The ethical policies of the Norwegian Government Pension Fund – Global may be cited as the ‘gold standard’ abroad, but the fund has no intention of resting on its laurels. As the government begins its review of the NKr2,053.1bn (€255bn) fund’s already robust ethical guidelines, it is seeking advice from all over the world.

One suggestion is to expand beyond the current negative exclusion policy to screen positively for the ‘best’ companies to invest in. Another is to make a specific allocation to investments that help fight climate change, and a third to build closer ties between the body making exclusion decisions and the investment division seeking to work actively with companies on corporate governance issues.

“We’re expecting to get some useful input from a lot of different stakeholders. Being a global investor, we’re also looking to get comments and advice from abroad and we have an open invitation to, for example, other investors to have their say,” says Valborg Lie, senior adviser in the asset management department of the Norwegian ministry of finance.

Ms Lie says the ministry is reviewing the guidelines, which have been in place since 2004, because it has lofty ambitions and recognises that ethics is a dynamic field.

Presenting the government’s discussion paper, finance minister Kristin Halvorsen said: “We’re not dissatisfied with our current guidelines, but want to remain at the forefront of ethical investment and that won’t happen without a continuous discussion about how we can improve.”

Adding positive screening would mean companies would be selected based on certain criteria, for example ‘best in class’ or specific focus areas. Previous research for the fund has not favoured positive selection, since it narrows the investment universe, thus concentrating risk. It would also be detrimental to the fund’s aim of being a small investor in several different companies.

The ministry of finance has also said it would look into earmarking a percentage of the assets to be invested in a sector or region, such as environmentally friendly technology or for developing countries. Those investments would still be required to deliver positive returns.

One of the key areas to come under scrutiny is the relationship between the ministry of finance’s Council on Ethics, which makes the exclusion decisions, and Norges Bank Investment Management (NBIM), which invests the assets and practises active ownership by engaging with companies not living up to its corporate governance standards. The ministry believes there are indications that the current structure is not sufficient and that having two separate organisations hampers communication and the optimal use of information.

“There is potential for greater synergy between exclusion and active ownership that could be developed further,” says Ms Lie.

Andreas Føllesdal, member of the Council on Ethics and professor at the Norwegian Centre for Human Rights at the University of Oslo, agrees that close ties between the two sides are crucial, but insists there is a benefit to having separate structures.

“I believe the real threat of divestment can increase the influence of shareholder engagement, even more so if decisions about divestment are taken by another body than those involved in the dialogues,” says Mr Føllesdal. The recent changes in the fund’s investment strategy have also prompted discussion about how to deal with ethics in new asset classes and markets. In particular, the inclusion of property as a new asset class may require a different ethical approach.

The discussion paper will be out for referral until September 15 and the government’s evaluation will be presented in its annual fund report to the parliament in spring 2009.

The ministry of finance has invited a variety of organisations and authorities for comments, including universities, Amnesty Norway and the Oslo Stock Exchange.

The results of the evaluation will not only have direct implications for the investments of the Norwegian government fund, but also significance for most other Norwegian investors, many of whom directly follow the state fund’s ethical decisions. Investors abroad may also follow suit: for example, the Norwegian fund’s exclusion of Wal-Mart was the impetus for the AP funds’ (the Swedish national buffer funds) decision to divest. The current evaluation of the AP funds’ ethics is likely to closely follow the Norwegian debate.

This article first appeared in FTfm

OUR VIEW

A lot has happened in the field of responsible investment since the ethical guidelines for the Norwegian Government Pension Fund – Global were implemented four years ago. Modernising the guidelines provides an opportunity for the fund to reaffirm its position as one of the most responsible investors in the world. So far, it is the fund’s exclusion policies that have received the most attention, despite the efforts to emphasise the importance of corporate governance.

One of the core issues under review is the relationship between exclusions and active ownership. Both the Council on Ethics, which makes the exclusion decisions, and Norges Bank Investment Management, which invests the assets and practises active ownership, claim that the current organisational structure is sufficient. But there is some doubt and the ministry of finance should seriously consider how to bridge any gap between the two areas.

Setting up criteria on how to be a responsible property investor will also be an influential move, since there is still some confusion about how to apply ethics in asset classes other than equities.

Ultimately, the ministry of finance has an excellent opportunity to help set new and more advanced standards for responsible investment that will have implications far beyond the Norwegian borders.

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