The Ethical Work of Norway’s Sovereign Wealth Fund

Last week wasn’t a great one for companies in the extractive industries. In South Africa, a wage strike by the Association of Mineworkers and Construction Union (AMCU) against the world's top three platinum producers -- Amplats, Lonmin and Impala Platinum -- entered its eighth week, with no end in sight.

In Norway, the Ethics Council of the state’s Sovereign Wealth Fund (SWF or the Fund) released its 2013 Annual Report and announced that it was examining the operations of French oil giant Total, in the disputed Western Sahara, to determine whether its activities there are unethical and warrant exclusion of Total by the Fund. Days later, Norway’s Prime Minister proclaimed that the Fund would be investing a greater proportion of its wealth in renewable energy; the Fund is also considering exiting oil, gas and coal investments altogether, for environmental reasons (the arguable hypocrisy of which has been noted).

Norway operates what is by far the world’s largest sovereign wealth fund, with approximately $840 billion in assets under management, so its investment decisions are powerful. For example, the World Wildlife Fund, which has encouraged Norway’s SWF to invest up to 5 percent of its assets in renewable energy, commented that such a move could have a “global impact and redefine how we use money consistent with commitments to limit climate change.”

The Fund’s Ethics Council, an independent group appointed by the Ministry of Finance, makes periodic recommendations to the Ministry on companies that should be excluded from the Fund or placed under “observation,” and the Ministry has established ethical guidelines against which the council measures companies’ conduct. A current list of excluded companies can be found here, though the council may from time to time recommend the removal of a company from the exclusion list if its conduct becomes consistent with the Fund’s guidelines.

The council typically recommends a company for exclusion due to concerns that the company is associated with gross breaches of human rights, gross corruption or severe environmental damage. All of the council’s recommendations are published in its annual reports, and the final decision whether or not to exclude a company from the Fund resides with the Ministry of Finance.

This year, the council contacted 43 companies, met with 18 and made 13 recommendations for exclusion, 12 of which resulted in decisions by the Ministry to exclude companies from the Fund. (Report, 8-9) The majority of the council’s 2013 recommendations concerned severe environmental damage; only one concerned human rights violations (the Ministry accepted the council’s recommendation to exclude Zuari Agro Chemicals Ltd. for using child labor in the production of hybrid seed in India).

The 2013 Report itself is worth a read, in part for its observations regarding the evolving ethical behavior of multinationals. For example, I found insightful the the council’s statement that, “Companies’ actions in resource-rich countries with weak governance systems can have a profound impact on the living conditions of the local population.” One example of this is the council’s work, over the last two years, regarding the operation of oil companies in Equatorial Guinea, the third-largest oil and gas producer in sub-Saharan Africa.

Although the World Bank ranks Equatorial Guinea’s GDP as “High: non OECD,” the average life expectancy there is 51 years, and child mortality is on par with Afghanistan. In other words, it seems the the country’s “substantial [oil] revenues are not being used to improve the living conditions of the population,” which may constitute a gross violation of human rights under the International Covenant on Economic, Social and Cultural Rights. Though the council does not suggest that companies are to blame for the culture of corruption in Equatorial Guinea, it does recommend that companies “make systematic, deliberate efforts to prevent their activities from having negative consequences” and put in place “robust systems ... for preventing corruption, publish payments made to authorities, persons and companies closely connected to the governing elite,” and comply with the U.N. Guiding Principles on Business and Human Rights. (Report, 24) Here, here.

On a positive note, the council concludes that the way in which companies view and express their responsibility for human rights is changing. For example, the council notes the existence of “many initiatives at both the national and international level that aim to improve working conditions.” The council also believes that companies are responding more quickly to allegations of human rights abuse and implementing remedial measures sooner than ever before. (Report, 30) If true, certainly a welcome development and reflective of the impact of the Guiding Principles.

In addition, companies would be wise to take note of the council’s focuses for 2014, which include:

• Increased scrutiny in connection with “environmentally damaging fishing and the conversion of forest into plantations”;


• Extractive companies operating in Western Sahara (as reflected by its focus on Total);


• Labor rights, particularly in the textiles industry; and


• Companies in the oil and gas sector operating in countries presenting a “particularly high risk of corruption.”

Interestingly, the 2013 Report also had an added political context, in that it served as something of a response to the Ministry of Finance Strategy Council’s earlier report, which sought to “reduce the political effectiveness of the [Fund] as an actor, through private markets, in the development of corporate governance and social responsibility standards.” In 2013, the Strategy Council advised the Ministry to reassign the Ethics Council’s work to Norges Bank, and recommended that the Ministry no longer publish the reasons for excluding particular companies.

It seems beyond dispute that the Strategy Council’s recommendations against publication would severely undercut the power of the Ethics Council’s work. As the council puts it:

The “public reasonings [of the Ethics Council] have been one of the most important components of the present system. Publication of recommendations has given the general public insight into the work being done, and the opportunity to evaluate whether the guidelines safeguard ethical values.” (Report, 12-13)

In other words, the council’s reports serve a shaming function as well as a financial one. Furthermore, the publication of the Ethics Council’s recommendations has helped focus international attention on corporate social responsibility and business and human rights. A number of other investors follow the council’s recommendations, which compounds the impact -- and heightens the deterrent effect of -- the Ministry’s decisions. Hiding the reasoning from view would lessen the shaming effect and give some investors cover for keeping Fund-excluded companies in their portfolios. Let’s hope the Ethics Council wins this debate and can continue its important work in socially responsible investing.

Image credit: Flickr/i_am_neuron