4 Responsible management
4.1 Current framework
The Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (GPFN) are financial investors. The objective is the highest possible return, given an acceptable level of risk. The funds shall be responsible investors, within the overarching financial objective. This is reflected in, inter alia, guidelines and frameworks for Norges Bank’s and Folketrygdfondet’s responsible management of the GPFG and the GPFN, respectively.
The Ministry of Finance has in the mandates for both the GPFG and the GPFN adopted the premise that good long-term returns are assumed to depend on sustainable development and well-functioning markets. Such an interrelationship is assumed to be of particular importance to large, broadly diversified long-term funds, whose return will over time be closely linked to global value creation developments.
The mandates for the two funds refer to international principles and standards, such as the UN Global Compact, the OECD/G20 Principles of Corporate Governance and the OECD Guidelines for Multinational Enterprises; see Box 4.1. The mandate for the GPFN also refers to the Code of Practice issued by the Norwegian Corporate Governance Board (NUES). Norges Bank and Folketrygdfondet apply these standards in their responsible management activities.
Textbox 4.1 Standards and principles
The mandates for the GPFG and the GPFN refer to OECD and UN standards and principles in relation to responsible investment. The mandate for the GPFN also refers to the Code of Practice issued by the Norwegian Corporate Governance Board (NUES). The standards are voluntary, and not legally binding, recommendations. They express expectations with regard to environmental, social and corporate governance issues.
OECD Guidelines for Multinational Enterprises
The OECD Guidelines for Multinational Enterprises provide recommendations on responsible business conduct for companies with an international presence, and aim to promote sustainable development through responsible operations, trades and investments.
The guidelines were launched in 1976, and most recently updated in 2011. The guidelines are binding on signatory governments. The voluntary nature of the guidelines implies that there is no legal requirement for company compliance. There is nonetheless an expectation that companies will adhere to the guidelines, but each company must itself assess how the guidelines can best be implemented.
The guidelines cover all aspects of corporate social responsibility and are based on recognised UN standards. The guidelines encourage companies to avoid causing or contributing to negative social, human or environmental effects through their own operations, and to address cases in which such effects do occur. Guidance is also provided on how companies should follow up on their business partners and supply chains. The guidelines also ask companies to conduct due diligence assessments to identify any risk of negative impact and ensure that they meet the expectations in the guidelines. OECD has prepared guidance notes on how such due diligence assessments may be conducted in practice, as well as specific guidance notes for certain selected sectors, including institutional investors.
Countries that have adopted the OECD guidelines are obliged to establish national contact points for responsible business conduct. The contact points are mandated to spread knowledge about the guidelines and offer dialogue and mediation in individual cases. The Norwegian contact point is an independent specialist body subject to the administrative oversight of the Ministry of Foreign Affairs.
UN Global Compact
The UN Global Compact was launched in 2000 and is a broad collaboration between the UN and businesses, and aims to promote corporate social responsibility. It currently has more than 12,000 participants in about 160 countries. Companies are encouraged to integrate ten universal principles relating to human rights, labour rights, the environment and anti-corruption in their operations. The principles are derived from the Universal Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the UN Convention against Corruption. Besides, the Global Compact encourages companies to support the UN Sustainable Development Goals. Participants are expected to report on their implementation of the principles in their operations, either through their annual reporting or in a designated sustainability report.
G20/OECD Principles of Corporate Governance
The G20/OECD Principles of Corporate Governance were launched in 1999 and seek to clarify the distribution of roles and responsibilities between the owners, the board of directors and the senior executives of a company. The principles are designed to promote best practice on transparency and disclosure, treatment of shareholders, and the responsibilities and liabilities of the board of directors. The principles also provide guidance on the conduct of institutional investors and the establishment of well-functioning equity markets.
The principles are based on the view that good governance over time promotes growth in company value, access to financing and well-functioning capital markets. Effective corporate governance and capital allocation will in turn promote welfare and general economic growth. The revised principles were launched in 2015 and were endorsed by the G20.
Norwegian Code of Practice for Corporate Governance
The Norwegian Corporate Governance Board (NUES) issues the Norwegian Code of Practice for Corporate Governance. The objective is that companies listed on regulated markets in Norway will practice corporate governance that regulates the division of roles between shareholders, the board of directors and executive management more comprehensively than is required by legislation. This is based on the premise that good corporate governance will strengthen confidence in companies and help to ensure the greatest possible value creation over time in the best interests of shareholders, employees and other stakeholders. The Norwegian Accounting Act requires companies listed on regulated markets in Norway to annually provide a report on their corporate governance policies and practices. Furthermore, the provisions of Oslo Stock Exchange and Oslo Axess require companies listed on these market places to report in relation to the Norwegian Code of Practice for Corporate Governance. A revised Code of Practice for Corporate Governance was issued in 2018.
