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: Law at the End of the Day

Norway's SWF Adds Another Tobacco Producer to its Excluded Universe and the Rehabilitation of a Former Cluster Bomb Component Maker

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The Norwegian Sovereign Wealth Fund has excluded companies form its investment universe if they engage in the production of certain products, with the connection to production sufficient to trigger exclusion defined distinctly with respect to each product. The Norwegian Ministry of Finance recently announced that it has added a company to its excluded universe because one of its subsidiaries was involved in the production of tobacco. It also revoked the exclusion of another now determined no longer to be involved in the production of cluster bomb components.

The most interesting element of this story is not the action taken--tobacco and cluster bombs have been exclude for some time and the determinations were made in conformity with prior decisions and the provisions of the Ethics Guidelines. Rather, in the case of the tobacco exclusion, Norway is now moving more decisively against Chinese companies. This may eventually set up an interesting public-private political confrontation. That conflict will pit Chinese interests in sovereign investing abroad against Norway's objectives in responsible investment. Both countries seek to project their power (and public policy) abroad through private markets, and both use private market mechanisms for the purpose to develop international norms in ways that further domestic political goals. The time may be coming when Chinese interests abroad, and their relationship to law, may confront an opposing Norwegian public policy effectuated through its responsible investment rules.

From Shanghai Industrial Holding, Ltd., Corporate Governance. ??????????????????????????????????????????????????????????????????????????????????????????????????????????????????? (rough translation: "Good corporate governance is crucial to the development of enterprises, the holding is committed to maintaining high quality corporate governance, implemented through internal monitoring mechanisms that enhance the transparency of operations and accountability in order to ensure effective monitoring and operational risk and financial risk, compliance business operation, so that shareholders interests are protected. At present the company's board composition and corporate governance structure is as follows:")

Here is the press release (Ministry of Finance, News Story: Tobacco company excluded from the Government Pension Fund Global ? and a defense company re-included, March 15, 2011):

The Ministry of Finance has excluded the Chinese company Shanghai Industrial Holdings Ltd. from the investment portfolio of the Government Pension Fund Global on account of its tobacco production. The Ministry has also decided to revoke its decision to exclude a US company that no longer produces components for cluster bombs.
The decision was based on the recommendations of the Fund?s Council on Ethics.
In October 2009 the Council on Ethics submitted a recommendation to exclude 17 companies that produce tobacco from the Fund?s investment portfolio. All the companies were classified as tobacco producers by the Fund?s index provider. The recommendation stated that there might be companies in the Fund?s investment portfolio that are involved in several different industries including tobacco production, but that such companies would still have to be excluded even when tobacco production represented only a small proportion of their total activities. In a review of the Fund?s portfolio with the aim of identifying such companies, the Council found that Shanghai Industrial Holdings Ltd. might have been involved in tobacco production, and in a letter in September 2010, Shanghai Industrial Holdings Ltd. informed the Council that its wholly owned daughter company Nanyang Brothers Tobacco Company Ltd. did in fact produce tobacco. The Council has therefore recommended that Shanghai Industrial Holdings Ltd. should be excluded from the Fund?s investment portfolio.
No longer a producer of cluster munitions
The decision to exclude the US company L-3 Communications Holdings from the Fund?s portfolio has been revoked because it no longer produces components for cluster munitions.
On 16 June 2005, the Council on Ethics advised the Ministry of Finance to exclude companies that produce cluster munitions from the portfolio of the Government Pension Fund Global, and one of the companies to be excluded on these grounds was the US company L-3 Communications Holdings Inc. The Council regularly reviews the activities of excluded companies to establish whether the grounds for exclusion still apply. In this case it received information indicating that the company no longer produces components for cluster munitions, and the company has confirmed this. The Council therefore considers that the grounds for excluding L-3 Communications Holdings Inc. no longer apply.
Read more:
The recommendation from the Council on Ethics - Shanghai Industrial Holdings Ltd.
The recommendation from the Council on Ethics - L-3 Communications Holdings
The Council on Ethics of the Government Pension Fund Global
A list of all the companies that have been excluded from the Fund?s investment universe

Full post as published by Law at the End of the Day on March 15, 2011 (boomark / email).