The Ethical Guidelines for the Norwegian Government Pension Fund


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Presentation by Eli Lund at TBLI CONFERENCE EUROPE 2008.

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The Ethical Guidelines for the Norwegian Government Pension Fund

  1. 1. The Ethical Guidelines for the Norwegian Government Pension Fund By Eli Lund, Head of secretariat, Council on Ethics TBLI 2008
  2. 2. The Norwegian Government Pension Fund is not really a pension fund, but a petroleum fund
  3. 3. The petroleum sector in relation to the Norwegian economy Source: Statistics Norway, Ministry of Finance 25 % 38 % 51 % 51 % The petroleum sector’s share of GDP The petroleum sector’s share of total exports
  4. 4. - Total petroleum production in Norway, mill. Sm 3 o.e. Source: Norwegian Petroleum Directorate Oil and gas extraction in Norway
  5. 5. Norway’s SWF is large and still growing fast - The Fund’s market value 1996–2011. Billion USD, year end. Source: Ministry of Finance, NB09
  6. 6. The Fund mechanism – integrated with fiscal policy Return on fund investments Fund Transfer to finance non-oil budget deficit Revenues Expenditures State Budget Fiscal policy guideline (over time spend real return of the fund, estimated at 4%) Petroleum revenues
  7. 7. Global Governance Structure Ministry of Finance <ul><li>Regulations </li></ul><ul><li>Performance reports </li></ul>Central Bank (NBIM) Norwegian Parliament <ul><li>Pension Fund Act </li></ul><ul><li>Performance reports and strategic changes reported in White Papers and National Accounts </li></ul>Legislator Principal Manager <ul><li>Management agreement </li></ul>Office of the Auditor General Norges Bank Audit Advisors <ul><li>Advisory / consultancy agreement </li></ul>
  8. 8. Asset management: Clear lines of responsibilities <ul><li>Ministry of Finance – “Owner” </li></ul><ul><ul><li>separate asset management department with overall responsibility for managing the Fund </li></ul></ul><ul><ul><li>strategic asset allocation (benchmark + risk limits) </li></ul></ul><ul><ul><li>monitoring and evaluating operational management </li></ul></ul><ul><ul><li>ethical guidelines </li></ul></ul><ul><ul><li>reports to Parliament </li></ul></ul><ul><ul><li>international advisor on resource funds </li></ul></ul><ul><li>Central Bank – “Operational manager” </li></ul><ul><ul><li>separate entity within the central bank (NBIM) charged with the operational management of the Fund </li></ul></ul><ul><ul><li>implement investment strategy (benchmark) </li></ul></ul><ul><ul><li>active management to achieve excess return </li></ul></ul><ul><ul><li>risk control and reporting </li></ul></ul><ul><ul><li>exercise the Fund’s ownership rights </li></ul></ul><ul><ul><li>provide professional advice on investment strategy </li></ul></ul>
  9. 9. <ul><li>Equities 60 % </li></ul><ul><li>Fixed Income 35 % </li></ul><ul><li>America and Africa </li></ul><ul><li>35 % </li></ul><ul><li>Asia and Oceania </li></ul><ul><li>15 % </li></ul><ul><li>America and Africa 35 % </li></ul><ul><li>Europe </li></ul><ul><li>60 % </li></ul><ul><li>Asia and Oceania 5 % </li></ul>Equity index: FTSE All-Cap Index Approx. 7 000 equities Fixed income index: Lehman Brothers Global Aggregate/Global Real Government / Agency / Corporate / Securitized Approx. 10 000 bonds Strategic benchmark <ul><li>Europe </li></ul><ul><li>50 % </li></ul><ul><li>Real estate 5 % </li></ul>
  10. 10. Ethical guidelines and corporate governance <ul><li>Two main ethical obligations: </li></ul><ul><ul><li>The obligation to ensure sound financial returns so that future generations will benefit from the petroleum wealth. </li></ul></ul><ul><ul><li>The obligation to respect fundamental rights for those who are affected by the companies in which the Fund invests. </li></ul></ul><ul><ul><ul><li>exercise ownership rights – corporate governance </li></ul></ul></ul><ul><ul><ul><li>avoid investments in companies whose practices constitute an unacceptable risk that the Fund is or will be complicit in grossly unethical activities </li></ul></ul></ul>