Norges Bank and Folketrygdfondet make investment decisions and exercise ownership rights independently of the Ministry, in line with established mandates and guidelines. It is neither desirable, nor feasible, for the Ministry of Finance to engage in detailed regulation of, or intervention in, the operational management of the two funds. This division of responsibilities is broadly endorsed by the Storting.
Environmental, social and corporate governance considerations form an integral part of the management of the GPFG and the GPFN. Important responsible investment tools are advocacy of principles and expectations based on international and recognised standards. The asset managers also participate in the further improvement of standards. Moreover, Norges Bank and Folketrygdfondet engage in company dialogue on relevant themes and issues, and cast votes in general meetings of the companies in which the funds are invested. Risk management is also an important aspect of the responsible management of the fund capital.
The Ministry of Finance introduced ethically motivated guidelines for the management of the GPFG in 2004. These have subsequently been updated and revised. Certain criteria in the guidelines are based on the products of individual companies, such as tobacco, weapons and coal. Other criteria are based on the conduct of companies, such as serious human rights violations and severe environmental damage. The ethically motivated Guidelines for Observation and Exclusion from the GPFG are discussed in Box 4.2.
Textbox 4.2 Guidelines for Observation and Exclusion from the GPFG
The Ministry of Finance has adopted ethically motivated guidelines for the observation and exclusion of companies from the GPFG. The guidelines include exclusion criteria that are based on what the companies produce (products) or on their conduct. Companies may be placed under observation if there is uncertainty as to whether the exclusion conditions are met.
The product criteria
The Fund shallnot be invested in companies which themselves or through entities they control:
produce weapons that violate fundamental humanitarian principles through their normal use;
produce tobacco; or
sell weapons or military materiel to sovereign states in whose government bonds the Fund is barred from investing (the government bond exemption clause).
The weapons criterion encompasses chemical weapons, biological weapons, anti-personnel mines, undetectable fragmentation weapons, incendiary weapons, blinding laser weapons, cluster munitions and nuclear arms.1 Moreover, the Fund shall not be invested in companies that develop or produce key components for these types of weapons.
The tobacco criterion is limited to the actual tobacco product, and does not include associated products such as filters and flavour additives or the sale of tobacco products. All companies that grow tobacco plants or process tobacco into end products, whether directly or through entities they control, shall be excluded. Tobacco is a product distinguished by its normal use entailing a risk of severe illness and death. This is reflected in strict regulations, both nationally and internationally. In 2009, when it was decided to exclude tobacco producers from the GPFG, an international tobacco control convention had been adopted, and legislation had been tightened considerably in both Norway and other countries.
In addition, the product-based coal criterion implies that observation or exclusion may be decided for mining companies and power producers which themselves or through entities they control derive 30 percent or more of their revenue from thermal coal or base 30 percent or more of their operations on thermal coal. The coal criterion is discussed in further detail in section 4.3.
There is a broad political consensus that there should be a high threshold for excluding an entire sector from the Fund.
Observation or exclusion may be decided for companies where there is an unacceptable risk that the company contributes to or is responsible for:
serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour or the worst forms of child labour;
serious violations of the rights of individuals in situations of war or conflict;
severe environmental damage;
acts or omissions that on an aggregate company level lead to unacceptable greenhouse gas emissions;
gross corruption; or
other particularly serious violations of fundamental ethical norms.
The climate criterion and the human rights criterion are discussed in further detail in 4.4 and 4.5, respectively.
1 See the Revised National Budget 2004.
Figure 4.1 presents responsible investment roles and responsibilities in the GPFG and the GPFN. Norges Bank and Folketrygdfondet manage the GPFG and the GPFN, respectively, based on the mandates laid down by the Ministry. The Council on Ethics performs assessments on the basis of the Guidelines for Observation and Exclusion from the GPFG. Decisions on observation and exclusion of companies from the Fund are made by Norges Bank, based on recommendations from the Council on Ethics. An exemption is made for the product-based coal criterion, for which Norges Bank may take decisions without any recommendation from the Council on Ethics. The division of responsibilities between the Council on Ethics and Norges Bank facilitates an appropriate relationship between the responsible investment measures.
