Wednesday, June 15, 2022

The Norwegian Pension Fund Global: Observation for risk of contributing to human rights abuses; Revocation of Exclusion for Severe Environmental Damage as a Reward for Divestment


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Despite an Ethics Council recommendation for exclusion due to an unacceptable risk that the company is contributing to human rights abuses, Norges Bank announced its decision to place the company Supermax Corp Bhd (a Malaysian manufacturer of rubber gloves with several factories in Malaysia) under observation. The Council on Ethics issued its recommendation on exclusion on 24 February 2022. Norge Bank announced its decision to place the company under observation on 15 June 2022. Please find the Council’s recommendation here:

Also, Norges Bank has announced its decision to revoke the exclusion of the company IJM Corp Bhd (a company involved in the conversion of tropical forest into oil palm plantations; the company seemed not to have implemented measures to reduce the loss of biodiversity). The company had been excluded under the criterion for severe environmental damage which was thereafter revoked when IJM divested its stake in its plantations business. Please find the Council’s recommendation here:

Superrmax Corp is particularly interesting  for what it suggests is the refinement of standards of risk in the context of human rights risk of corporate activity. In that case, having been accused of human rights abuses respecting their workers, the company announced a series of reforms.  But there was no satisfactory examination of implementation.  It is in that gap between announcement and implemention that risk resides; risk sufficient enough to warrant an assessment of exclusion. And that even that proves murky--at least with respect to the specific standards to be applied. The decision summary explains:

The Council takes a positive view of the measures the company has announced. However, the Council has not been able to assess the implementation of these measures, and it remains unclear whether the measures will reduce the risk of human rights abuse in the longer term. On this basis, the Council has concluded that the risk of future violations is unacceptably high.

As is becoming more common in these decisions, the Ethics Council--and the Pension Fund--are becoming more passive in the sense of relying on better funded and more aggressive regulators elsewhere.  In the case of Supermax, the Americans, Canadians, and British (see Opinion §3). That is not a bad thing, but it does raise the question of autonomy and control.  This becomes a more acute issue where reliance becomes dependent on press investigations (Ibid.). 

 For all that, the determination of Norges Bank to place the company under observation suggests at least some disquiet with the Ethics Council's approach.  That disquiet may not touch on the findings--in this case mostly derivative, bur rather on its application of the Ethics Guidelines, and more specifically on its standards for determining whether a company should be placed under observation or excluded. One of the more interesting developments in the operation of the Ethics Council has been the challenge it faces in developing robust standards for determining the factors it considers in making a determination of exclusion or observation. The Guidelines for observation and exclusion from the Government Pension Fund Global provide little help. It would be helpful if the exe4rcise of discretion in these cases by both Ethics Council and Norges Bank might be better rationalized through a more public and precise set of standards for exercising judgment. 

In the IJM case, the revocation was a product of divestment.  No amount of reform might have been sufficient to overcome the presumptions of plantation agriculture as inherently environmentally damaging. And the criteria for preserving bio-diversity sufficiently enough to avoid an exclusion analysis remains undefined. Divestment appears to be the cure.  First, it appears that the continued invocati6on of qualitative assessment of quantitative issues produces a large space for abuse of discretion and little space for guidance. More importantly, perhaps, the response of the company suggests that the easiest way to avoid entanglement with the Pension Fund is to divest.  The result is not greater sensitivity to bio-diversity or better managed palm oil plantations. It produces instead the opposite effect--potentially. But now that potential remain opaque: by shifting plantation agriculture from the sphere of public scrutiny to that of private  operations less susceptible to public or investor pressure.

Both decisions are worth reading. In the end, though, each suggests, in its own way, good intentions without a guiding center. Each is the product of a system that is reduced to a faith in the episodic expression of good intentions but within a system that provides substantially little guidance to those who are blessed with the result--or to others seeking some measure of certainty and predictability. More troublesome is the unguided practice of decisions that veer in unpredictable ways veer between quantitative and qualitative measures, neither of them precisely defined. The result is the development of a decision context in which the accountability of the procedures of exclusion (and observation) themselves become fair game for analysis. It also raises the question of values and of autonomy.  It may be time to seriously consider a comprehensive revisiting the structure of the Ethics Council and decision making: starting with its foundational organization to the modalities of its decision analysis model. Periodic "guiding case" or exemplar actions like these no longer appear to have the impact they might have had a decade or more ago. Jurisprudence by example worked well enough under conditions of modernity--in an age of data driven accountability and compliance based measures, they appear not just inefficient, but increasingly irrelevant. The failure to embrace quantitative measures and platform or algorithmic methods severely impedes the work of the Ethics Council. It may be time to bring the structures of the good intentions of the Ethics Guidelines administration closer to the 21st century.

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