  11. 11. Application of the ethical guidelines Norges Bank Council on Ethics Annual report on exercise of ownership rights Assessment of ownership rights as tool in individual cases Fundamental principles for exercise of ownership rights Decisions on exclusion of specific companies Advice on exclusion of companies from the Fund’s investment universe Criteria for negative screening and exclusion of specific companies The Ministry of Finance
  12. 13. Exclusion of companies based on Negative screening and Ad-hoc exclusion <ul><li>Negative screening of companies that </li></ul><ul><ul><li>Produce weapons that through their normal use may violate fundamental humanitarian principles (e.g. cluster munitions and nuclear arms) </li></ul></ul><ul><ul><li>Sell weapons or military materiel to certain states. (At present only Burma) </li></ul></ul><ul><li>Ad-hoc exclusion (production methods and conduct) </li></ul><ul><ul><li>serious violations of fundamental ethical norms </li></ul></ul><ul><ul><li>(human rights incl. child labour, corruption, severe environmental damage, other particularly serious violations of fundamental ethical norms) </li></ul></ul><ul><li>The Ministry of Finance has excluded 29 companies </li></ul><ul><li>as of October 2008 </li></ul>
  13. 14. Ad-hoc exclusion <ul><li>Unacceptable risk of being complicit in: </li></ul><ul><ul><li>Serious or systematic human rights violations </li></ul></ul><ul><ul><li>Grave breeches of individual rights in situations of war or conflict </li></ul></ul><ul><ul><li>Severe environmental degradation </li></ul></ul><ul><ul><li>Gross corruption </li></ul></ul><ul><ul><li>Other particularly serious violations of fundamental ethical norms </li></ul></ul>
  14. 15. The procedure for exclusion: <ul><li>The Council decides to take a case up for consideration </li></ul><ul><li>The secretariat collects and checks information and documentation </li></ul><ul><li>The secretariat/council drafts a recommendation </li></ul><ul><li>NBIM sends the draft recommendation to the company for comments or clarifications </li></ul><ul><li>The Council issues a recommendation to the Ministry of Finance </li></ul><ul><li>The Ministry of Finance makes a decision </li></ul><ul><li>NBIM sells the holdings of the company </li></ul><ul><li>The Ministry of Finance publishes the decision and the recommendation </li></ul><ul><li>This process normally takes close to a year </li></ul>
  15. 16. Information gathering/documentation <ul><li>Two companies are screening the fund for weapons in violation of the criteria. Supplemented by searches by the secretariat. </li></ul><ul><li>Two companies are performing daily news searches of various web-sites in order to identify companies with activities in violations of the exclusionary criteria. </li></ul><ul><li>Information from e.g. NGOs, scientist and consultants. </li></ul><ul><li>The secretariats own research. </li></ul>
  16. 17. Recommendations under the Human Rights criterion: <ul><li>The Total recommendation </li></ul><ul><li>(14 Nov. 2005) (not excluded) </li></ul><ul><li>The Wal-Mart recommendation </li></ul><ul><li>(15 Nov. 2005) </li></ul><ul><li>The Vedanta recommendation </li></ul><ul><li>(15 May 2007) </li></ul><ul><li>The Monsanto Recommendations (20 Nov. 2006 </li></ul><ul><li>and 10 June 2008) (not excluded) </li></ul>
  17. 18. Exercise of ownership rights <ul><li>The overall objective of the ownership effort is to safeguard the (long-term) financial interests of the Pension Fund </li></ul><ul><li>The principles governing the exercise of ownership rights: </li></ul><ul><ul><li>the UN Global Compact </li></ul></ul><ul><ul><li>the OECD Principles of Corporate Governance and the OECD principles for Multinational Enterprises </li></ul></ul><ul><li>Priority areas </li></ul><ul><ul><li>corporate governance </li></ul></ul><ul><ul><li>children’s rights </li></ul></ul><ul><ul><li>environment </li></ul></ul><ul><li>Tools for exercising ownership rights </li></ul><ul><ul><li>voting </li></ul></ul><ul><ul><li>contact with portfolio companies </li></ul></ul><ul><ul><li>contact with regulatory authorities </li></ul></ul><ul><ul><li>contact and collaboration with other investors </li></ul></ul>