The mandate from the Ministry of Finance implies that the GPFG cannot be invested in interest-bearing instruments issued by states that are subject to large-scale UN sanctions or other international initiatives of a particularly large scale and where Norway supports the initiatives. The Ministry of Finance decides which countries fall within the scope of this provision, based on input from the Ministry of Foreign Affairs. The list of countries is evaluated on a regular basis, since international sanctions and initiatives change over time.1
The responsible investment efforts of Norges Bank are discussed in further detail in section 4.2.
4.2 Responsible investment efforts
This section outlines the responsible investment efforts of Norges Bank and the Council on Ethics.
4.2.1 Norges Bank’s responsible investment efforts
Norges Bank’s responsible investment efforts are based on the mandate from the Ministry of Finance and the ethically motivated Guidelines for Observation and Exclusion. The Bank annually publishes a report on the three main components of its responsible investment activities: establishing principles, exercising ownership and investing sustainably.
Norges Bank aims to contribute to the development of standards that further the long-term interests of the Fund. The Bank considers standard setting as an effective way of promoting well-functioning markets and good corporate governance, by contributing to more equal business conditions and sustainable practices across markets. Standard setting may also serve to influence company practices over time. Broad international standards and principles are emphasised, including the UN Global Compact, the G20/OECD Principles of Corporate Governance and the OECD Guidelines for Multinational Enterprises. The mandate from the Ministry of Finance refers to these standards; see Box 4.1. The Executive Board of Norges Bank has established principles for responsible investment, which refer to additional international standards, including the United Nations Guiding Principles on Business and Human Rights (UNGP) and the United Nations Conference on Trade and Development (UNCTAD) principles on promoting responsible sovereign lending and borrowing. In addition, the Bank pursues standards addressing specific industries or issues.
Norges Bank responded to 13 public consultations on various issues last year, including differentiated voting rights, national corporate governance codes, sound voting systems and standards for corporate disclosure. Furthermore, Norges Bank held meetings with regulators in several markets over the course of the year and participated in both international fora and discussions on standard setting. The Bank has, inter alia, participated in an initiative under the auspices of the UN Global Compact, which aims to develop a framework for international business leadership on the sustainable use of marine resources.
Norges Bank sets its own priorities within the scope of internationally recognised standards, based on the mandate laid down by the Ministry of Finance and the characteristics of the Fund. The Bank expresses its expectations of companies in which the Fund is invested through public documents and direct contact with the companies.
The expectation documents express the expectations of Norges Bank as a financial investor towards the companies in which the Fund is invested in addressing various challenges in their activities. The expectations expressed by the Bank are based on, inter alia, the recognised international principles referred to in the mandate from the Ministry of Finance. The expectation documents are primarily addressed to company boards, and may serve as a basis for company dialogue. The documents form part of a broader set of strategies and activities used by Norges Bank in its responsible investment efforts.
Norges Bank has issued expectation documents on the following seven issues: climate change, water management, human rights, children’s rights, tax and transparency, anti-corruption and ocean sustainability. The document on ocean sustainability was issued in September 2018. The Bank updated the expectation documents on climate change and water management last year.
Norges Bank also publishes so-called position papers which communicate the Bank’s stance on selected corporate governance issues. In 2018, the Bank published three position papers on the effectiveness and composition of the board. The Bank also published an asset manager perspective on the UN Sustainable Development Goals. As a long-term and global investor, the Fund has an inherent interest in sustainable development.
Furthermore, Norges Bank promotes research that may support responsible investment efforts. It aims to further knowledge on good corporate governance and sustainability, and how these are linked to financial risk and return. Last year, Norges Bank initiated and supported various research projects, and also contributed to seminars and conferences. Topics addressed were, inter alia, effective ownership, financial implications of climate change, as well as expansion and improvement of sustainability data in the mining sector.
The GPFG held ownership stakes in more than 9,000 companies as at the end of 2018. Ownership is exercised by voting in general meetings and through company dialogue. Active ownership aims to promote long-term value creation in companies, and contribute to good corporate governance and responsible business conduct.
