On January 20, 1998, the Norwegian Government Pension Fund – then known as the Norwegian Petroleum Fund – purchased its first shares on behalf of the country’s future pensioners. Ten years later, the fund has grown to NOK 2.1 trillion making it the second largest sovereign wealth fund after the United Arab Emirates and ahead of Singapore, Saudi Arabia and Kuwait, with an average 1% stake in all European stocks. But it has gained further international reputation in the market by blacklisting large international companies such as US retailer Wal-Mart for labour violations, while setting a model for transparency among sovereign wealth fund worldwide.
Ethical Investment Strategy
The Government Pension Fund has based its ethical investment strategy on three points: exercising its ownership rights; negative screening of companies that produce weapons; and exclusion of companies that may pose a risk of human rights violations, such as child labour, violations of individuals’ rights in war or conflicts, severe environmental damages, gross corruption, and other serious violations of fundamental ethical norms.
“We think we can have a better economy if we can get those kids to school,” said Yngve Slagstad, CEO of Norges Bank Investment Management (NBIM), the manager of the fund, regarding child labour.
The most visible strategy has been to screen and exclude companies. The exclusion list includes everyone from polluting miners to defence contractors. Twenty of the 29 companies dropped from the investment list were negatively screened out because of weapons production, such as EADS. But the other nine were excluded based on their activities in relation to human rights and environmental standards.
All exclusions are made on the advice of the Council on Ethics, the governmental advisory body that recommends to the ministry whether an investment poses a possible violation of the fund’s ethical guidelines. Rio Tinto, for example, was recently tossed out of the fund's investment universe because of severe environmental damage at its mining operations in Indonesia.
Companies do have the ability to get back into good graces with the fund. In 2006, the Ministry of Finance reversed its decision to exclude US oil company Kerr McGee from the fund’s investment portfolio for its oil activities offshore Western Sahara. Another example was the ministry’s decision in September 2008 to continue to pursue active ownership in Monsanto, rather than blacklist it, because it felt that contributed more significantly to reducing the use of the child labour in the company’s cotton seed production in India than simply excluding it from the list.
||Yngve Slagstad, CEO of Norges Bank Investment Management.
© Nancy Bundt/NBIM
Active Ownership Strategy
The other strategy, active ownership, has been run by Norges Bank Investment Management’s corporate governance team since 2006. The team works on a 5-10 year time perspective to develop market sustainability among the 7,000 companies where it invests. It does so by exercising its shareholder right to vote. In the first half of 2008, it proxy voted 90% of the time and disclosed each and every one on its website.
The team works closest on 75 companies in particular which are based on a sector approach and six focus areas: the right to vote, the right to participate in board elections, the right to sell, the right to information, child labour, and lobbying and the environment. On these companies, it is more active through annual general meeting proposals, legal action and investment decisions. In the US for example it has been in discussions with the Securities and Exchange Commission about the rules governing the election of board members. Other concerns are poison pills among Japanese companies and the shareholders’ right to vote in France.
“We own about 1% of all companies on average in Europe, so we are a minority,” said Anne Kvam, NBIM head of corporate governance. “Our main thing is that shareholders should be treated equally…whether it is a family, a sovereign wealth fund, a state-owned company that, as a big shareholder, abuses its power at the cost of shareholders.”
Transparency & Accountability
This concern for transparency and accountability has been the focus for an international working group of sovereign wealth funds spearheaded by the International Monetary Fund. The group adopted in October 2008, with the backing of Norway, a common set of principles for the organization and management of sovereign wealth funds. Known as the Santiago Principles, this voluntary code guides on issues such as the purpose and asset allocation of the fund, rather than ethical investing issues.
“The worry is that there is a political agenda,’ said Kvam. “There needs to be a clear division of roles and its important to show that there is no mixing. Norway sets a golden standard because of its transparency.”
The work does not end there. The Ministry of Finance is also looking at revising its ethical guidelines based on comments to a white paper proposed in October, the results of which should be made public by April 2009. One of the issues that may be addressed is the possible expansion of negative screening to include tobacco companies and the introduction of positive screening. No matter what it does, it is sure to attract international interest once again.
The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the fund to the Pension Fund – Global in 2006 was part of a broader pension reform, highlighting also the fund’s role in facilitating government savings necessary to meet the rapid rise in public pension fund expenditures in the coming years.
1969: Petroleum discovered in the North Sea
1990: Parliament passed the Government Petroleum Fund law
1996: First net transfer to the Fund (invested like Central Bank currency reserves)
1998: Investment in equities introduced in the benchmark (40% allocation)
2000: Five emerging market countries added to the equity benchmark
2002: Non-government bonds added to the fixed income benchmark
2004: New ethical guidelines
2006: The Government Petroleum Fund renamed the Government Pension Fund –
2007: Strategic equity allocation increased to 60%, small-cap stocks included in benchmark
2008: Plan to invest over time up to 5% in real estate (at the expense of bond allocation), all emerging countries included in equity benchmark
Source: Norwegian Ministry of Finance (www.regjeringen.no)