrusive as to constitute grounds for exclusion from investment by the GPFG. This may apply, for example, where deeply sensitive information is obtained on a large scale, without reasonable grounds, consent or necessary safety mechanisms.

On the basis of the first report, the Council progressed to identifying companies in the funds portfolio engaged in the surveillance sector, with the focus on cases where the information collected leads to serious abuses. Because of the nature of these products and services, there is a great deal of secrecy surrounding the companies and who they sell to. It is therefore difficult to obtain specific information about the companies’ complicity. Information also often emerge many years after an event is a challenge given the ethical guidelines’ forward-looking framing. The Council elected to restrict the focus of a follow-up report to allegations that have been made in the past five years.

The second report was delivered at the end of August 2020. It contains a list of ten companies which have been accused of contributing to norm violations through the sale of surveillance technology to states that have used it to subject its population to serious human rights violations, including torture and arbitrary detention. The victims are primarily ethnic or religious minorities, political opponents and journalists. The Council will continue to work on this issue in 2021.


The Council’s work under the climate criterion

After a lengthy clarification process between the Council on Ethics, Norges Bank and the Norwegian Ministry of Finance, four companies were excluded in May 2020 on the grounds of unacceptable green-house gas emissions. The companies extract oil from oil sands, which also account for the bulk of their oil reserves. The extraction of oil from oil sands is extremely energy-intensive and therefore leads to materially higher greenhouse gas emissions per unit produced than oil production based on other resources. Absolute emissions and emission intensity levels have been the most important elements in the Council’s recommendations relating to the climate, along with forward-looking assessments. Since the Ministry of Finance’s clarification, the Council now also includes authorities’ climate-related regulatory framework in its assessments.

The Council concentrates its efforts on extremely large individual emissions or business sectors and processes which, by their nature, generate high emission levels. This applies, for example, to the production of cement and steel, which the Council plans to work on in 2021. 

While the Council’s role is to advise on whether to exclude companies from the GPFG or place them under observation, Norges Bank undertakes a number of activities to manage the risk that greenhouse gases represent. Of the Bank’s total risk-based divestment of shares in 314 companies that had taken place at the close of 2020, 170 were divested on the grounds of climate risk. Climate change was a topic discussed at over 500 of the almost 2,900 meetings with companies that the Bank held during the year. Cement is one of the business sectors that the Bank is also working on.

With the guidelines that have been drawn up for the climate criterion, it is natural that the work of Norges Bank and the Council should overlap. Both institutions will prioritise sectors that generate substantial emissions, and the main focus will be on companies that perform below the industry average. In this area, therefore, there is a particular need for close coordination to establish an effective division of labour.

        Corruption linked to state-controlled oil companies

Since the Council started systematically monitoring the GPFG’s portfolio with respect to corruption, the oil and gas sector has produced the second highest number of recorded cases. The sector with the most recorded cases – Industrial Goods & Services – is a very heterogenous “supersector”, which also includes companies that supply the oil and gas industry. This picture accords with the findings of international surveys, where oil and gas stands out among the sectors with the world’s highest corruption risk.

The high level of corruption risk must be seen in light of several factors. The exploitation of natural resources is traditionally associated with extraordinary returns (economic rent), which in and of itself may provide strong incentives for corrupt behaviour. Furthermore, oil and gas production projects are often extremely complex, consisting of many different components and actors, which can make it very challenging for an outsider to gain an overview of what is going on. The projects are also often large and long-lasting. It can take several years before the companies concerned receive a return on their invested capital. This can make it more difficult to resist any demands for bribes that may be made during the course of the project.

However, the main challenge relating to corruption risk in the oil and gas industry is, perhaps, that much of the world’s oil and gas resources are located in countries with weak governance, an absence of democracy and weak institutions. In several of these countries, a wealth of natural resources has proved not to make a positive contribution, but has instead reinforced these negative societal features. This phenomenon is often referred to as the “resource curse”. The authorities in these countries have increasingly secured for themselves direct control over the extraction of oil and gas resources through the establishment of state-controlled oil companies, also known as National Oil Companies (NOCs), in which the state owns more than 50 per cent of the shares. Where NOCs lack financial resources, techno logy or competence, they often form joint ventures with major international oil com-panies (IOCs). According to the Natural Resource Governance Institute’s NOC database, there are a total of 71 NOCs in 61 countries worldwide. NOCs account for around 55 per cent of the world’s oil production and control approx. 90 per cent of global oil and gas reserves.6 Almost all of the NOCs are in countries outside the OECD, the vast majority of them in countries with a high or extremely high corruption risk, according to indexes produced by Transparency International or the World Bank.

The corruption risk associated with NOCs is primarily a matter of passive corruption. In other words, the people in authority, who control the award of licences, procurement contracts, etc, demand or accept bribes from companies in return for choosing them as the operator, supplier, building contractor, and the like. In addition, corruption may include different forms of embezzlement and financial misconduct, where a portion of the NOC’s revenues are syphoned off before they end up in the nation’s coffers. These bribes or misappropriations may be channelled into private pockets, but may also be misused by governing political parties in connection with election campaigns and to buy support.

Some of the NOCs in the GPFG’s portfolio have already been investigated for corruption (Petrobras and PetroChina, for example). However, the Council has not previously carried out a collective review of such GPFG companies. A review of this kind got underway in the autumn of 2020 and will continue in 2021

No comments: