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: Law at the End of the Day

Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model Part III

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This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. The Ruminations Series in 2009 produced a series of aphoristic (?????????) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time. For 2010, this site introduced a new series--Business and Human Rights. The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum.

For 2011, this site introduces a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model. The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund. The thesis of this series is this: The Norwegian Sovereign Wealth Fund (NSWF) )investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF. The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment. That jurisprudence may contribute significantly both to the development of transnational social norm standards and affect the way domestic corporate law is understood. This is Part II of the series.

Storting Building

Part II: Framing a Operational Structure for Responsible Investing: The NSWF Ethical Guidelines.

We have seen how the NSWF's goal of responsible investing is central to the operation of the Fund. We understand that the centrality of the responsible investment goal is memorialized in the management regulation for the NSWF, enacted by the Ministry of Finance pursuant to the regulatory vested in the Ministry of Finance by the Acts constituting the NSWF. Responsible investing is understood as a cluster of concepts. First, the ultimate goal of Fund investing is to achieve the highest possible return. Second, a good return is grounded in long term time horizon and is dependent on the contribution of the investment, in part, to sustainable development in economic, environmental and social terms, as well as functioning, legitimate and effective markets. To achieve the highest possible good return the Norges Bank is instructed to develop guidelines for integrating good corporate governance and environmental and social issues in investment activities. These guidelines are to be based not on national, but rather on internationally recognized principles for responsible investment.

But responsible investing is not limited to the use of international standards as a touchstone for national governance of the Fund's activities. Rather, responsible investing extends to the use of the Fund's power as an investor under principles of active ownership. While the Norges Bank, acting through the Fund investment, operates in something like a regulatory capacity--operationalizing a regulatory standard under which the lawfulness of Fund investment is measured--the Norges Bank is also obligated to exercise its ownership rights, that is its rights as a shareholder, to the purposes specified by statute and regulation. Specifically, the Fund is obligated to make decisions about the nature of its participation, and the exercise of its shareholder tights in a corporation, on the basis of a set of international soft law frameworks. These include the UN Global Compact, the OECD Principles of Corporate Governance and the OECD Guidelines for Multinational Corporations. The effect is profound, the regulations compel the Fund, as a public shareholder, to govern its conduct as a shareholder (and thus to determine the character of its interests int he corporation) on the basis of a set of international soft law. Soft law is thus hardened, but indirectly by compelling a public entity to incorporate these standards in its private self interested conduct. Thus, responsible investment does not merely compel the incorporation of international standards in national norms for investment. rather it also requires the Norges Bank to actively contribute to the development of the standards under which it is to be governed. As such, investing is both understood as participation in markets and also the development of the rules under which such private market participation is organized and its companies regulated.

Among the most important guidelines developed for the operationalization of the responsible investment objectives of the NSWF are what are commonly called the Fund's Ethical Guidelines--Guidelines for the observation and exclusion of companies from the Government Pension Fund Global?s investment universe (the "Ethics Guidelines"), Adopted by the Ministry of Finance on 1 March 2010 pursuant to Act no. 123 of 21 December 2005 relating to the Government Pension Fund, section 7. The Ethics Guidelines replaced the Ethics Guidelines for the Government Pension Fund--Global, which had been adopted in 2004, and came into effect on March 1, 2001 (Ethics Guidelines Section 9).

The Ministry of Finance presented ethical guidelines for the Government Pension Fund ? Global (former Government Petroleum Fund) in the Revised National Budget for 2004. The Storting endorsed the guidelines in Budget Recommendation to the Storting No. 1 (2003?2004). The Ministry of Finance established the ethical guidelines with effect from 1 December 2004. Clause 4.4 of the guideline was revised on the 29th of September 2008, according to the Report to the Storting No. 16 (2007?2008), and again on the 30th of September 2009, according to the Report to the Storting No. 20 (2008?2009). (From Council on Ethics for the Government Pension Fund Global, Annual Report 2009, at 8)

The Guidelines were originally added created as a separate enforcement mechanism (See, Report of the Ministry of Finance. Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the Management of the Government Pension Fund in 2008). Today, the Ethics Guidelines have now become part of an integrated system of responsible investing that is meant to serve as a set of legal qualitative and policy standards governing the sorts of investments that may be made by the Fund.

The Guidelines are based on two premises. The first is that the Fund must be managed to extract a ?sound return in the long term.? (See, Report of the Ministry of Finance. Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the Management of the Government Pension Fund in 2008, at Par. 1, subpart 1). The second is that the first objective is contingent on a number of policy factors, including ?sustainable development in the economic, environmental and social sense." (Id.). The policy nature of these contingencies is clearly articulated as well. The Fund is to be used not merely to protect and increase the value of the Fund itself, but to influence behaviors among the pool of potential targets of investment. The Ethical Guidelines are implemented in three ways?through the exercise of ownership rights, negative screening of companies, and exclusion of companies from the investment pool. (Id.).

The Ethics Guidelines bind the Ministry of Finance, the Council on Ethics and Norges Bank with respect to investments in the NSWF's equity and fixed income portfolio, as well as instruments in the Fund?s real-estate portfolio issued by companies that are listed in a regulated market. (Ethics Guidelines, supra, Sec. 1). The Ethics Guidelines forbid investment in companies that engage in a broad range of economic activity, some of which are perfectly legal in the states in which they are undertaken and some of them might not be.

The assets in the Fund shall not be invested in companies which themselves or through entities they control:
     a) produce weapons that violate fundamental humanitarian principles through their normal use;
     b) produce tobacco;
     c) sell weapons or military material to states mentioned in section 3.2 of the
       guidelines for the management of the Fund. (Ethics Guidelines Sec. 2(1)))

From Norway Pension Fund Reinstates Thales and DRD Gold, (Sept. 9, 2009) (Cluster munitions fall within the category of weapons that the Norwegian Pension Fund is not allowed to invest in).

In addition, the Finance Ministry is provided a discretionary power to exclude another group of companies from the Fund's investment universe. This discretionary power may not be exercised by the Ministry of Finance unless there is an authoritative determination that "there is an unacceptable risk that the company contributes to or is responsible for" (Ethical Guidelines, sec. 2(3)) one of five categories of activities or conditions:

a) serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour and other child exploitation;
b) serious violations of the rights of individuals in situations of war or conflict;
c) severe environmental damage;
d) gross corruption;
e) other particularly serious violations of fundamental ethical norms. (Id.).

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