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NORWAY: Oil Fund Finds Ethical Success

Tarjei Kidd Olsen

OSLO, Jul 31 2008 (IPS) - Norway's 'oil fund' has risen to become the second largest fund in the world despite housing an ethical investments council which has kicked out major companies such as Wal-Mart, Lockheed Martin and Boeing.

The 'oil fund', properly called the Government Pension Fund – Global, and worth an estimated 390 billion dollars, has become the world's second largest sovereign wealth fund, now only trailing the Abu Dhabi Investment Authority after overtaking the Dutch fund for public employees.

The fund invests some of the huge profits from Norway's oil and gas sector in companies worldwide to raise money in anticipation of increased pension costs and a future without oil exports.

Business is booming, perhaps partly explaining why the ethics councils of 20 non-Norwegian funds are said to be copying its ethical guidelines and recommendations, and in the process broadening its impact considerably, according to Norway's finance ministry.

The unprecedented level of investment transparency practised by the oil fund may be another contributor to its success. The fund has been clear that its goals relate to financial sustainability as opposed to any secretive political agendas, and it scored no less than 100 percent for governance, accountability and transparency in a 2007 study by the U.S.-based Peterson Institute for International Economics (Abu Dhabi Investment Authority scored 2 percent).

The fund invests earnings from Norway's oil and gas sector in companies outside of Norway in accordance with guidelines from the finance ministry. Some of these guidelines relate to ethics and are meant to ensure that the fund does not invest in companies that contribute to any of a series of specified abuses that finance minister Kristin Halvorsen has summarised as "serious, systematic or gross violations of ethical norms."

A total of 27 companies have been kicked out of the fund following the creation of the ethics council in 2004. Most of these were excluded for producing weapons that "may violate fundamental humanitarian principles." Among these were Lockheed Martin or EADS for producing components for cluster bombs, and Boeing for producing central components for nuclear weapons.

Wal-Mart got the boot for workers right abuses (including child labour, gender discrimination, and the blocking of unionisation attempts). The oil fund has also pulled out of companies that have engaged in abuses such as the forced displacement of tribal peoples or serious environmental destruction.

However, most of the time the fund engages in less dramatic action which, its proponents argue, may be more effective in the long run. This approach focuses on using the oil fund's position as an investor to influence the ethical practices of offending companies, and is managed by Norway's central bank instead of the finance ministry.

The central bank's Anne Kvam, head of the corporate governance department, has an in-house team of 11 people working to influence the 7,000 stock market-listed companies in the oil fund's investment portfolio. The team works with 'traditional' corporate governance issues, for instance shareholder voting rights, as well as social concerns – currently child labour and the environment.

"With 7,000 companies and a fairly broad set of international principles to take account of, there are quite a lot of different themes and areas that could be focused upon. Obviously we don't have the resources or possibility to do that, so instead we focus on a few specific areas for each strategic period which we can delve into more deeply," Kvam told IPS.

"We take a sector-wise approach to investigating abuses by the companies we invest in, and for child labour in Brazil that means the mining sector, in India it means the cotton industry, and so on."

The effort involves voting at shareholder meetings, discussions and ongoing processes of engagement with the companies, networking with other investors, and government dialogue.

Even though the oil fund usually owns no more than one percent of stocks and bonds in any given company, Kvam feels that her team is being listened to.

"Social issues such as child labour are structural problems connected to poverty and many other themes that we don't expect to solve in six months – it's a long-term effort, and my team only began working with this in 2006. But we do feel that the companies are interested in talking to us, in that we are given the opportunity to engage in dialogue with receptive CEOs and boards," she said.

Kvam's team has already helped convince some companies to sign up to the United Nations Global Compact, a corporate responsibility initiative. "It naturally helps that we are one of the largest funds in the world. They listen to us, and now it remains to be seen how our work will affect policy."

The finance ministry's exclusion of companies and the central bank's investor approach are meant to complement each other. While the exclusion of companies garners attention and roots out the worst of the worst, the less dramatic central bank approach serves to influence a larger number of companies.

"The process that takes place with the finance ministry's council of ethics is very thorough and very transparent. It makes people take notice; something which stock market-listed companies hardly enjoy. But this approach has a limited capacity – they have excluded 27 companies out of the total 7,000 – so it can never become the main instrument as it simply can't investigate everyone," Kvam pointed out.

Finance minister Kristin Halvorsen agrees that it is usually better to influence companies from the inside, rather than by kicking them out.

"If the finance ministry excludes a company it will garner attention, but we lose the ability to influence the company's behaviour, and those that buy the stocks we sell may have a completely different agenda than we do when it comes to ethics," she said in a press statement.

"Because of this it is important that the exclusion of companies should only be on the table in exceptional circumstances, although in certain cases the ministry has to forcefully demonstrate that we cannot contribute to the financing of gravely unethical activities."