Norges Bank has established voting guidelines. These are based on the G20/OECD Principles of Corporate Governance and provide a principled basis for the voting decisions. The guidelines outline the overarching rationale behind the voting decisions of Norges Bank. The voting guidelines are augmented with knowledge and assessments of the specific companies and matters. The Bank seeks to vote in a manner that further the long-term interests of the Fund and emphasises long-term value creation, responsible business practices, board accountability, equal treatment of shareholders, well-functioning markets and corporate transparency.
Norges Bank votes in all general meetings unless there are significant practical impediments to doing so. In 2018, the Bank voted in 97.7 percent of all general meetings. Voting decisions are published on the day after each general meeting. Norges Bank voted on 113,546 resolutions in 11,287 general meetings in 2018. About 50 percent of the resolutions voted on by the Bank concerned the appointment of directors. In certain cases, the voting intentions are published ahead of general meetings to communicate the Bank’s principled position to the market. Norges Bank has also been represented on the nomination committees of six Swedish companies.
Norges Bank aims to promote good corporate governance and responsible business practices through company dialogue. Dialogue is an important active ownership tool, and improves the understanding of companies, whilst enabling the Bank to communicate its expectations with regard to good business practices, corporate governance and adequate disclosure. Company dialogue focuses on selected topics, and in 2018 Norges Bank emphasised sustainability, board accountability and effectiveness, executive remuneration and shareholder rights. In addition, the Bank will follow up on companies in connection with corporate actions and any risk incidents. Last year, it held 3,256 meetings with 1,420 companies. In aggregate, these companies represented about 66 percent of the value of the equity portfolio. 199 of the meetings were at board level. Environmental, social and corporate governance issues were raised in 1,493 of the meetings. Norges Bank has, for example, discussed climate reporting and deforestation financing with banks, deforestation and marine pollution with food production companies, human rights in the supply chain with automotive companies, as well as tax, transparency and corruption risk with companies in various sectors.
Norges Bank has over time collaborated with companies, investors and other stakeholders in various initiatives to improve information to the market and promote responsible business practices. This is of particular relevance when companies in the same industry or value chain face a joint challenge. The Bank has conducted annual corporate disclosure assessments for the three selected sustainability themes of climate change, water management and children’s rights. In 2018, Norges Bank expanded the assessments to also include deforestation, anticorruption, human rights, tax and ocean sustainability for selected companies. 2,256 companies were analysed in 2018, in aggregate representing about 62 percent of the value of the equity portfolio. Norges Bank also sent letters to 100 companies on the said themes, encouraging companies to improve their disclosures.
Norges Bank seeks to develop its understanding of potential links between sustainability and portfolio risk and return, and considers sustainability issues in its risk management and investment decisions. The Bank has established comprehensive databases of sustainability data that span a number of factors at country, industry and company levels, which are used for the continuous monitoring and analysis of portfolio companies. Issues and themes assessed in 2018 include, inter alia, greenhouse gas emissions, deforestation, corruption risk and social issues. The risk assessments have caused Norges Bank to divest its holdings in some companies, within the scope of the management framework for the Fund. In 2018, the Bank divested holdings in 30 companies. Such divestments are separate from exclusions decided on the basis of the ethically motivated guidelines. Norges Bank has been analysing the portfolio’s carbon footprint since 2015, and reports, inter alia, on greenhouse gas emissions from the companies in which the Fund is invested. For last year, such emissions were calculated at about 107 million tonnes of CO2 equivalents, based on the Fund’s percentage holdings in each company. The portfolio carbon footprint calculations are based on the recommendations for asset managers from the Task Force on Climate-related Financial Disclosures (TCFD). Norges Bank is also pursuing the development of a number of different methodological tools for climate scenarios that can provide a broad understanding of how various scenarios may affect individual companies and the portfolio as a whole.
The mandate from the Ministry of Finance requires Norges Bank to establish dedicated environment-related investment mandates. The Bank is in its implementation seeking to identify long-term investment opportunities in companies and technologies that facilitate more environmentally friendly economic activity. About NOK 57 billion was invested under the environment-related mandates as at the end of 2018. Just over NOK 43 billion was invested in equities of 77 companies, whilst about NOK 13 billion was invested in green bonds. The return on the environment-related equity investments was -8.3 percent in 2018. Average annual return was 4.5 percent over the period from 2010 to 2018, inclusive. The environment-related mandates are described in further detail in section 3.2.
