the ethical guidelines for the norwegian government pension fund
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Presentation by Eli Lund at TBLI CONFERENCE EUROPE 2008.TRANSCRIPT
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
Asset management: Clear lines of responsibilities
• Ministry of Finance – “Owner” separate asset management department with overall
responsibility for managing the Fund strategic asset allocation (benchmark + risk limits) monitoring and evaluating operational management ethical guidelines reports to Parliament international advisor on resource funds
• Central Bank – “Operational manager” separate entity within the central bank (NBIM) charged with the
operational management of the Fund implement investment strategy (benchmark) active management to achieve excess return risk control and reporting exercise the Fund’s ownership rights provide professional advice on investment strategy
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 Government / Agency / Corporate / Securitized 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
(human rights incl. child labour, corruption, severe environmental damage, other particularly serious violations of fundamental ethical norms)
• 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.
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)
Exercise of ownership rights• The overall objective of the ownership effort is to safeguard the
(long-term) financial interests of the Pension Fund
• The principles governing the exercise of ownership rights: the UN Global Compact the OECD Principles of Corporate Governance and the OECD principles
for Multinational Enterprises
• Priority areas corporate governance children’s rights environment
• Tools for exercising ownership rights voting contact with portfolio companies contact with regulatory authorities contact and collaboration with other investors
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
The environmental criterion:
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:
…
• Severe environmental damage• …• …
The Council’s interpretation of “severe environmental damage”
The damage • is significant• causes irreversible or long-term effects• has considerable negative consequences for human
life and health• is the result of violations of national law or
international normsThe company • has neglected to act in order to prevent damage• has not implemented adequate measures to rectify
the damage
It is probable that the company’s unacceptable practice will continue
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)
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
Evaluation of the Ethical Guidelines
• A thorough evaluation process
• Builds on the existing framework
• White Paper to the Parliament in March
The Ethical Guidelines and all recommendations in full text
(English) are publicly available at:
www.etikkradet.no
Questions/Comments: [email protected]