  18. 19. The production of hybrid cotton seed in India <ul><li>Extensive use of child labour </li></ul><ul><li>Migrant children </li></ul><ul><li>Extensive use of pesticides </li></ul><ul><li>Similar situation in the production of hybrid vegetable seed </li></ul>
  19. 20. Monsanto Co <ul><li>The Council recommended the exclusion of Monsanto in November 2006 </li></ul><ul><li>NBIM developed a strategy to target this issue in its corporate governance activities </li></ul><ul><li>The Ministry of Finance decided to await development for one year </li></ul><ul><li>The Council on Ethics did not recommend the exclusion of the company in a new assessment in June 2008 </li></ul><ul><li>Problems still considerable, but company action plan seems to have an effect where implemented </li></ul>
  20. 21. The environmental criterion: <ul><ul><li>The Council shall issue recommendations on the exclusion of one or more companies from the investment universe because of acts or omissions that constitute an unacceptable risk of contributing to : </li></ul></ul><ul><ul><li>… </li></ul></ul><ul><ul><li>Severe environmental damage </li></ul></ul><ul><ul><li>… </li></ul></ul><ul><ul><li>… </li></ul></ul>
  21. 22. The Council’s interpretation of “severe environmental damage” <ul><li>The damage </li></ul><ul><li>is significant </li></ul><ul><li>causes irreversible or long-term effects </li></ul><ul><li>has considerable negative consequences for human life and health </li></ul><ul><li>is the result of violations of national law or international norms </li></ul><ul><li>The company </li></ul><ul><li>has neglected to act in order to prevent damage </li></ul><ul><li>has not implemented adequate measures to rectify the damage </li></ul><ul><li>It is probable that the company’s unacceptable practice will continue </li></ul>
  22. 23. Recommendations under the criterion of Environmental Damages: <ul><li>Freeport McMoRan Copper & Gold Inc. (15 May 2006) </li></ul><ul><li>DRD Gold Ltd. (24 Aug. 2006) </li></ul><ul><li>Vedanta Resources Ltd., (15 May 2007) including its subsidiaries: </li></ul><ul><li>Sterlite Industries Ltd. </li></ul><ul><li>Madras Aluminium Company Ltd. </li></ul><ul><li>Rio Tinto (15 February 2008) </li></ul>
  23. 24. Excluded weapons’ producers <ul><li>Cluster Weapons </li></ul><ul><li>Alliant Techsystems Inc. </li></ul><ul><li>General Dynamics Corp. </li></ul><ul><li>Hanwha Corp. </li></ul><ul><li>L3 Communications Holdings Inc. </li></ul><ul><li>Lockheed Martin Corp. </li></ul><ul><li>Poongsan Corp. </li></ul><ul><li>Raytheon Co. </li></ul><ul><li>Thales SA. </li></ul><ul><li>Nuclear Weapons </li></ul><ul><li>BAE Systems Plc., </li></ul><ul><li>Boeing Co. </li></ul><ul><li>EADS Co., including its subsidiary </li></ul><ul><li>EADS Finance B.V. </li></ul><ul><li>Finmeccanica Sp. A. </li></ul><ul><li>GenCorp Inc. </li></ul><ul><li>Honeywell International Corp. </li></ul><ul><li>Northrop Grumman Corp. </li></ul><ul><li>Safran SA. </li></ul><ul><li>Serco Group Plc. </li></ul><ul><li>United Technologies Corp. </li></ul><ul><li>Anti Personell Landmines </li></ul><ul><li>Singapore Technologies Engineering </li></ul>
  24. 25. Evaluation of the Ethical Guidelines <ul><li>A thorough evaluation process </li></ul><ul><li>Builds on the existing framework </li></ul><ul><li>White Paper to the Parliament in March </li></ul>
  25. 26. <ul><li>The Ethical Guidelines and all recommendations in full text (English) are publicly available at: </li></ul><ul><li> </li></ul><ul><li>Questions/Comments: </li></ul><ul><li>[email_address] </li></ul>