4.2.2 Observation and exclusion of companies from the GPFG
The Ministry of Finance has adopted ethically motivated guidelines for the observation and exclusion of companies from the GPFG; see Box 6.2. The Executive Board of Norges Bank makes decisions on the observation and exclusion of companies, based on recommendations from the Council on Ethics. For companies falling within the scope of the coal criterion, Norges Bank may exclude companies or place them under observation without a recommendation from the Council on Ethics. The Guidelines for Observation and Exclusion require both Norges Bank and the Council on Ethics to assess, on a regular basis, whether observation or exclusion remains justified.
Norges Bank publishes which companies are excluded or placed under observation, as well as the rationale behind decisions on the observation and exclusion of coal companies.2 The recommendations under the other criteria are available on the Council on Ethics website.
138 companies were excluded and 22 companies placed under observation as at the end of 2018. The coal criterion accounted for just over half of the decisions under the guidelines, with 68 excluded companies and 14 companies under observation.
In 2018, a total of 13 companies were excluded and four were placed under observation. Companies falling within the scope of the coal criterion accounted for two of the company exclusions and two of the observation decisions. Four companies were excluded for the production of nuclear arms, two companies were excluded under the human rights criterion and four companies were excluded for both serious human rights violations and severe environmental damage. One company was placed under observation under the criteria for severe environmental damage and serious human rights violations and one company was placed under observation under the serious human rights violation criterion. The exclusion of two companies was revoked on the basis of advice from the Council on Ethics.
The guidelines require the Council on Ethics to provide recommendations on the exclusion or observation of companies. The decisions are made by Norges Bank, which performs an independent assessment as to whether exclusion or observation is justified. The Bank may also assess whether other measures, including active ownership, may be better suited to reducing the risk of continued norm violation or may be more appropriate for other reasons. Norges Bank shall take a comprehensive approach to the full range of measures at its disposal and apply these in a coherent manner, to ensure that the most suitable tool is applied in each case. Such an integrated assessment may in some cases result in Norges Bank deciding to apply a different measure from that recommended by the Council on Ethics. In 2018, the Executive Board of Norges Bank decided on active ownership in one instance for a company that the Council on Ethics had recommended be placed under observation. Both observation and active ownership require extensive follow-up on the part of the Council on Ethics and Norges Bank, respectively.
The Council on Ethics’ application of the product criteria
The Council on Ethics uses a consultancy firm to monitor the companies in the fund portfolio on an ongoing basis for production that may potentially violate the guidelines, and to report on this to the Council every quarter. If production is suspected to violate the guidelines for the Fund, the Council on Ethics will contact the companies in question. If the companies provide information confirming the suspected violation of the guidelines, Norges Bank will be advised to exclude these companies. Companies which fail to respond to the communication will be recommended for exclusion if the documentation of the Council on Ethics indicates a high probability that the companies have products falling within the scope of the exclusion criteria. This procedure is intended to provide a reasonable degree of certainty that companies with production that violates the guidelines will be excluded from the Fund. However, there is no guarantee that all relevant companies are captured by the monitoring of the Council on Ethics at any given time.
The government bond exemption clause was introduced in 2010 and pertains to fixed-income instruments issued by states that are subject to large-scale UN sanctions or other international initiatives of a particularly large scale and where Norway supports the initiatives. This currently applies to fixed-income instruments issued by North Korea and Syria. Nor can the GPFG be invested in companies that sell weapons or military materiel to governments of such states. The Council on Ethics has yet to identify any companies in the fund portfolio that violate this criterion.
As at the end of 2018, a total of 37 companies were excluded on the basis of other product-based criteria than the coal criterion. 19 of these were excluded as the result of production of weapons that violate fundamental humanitarian principles through their normal use, whilst 18 companies were excluded because they produce tobacco.
The Council on Ethics’ application of the conduct-based criteria
For the conduct criteria, the Council on Ethics investigates companies and areas where the risk of guideline violations is deemed to be highest. Whilst the review of particularly high-risk areas will often be based on a long-term plan, individual matters will, inter alia, be raised on the basis of news coverage. A consultancy firm performs daily searches of a large number of news sources in several languages for information on companies held in the Fund. The Council on Ethics also receives input from individuals and organisations concerning companies or issues that may merit investigation by the Council.
The Council on Ethics selects the cases considered to be most serious for further assessment, based on the severity and scope of the norm violation, the implications of the norm violation, the company’s responsibility for, or contribution to, the situation in question, the company’s efforts to prevent or remedy any damage incurred and the risk of similar incidents in future. The purpose is to identify companies where there is an unacceptable risk that guideline violations are taking place and will continue.
