The Ethical Guidelines for the Norwegian Government Pension Fund

By Eli Lund, Head of secretariat, Council on Ethics

TBLI 2008

The Norwegian Government Pension Fund is not really a pension fund, but a petroleum fund

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

-Total petroleum production in Norway, mill. Sm3 o.e.

0

50

100

150

200

250

300

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Crude oil Gas NGL (including condensate)

Source: Norwegian Petroleum Directorate

Oil and gas extraction in Norway

Norway’s SWF is large and still growing fast-The Fund’s market value 1996–2011. Billion USD, year end.

0

100

200

300

400

500

600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

100

200

300

400

500

600

Source: Ministry of Finance, NB09

Return on fund investments

Fund Transfer to finance non-oil budget deficit

Revenues

Expenditures

State Budget

The Fund mechanism – integrated with fiscal policy

Fiscal policy guideline(over time spend real return of the fund,

estimated at 4%)

Petroleum revenues

Global Governance Structure

Ministry of Finance

Regulations

Performance reports

Central Bank

(NBIM)

Norwegian Parliament

Pension Fund Act

Performance reports and strategic changes reported in White Papers and National Accounts

Legislator

Principal

Manager

Management agreement

Office of the Auditor General

Norges Bank AuditAdvisors

Advisory / consultancy agreement

Equities 60 % Fixed Income 35 %

America and Africa

35 %

Asia and Oceania 15 %

America and Africa

35 %

Europe 60 %

Asia and Oceania

5 %

Equity index:

FTSE All-Cap Index Approx. 7 000 equities

Fixed income index:

Lehman Brothers Global Aggregate/Global Real Approx. 10 000 bonds

Strategic benchmark

Europe

50 %

Real estate 5 %

Ethical guidelines and corporate governance

Two main ethical obligations:

1) The obligation to ensure sound financial returns so that future generations will benefit from the petroleum wealth.

2) The obligation to respect fundamental rights for those who are affected by the companies in which the Fund invests. exercise ownership rights – corporate

governance avoid investments in companies whose

practices constitute an unacceptable risk that the Fund is or will be complicit in grossly unethical activities

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

Exclusion of companies based on Negative screening and Ad-hoc exclusion

• Negative screening of companies that Produce weapons that through their normal use may

violate fundamental humanitarian principles (e.g. cluster munitions and nuclear arms)

Sell weapons or military materiel to certain states. (At present only Burma)

• Ad-hoc exclusion (production methods and conduct) serious violations of fundamental ethical norms

specified in the guidelines.

• The Ministry of Finance has excluded 29 companiesas of October 2008

Ad-hoc exclusion

Unacceptable risk of being complicit in:

• Serious or systematic human rights violations

• Grave breeches of individual rights in situations of war or conflict

• Severe environmental degradation

• Gross corruption

• Other particularly serious violations of fundamental ethical norms

The procedure for exclusion:

• The Council decides to take a case up for consideration

• The secretariat collects and checks information and documentation

• The secretariat/council drafts a recommendation• NBIM sends the draft recommendation to the

company for comments or clarifications• The Council issues a recommendation to the

Ministry of Finance• The Ministry of Finance makes a decision• NBIM sells the holdings of the company• The Ministry of Finance publishes the decision and

the recommendation

This process normally takes close to a year

Information gathering/documentation

• Two companies are screening the fund for weapons in violation of the criteria. Supplemented by searches by the secretariat.

• Two companies are performing daily news searches of various web-sites in order to identify companies with activities in violations of the exclusionary criteria.

• Information from e.g. NGOs, scientist and consultants.

• The secretariats own research.

The production of hybrid cotton seed in India

• Extensive use of child labour

• Migrant children

• Extensive use of pesticides

• Similar situation in the production ofhybrid vegetable seed

Monsanto Co

• The Council recommended the exclusion of Monsanto in November 2006

• NBIM developed a strategy to target thisissue in its corporate governance activities

• The Ministry of Finance decided to await development for one year

• The Council on Ethics did not recommend the exclusion of the company in a new assessment in June 2008

• Problems still considerable, but company action plan seems to have an effect where implemented

Evaluation of the Ethical Guidelines

• A thorough evaluation process

• Builds on the existing framework

• White Paper to the Parliament in March

Recommendations under the criterion of Environmental Damages:

• Freeport McMoRan Copper & Gold Inc. (15 May 2006)

• DRD Gold Ltd. (24 Aug. 2006)

• Vedanta Resources Ltd., (15 May 2007) including its subsidiaries:

• Sterlite Industries Ltd. • Madras Aluminium Company Ltd.

• Rio Tinto (15 February 2008)

Recommendations under the Human Rights criterion:

The Total recommendation (14 Nov. 2005) (not excluded)

The Wal-Mart recommendation (15 Nov. 2005)

The Vedanta recommendation (15 May 2007)

The Monsanto Recommendations (20 Nov. 2006and 10 June 2008) (not excluded)

Excluded weapons’ producersCluster Weapons• Alliant Techsystems Inc.• General Dynamics Corp.• Hanwha Corp.• L3 Communications Holdings Inc.• Lockheed Martin Corp.• Poongsan Corp.• Raytheon Co.• Thales SA.

Nuclear Weapons• BAE Systems Plc., • Boeing Co. • EADS Co., including its subsidiary • EADS Finance B.V.• Finmeccanica Sp. A.• GenCorp Inc.• Honeywell International Corp.• Northrop Grumman Corp.• Safran SA.• Serco Group Plc.• United Technologies Corp.

Anti Personell Landmines• Singapore Technologies Engineering

The Ethical Guidelines and all recommendations in full text

(English) are publicly available at:

www.etikkradet.no

Questions/Comments: eli.lund@etikkradet.no