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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 X

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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.

(From Hugh Wheelan, Norwegian fund sells off euro1.8bn in tobacco shares after government ban, Responsible Investor.com, Jan. 19, 2010).

Part X: Ethics and a Jurisprudence of Responsible Investment: The Cases--

I. Products
3. Tobacco Production

There is one principle determination:

1. Recommendation of the Council on Ethics. October 22, 2009. (Alliance One International Inc., Altria Group Inc., British American Tobacco BHD, British American Tobacco Plc., Gudang Garam tbk pt., Imperial Tobacco Group Plc., ITC Ltd., Japan Tobacco Inc., KT & G Corp, Lorillard Inc., Philip Morris International Inc., Philip Morris Cr AS., Reynolds American Inc., Souza Cruz SA, Swedish Match AB, Universal Corp VA and Vector Group Ltd., ). Website link.

Ministry of Finance Announcement, Jan. 19, 2010.

Summary: At the time of the exclusion, Responsible Investor reported:

The Norwegian Ministry of Finance has taken one of the biggest ethical stances against investing in cigarette companies by selling shares worth ?1.8bn in 17 tobacco producers from the portfolios of its massive NOK2,385bn (?280bn) Government Pension Fund. . . . The Norwegian ban, however, is based on a pure ethical decision to remove tobacco manufacturers from its investments following an April 2009 recommendation report by the Ministry of Finance to the Storting Norwegian Parliament. The exclusion is based on the production of tobacco, not on the sale of tobacco products nor the production of additives or ingredients used for tobacco products. Norwegian Minister of Finance, Sigbjørn Johnsen, said it was important that the ethical guidelines of the fund reflect ?what can be considered to be commonly held values of the owners of the fund?. He cited international and national developments such as the WHO Framework Convention on Tobacco Control and the tightening of the Norwegian Tobacco Act as examples of policy aimed at stopping smoking: ?We have taken these changes on board and believe ? amongst others in light of the consultative input in connection with the evaluation of the ethical guidelines ? that it is timely to exclude tobacco from the fund. (From Hugh Wheelan, Norwegian fund sells off euro1.8bn in tobacco shares after government ban, Responsible Investor.com, Jan. 19, 2010).

This essentially describes the jurisprudential basis of the decision. The decision c an be understood as the articulation of the common position of the Norwegian demos as developed through its representatives in the Storting. The basis for determining the meaning and character of that position is to be gleaned from the legislative actions of the Storting--in this case the tightening of the Tobacco Control Act--and policy position. The determination reminds us that "Government Whitepaper no. 20 (2008 -2009), the Ministry of Finance proposed that tobacco companies should be excluded from the investment universe of the Government Pension Fund Global. The proposition was supported by Stortinget (the Parliament)". This policy was then memorialized in changes to th Ethics Guidelines themselves, New guidelines for responsible investment practices in the Government Pension Fund Global (GPFG), Press Release No. 11, March 2, 2010. The Ethics Council effectively transformed policy positions to regulation by construing the Ethics Guidelines as mandating the action without the need for intervening Storting action of Ministry of Finance regulation. But that common position also had to be informed also by developing consensus at the international level, reflected in supra-national instruments, in this case the WHO Framework Convention. In this sense, the Ethical Guidelines represent a regulatory vehicle through which the Ethical Guidelines serve as a foundation that can be flexibly applied on a case by case basis by the Ethics Council through a quasi judicial process, the products of which in turn serve to gloss the Ethics Guidelines in ways that have effect beyond the specific context of a particular determination, and producing something that looks like regulation through judicial interpretation. Because of the regulatory character of the determination, and because the Ethics Council took the admissions in the suibject companies' public documents to be dis positive, the Ethics Council did not seek the participation of the companies excluded in the process leading to their exclusion ("As the companies themselves clearly state that they manufacture tobacco products, the Council has not found it necessary to write to the companies in order to have this confirmed."). The Ethics Council also failed to engage the compan ies with respect to the systems it used to make a determination of which set of companies ought to be excluded.

The Council has used the classification of tobacco companies in the industry classification of the Fund?s reference indices as its starting point for this recommendation.. . . . The Fund?s reference index for equities is derived from the FTSE All Cap. FTSE classifies the companies in the index in different industries. In the industry ?Consumer Goods?, ?Tobacco? is defined as a separate sector. Companies classified in this sector will receive the bulk of their revenues from the tobacco industry. As for the bond investments, Barclays Global Aggregate is used as basis for the Fund?s reference index. Also here, companies with the bulk of their revenues from the tobacco industry are classified under ? Tobacco?. (From Recommendation at 2).

From an efficiency perspective this approach might well have made sense. However, because the Council was seeking to translate general regulation into decision specific to a set of companies (and by definition not others) the Ethics Council's own determination might be understood as itself a violation of Norwegian sensibilities about the need for procedural protection of people adversely affected by state action. That the Ethics Council failed to protect the procedural rights of companies (and more importantly perhaps, failed to permit them to make statements or produce evidence that might have furthered their obligations under the Ethics Guidelines) puts the procedural legitimacy of this determination in doubt.

Norway Proposes to Exclude Tobacco From Wealth Fund Norway,com, April 3, 2009 ("Norway proposed excluding tobacco producers as part of an overhaul of ethical guidelines for its $310 billion sovereign wealth fund. ?There?s no healthy way to use tobacco,? Finance Minister Kristin Halvorsen said today at a press conference in Oslo, without naming specific companies. ?There has notably been a lot of attention directed at how tobacco companies target developing countries.?)

Summary of Case:

1. Company subject to investigation
    a. Name: Alliance One International Inc., Altria Group Inc., British American Tobacco BHD,
British American Tobacco Plc., Gudang Garam tbk pt., Imperial Tobacco Group Plc.,
ITC Ltd., Japan Tobacco Inc., KT&G Corp, Lorillard Inc., Philip Morris International
Inc., Philip Morris Cr AS., Reynolds American Inc., Souza Cruz SA, Swedish Match
AB, Universal Corp VA, and Vector Group Ltd.
b. form of organization (corporation, Partnership, etc.): Public companies
c. home country: US(7), UK(1), South Korea(1), Japan(1), Malaysia(1), India(1), Indonesia(1), Check Republic(1), Brazil(1), and Sweden(1).
    d. countries (exchanges) where shares are traded: Many
e. largest shareholders (individual, state owned enterprise: Unknown
f. form of investment by the Norway SWF fund: Equity & Bonds
2. Chronology
    a. Date complaint filed: 30 September 2009
    b. Date complaint resolved by the Ethics Council: 22 October 2009
3. Complainant
a. If the state, the office from which the reference was made: Ministry of Finance with support from Parliament.
4. Complaint
a. Action constituting violation: Production of tobacco products.
b. ?Legal? basis of violation: The Council?s own rules and Government Whitepaper no. 20 (2008-2009).
5 Determination
a. Council recommendation (for example divest, retain, wait): Exclusion
b. Legal basis for the determination (reference to the section of the Ethics Standard invoked): None
c. Underlying legal basis: None
6. Basis of Determination
a. standard of decision (rule or test etc.): New, first of its kind
    b. Use of prior Ethics Council recommendations as precedent or as persuasive: None
c. Use of case law of other courts or bodies: None
d. Reliance on other materials: Each producers website
e. Rationale: The production of tobacco from cultivation through to selling of product is grounds for exclusion. This is to make it to where companies that produce tobacco are excluded, but middle-men and third parties are not penalized for selling tobacco products in their commerce.

Full post as published by Law at the End of the Day on February 10, 2011 (boomark / email).

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