The Council on Ethics gathers information from researchers and research institutions, from international, regional and national organisations and from several other sources. The Council often hires consultants to investigate suspected guideline violations. The investigated companies are also important sources of information. There is often a close dialogue, both oral and written, with companies during this process. The Council on Ethics approaches companies at an earlier stage of the process, asking them to answer questions or forward information to the Council. Weight is attached to soliciting information directly from companies, but the Council on Ethics may also make recommendations to Norges Bank if companies fail to respond to the inquiries of the Council.
The Council on Ethics has in 2018 continued its systematic investigation of sectors considered to be at particularly high risk of human rights violations. This has primarily focused on the investigation of labour rights violations in the textiles industry in South East Asia. Thus far, three companies have been excluded and two companies have been placed under observation as the result of this effort. In addition, the Council has addressed conditions akin to forced labour for migrant workers in the Gulf states, child labour in seed production, as well as matters relating to freedom of speech and the rights of indigenous populations.
The Council has also continued to investigate companies selling obsolete vessels for scrapping; so-called beaching, in Bangladesh and Pakistan, in 2018. Thus far, four companies have been excluded and one company has been placed under observation on the basis of an unacceptable risk of contributing to both human rights violations and severe environmental damage as the result of such activities. Under the environmental criterion, the Council has been pursuing investigations into several of the priority areas identified already in 2010, such as for example tropical deforestation, threats to conservation areas, mining and industrial pollution and particularly environmentally harmful fisheries.
Under the climate criterion, the Council focuses on sectors where total emissions are high. The Council on Ethics has in 2018 made one recommendation under this criterion. Relevant sectors addressed include, inter alia, cement and international shipping. Norges Bank has yet to make any decision based on the Council on Ethics’ recommendations under the climate criterion, but has requested the Ministry of Finance to provide clarification as to the application of the said criterion; see the discussion in section 4.4.
Authorities in several countries have uncovered extensive corruption in recent years. The Council has in 2018 focused its effort in this regard on companies identified through portfolio monitoring resulting in one company being excluded from the GPFG.
By yearend, 33 companies were excluded under the conduct criteria. 15 companies were excluded under the environmental criterion, five were excluded under the human rights criterion, six were excluded on the basis of both the environmental damage criterion and the human rights criterion, three on the basis of other particularly serious violations of fundamental ethical norms, two on the basis of serious violations of the rights of individuals in situations of war or conflict, whilst two companies were excluded on the basis of a risk of gross corruption.
As at yearend, eight companies were placed under observation on the basis of recommendations from the Council; three under the corruption criterion, three under the human rights criterion, one under the environmental criterion and one under both the environmental criterion and the human rights criterion. The Council on Ethics is monitoring these companies on an ongoing basis and submits an annual assessment to Norges Bank.
The Council on Ethics performs annual assessments of whether exclusion or observation of individual companies remains justified. If new information suggests that this is no longer justified, the Council on Ethics makes a recommendation on revocation of the earlier decision. The exclusion of two companies was revoked in 2018.
The annual report of the Council on Ethics provides further details of its activities in 2018.
4.3 Application of the coal criterion
The Storting adopted, in connection with its deliberation of the fund report in the spring of 2018,3 a petition resolution calling for an «assessment of whether the current criteria for exclusion of coal companies from the GPFG are adequate for purposes of excluding companies with considerable coal-related operations».4
Against this background, the Ministry requested, in a letter of 28 June 2018, Norges Bank to describe its efforts to consider the observation and exclusion of companies under the coal criterion. The Bank was also asked to describe the scale of coal-related operations and the size of companies excluded or placed under observation under this criterion. Furthermore, the Bank was requested to describe, to the extent feasible, the scale of coal-related operations and the size of mining companies and power producers which themselves or through entities they control derive part of their revenue from or base part of their operations on thermal coal, but are not excluded or placed under observation under the coal criterion. Moreover, the Bank was asked to provide information on the number of companies still retained, as well as such companies’ plans, if any, for changing the thermal coal-related portion of their revenues and/or operations.
4.3.2 The product-based coal criterion
In 2014, the Ministry of Finance appointed an expert group to assess GPFG’s investments in coal and petroleum companies and the use of policy instruments in relation to such companies. The expert group was requested to assess, inter alia, whether the exclusion of coal and petroleum companies seems a more effective strategy than active ownership for addressing climate issues and bringing about future changes.
The Ministry endorsed the expert group’s assessment that the energy production, energy use or CO2 emissions of coal and petroleum companies cannot in themselves be said to violate generally accepted ethical norms; see the discussion in the fund report in the spring of 20155. The Ministry was therefore of the view that it would not be appropriate to introduce a product-based criterion for the exclusion of coal and petroleum companies. The Ministry also agreed with the expert group’s assessment that one must nonetheless expect portfolio companies to meet certain minimum standards with regard to the climate impact of their operations, and with the expert group’s recommendation to establish a conduct-based climate criterion that might be applied across companies and industries.
The Standing Committee on Finance and Economic Affairs stated, in its recommendation on the report, that there are ethical aspects to the operations of some coal companies in both mining and power production, and that it is therefore «appropriate to have a separate product-based criterion in the Guidelines for Observation and Exclusion in relation to such companies»; see Recommendation No. 290 (2014–2015) to the Storting. Against the background of the Standing Committee on Finance and Economic Affairs’ recommendation, the Ministry presented, in the National Budget for 2016, a proposal on how the criterion might be operationalised. The Storting endorsed the Ministry’s proposal; see Recommendation No. 2 (2015–2016) to the Storting. The criterion was, in contrast to other product criteria, worded as a «may» criterion and observation was included as an ownership measure. The intention was to provide necessary scope for discretionary assessment in attending to the considerations identified by the Standing Committee on Finance and Economic Affairs, including forward-looking assessments, a chain of policy instruments and other measures from Norges Bank.
The Ministry of Finance introduced the coal criterion with effect from 1 February 2016 in accordance with the Storting’s deliberations. Section 2 of the Guidelines for Observation and Exclusion from the GPFG is worded as follows:
«Observation or exclusion may be decided for mining companies and power producers which themselves or through entities they control derive 30 percent or more of their income from thermal coal or base 30 per cent or more of their operations on thermal coal. Such assessments shall, in addition to the company's current share of income or activity from thermal coal, attach importance to forward-looking assessments, including any plans the company may have that will change the share of its business based on thermal coal and the share of its business based on renewable energy sources»
Norges Bank may make decisions under the coal criterion without any recommendation from the Council on Ethics.
The guidelines establish that recommendations and decisions on exclusion of companies based on the coal criterion shall not include green bonds issued by the company in question where such bonds are recognised through inclusion in specific indices for green bonds or are verified by a recognised third party. Hence, the coal criterion does not encompass green bonds.
As at the end of 2018, 68 companies were excluded under the coal criterion, whilst 14 companies were placed under observation. The reasoning behind the decisions is published in accordance with the guidelines.
4.3.3 Norges Bank’s application of the coal criterion
Norges Bank has in letters of 25 October and 14 December 2018, respectively, to the Ministry provided an account of its application of the coal criterion. In its letters, the Bank describes, inter alia, how the criterion is operationalised, including data gathering and company contact. It also provides an estimate as to the scale of coal-related operations amongst the companies still retained in the fund portfolio.
Operationalisation of the coal criterion
Norges Bank has established processes to identify companies falling within the scope of the coal criterion, and to prepare recommendations on exclusion and observation to be decided on by the Executive Board of the Bank. Starting out from the Fund’s investments in about 9 000 companies, the Bank identified some 200 companies that were examined more thoroughly. The Bank has focused on the most relevant sectors for mining companies and power producers in the sector classification of Industry Classification Benchmarks (ICB), but other relevant companies have also been analysed.
Norges Bank notes that information on companies’ mining operations is often more readily available than information on power production, which normally requires more analysis. The Bank contacts relevant companies and uses several external data sources for this purpose, partly for the reason that there exists no single source covering all relevant power production companies. Moreover, the information reported by companies themselves is not normally sufficiently detailed for purposes of the required analysis. The Bank emphasises that company contact has been necessary to establish a sound basis for decision-making.
Norges Bank notes that operationalisation of the criterion has required considerable time and resources. The wording of the criterion, with a focus on thresholds and forward-looking assessments, necessitates extensive information gathering and analysis. In addition, the criterion addresses industries characterised by a significant number of corporate events, such as the acquisition and divestment of plants and subsidiaries, which necessitates continuous market monitoring, also after companies have been analysed and decisions made. In addition, the Bank needs to analyse any new companies entering the market. Proximity to investment management has been important in this context.
Norges Bank discusses certain operational challenges in implementing the green bond exemption. Any green bonds issued by companies that are excluded on the basis of the coal criterion shall, according to the guidelines, not be excluded from the investment universe or benchmark index for the Fund. However, the Bank identifies certain challenges in relation to the handling of benchmark inclusion or exclusion of individual bonds issued by the same company. This results in such green bonds not being included in the reported return on the benchmark index. This applies, according to the Bank, to a small number of bonds, thus implying that the reported return has thus far not differed from the return on a benchmark index that includes these bonds.
The scale of coal-related operations that are not excluded or placed under observation
Norges Bank estimates the scale of coal-related operations in mining companies and power producers by examining thermal coal extraction and coal power capacity, respectively.
Norges Bank estimates that companies accounting for 74 percent of total coal power capacity and 77 percent of total thermal coal extraction have been excluded from the Fund or placed under observation. The Bank notes that it is difficult to precisely estimate the scale of coal-related operations in companies that are not excluded or placed under observation, without a thorough analysis of each company. This may apply to a large number of companies in several different sectors. The Bank’s estimate is therefore based on data from the World Electric Power Plants coal power capacity database, and on reporting from companies identified by the Bank as having operations that involve coal extraction.
The Bank has identified 202 companies accounting for the remaining coal power capacity. Most of the remaining coal power production is concentrated in a small number of companies; see Figure 4.2A. The information from Norges Bank shows that two companies have coal power capacity in excess of 10,000 MW and together account for more than 15 percent of remaining capacity. 15 of the 202 identified power companies together account for more than 50 percent of total remaining coal power capacity. Norges Bank notes that power production is not the primary activity of most of the remaining companies.
The Bank has, furthermore, identified 27 companies that extract thermal coal, but are not excluded or placed under observation. Also for these companies is the main part of the remaining coal extraction concentrated in a small number of companies; see Figure 4.2B. The information from Norges Bank shows that the two companies with the largest-scale extraction account for 48 percent of remaining extraction, and the six companies extracting more than 20 million tonnes of thermal coal together account for 75 percent of remaining extraction. However, the portion of revenues derived from thermal coal is well below the 30-percent threshold for all of the 27 remaining mining companies.
Norges Bank notes that it is challenging to obtain data that can provide a total overview of companies’ plans, if any, for changing the thermal coal-related portion of their revenues and/or operations, and that forward-looking assessments must be made for each company. In addition, the acquisition and divestment of assets or subsidiaries will have a material impact on whether a company exceeds the thresholds under the criterion. This necessitates continuous monitoring of the market. The Bank also observes that several companies are undergoing a transition process to, inter alia, increase their renewable energy portion.
4.3.4 The Ministry’s assessments
The Ministry is of the view that Norges Bank has established processes which ensure a sound, structured and consistent implementation of the coal criterion. The Ministry has taken note of the fact that operationalisation of the criterion has required considerable time and resources. The Bank observes that the wording of the criterion, with an emphasis on thresholds and forward-looking assessments, necessitates extensive information gathering and analysis. The Bank emphasises that it is challenging to obtain information of sufficient quality and detail for operationalisation of the criterion. In addition, the criterion addresses industries characterised by a significant number of corporate events, and a potential reduction of thresholds under the criterion would add to the information gathering challenges and the transaction costs, since a larger number of companies would be exiting or entering the investment universe. The Ministry is of the view that this suggests that the threshold values should not be too low, and that relative thresholds of 30 percent therefore still remain appropriate.
The current criteria are based on what portion of the total revenues or total operations of mining companies and power producers are accounted for by coal-related operations. Hence, the criterion is based on relative measures, and not on the absolute size of the coal-related operations of a company. This is in line with the observation of the Standing Committee on Finance and Economic Affairs that the criterion should, as a general premise, encompass mining companies and power producers for which a material portion of their operations are related to coal used for energy purposes; see Recommendation No. 290 (2014–2015) to the Storting. The Standing Committee on Finance and Economic Affairs specified, furthermore, that a threshold value of 30 percent would be material.
According to the Global Coal Exit List,6 30 companies account for half of coal extraction in the universe covered by the website, but only for 20 of these does the portion of revenues from coal extraction come to more than 30 percent. Furthermore, 31 power producers account for half of coal power capacity in the universe covered by the website. However, in only about a third of these companies does coal represent more than 50 percent of power capacity.
The petition resolution refers to «considerable coal-related operations». The Ministry is of the view that the current criterion, which is based on relative measures, should be supplemented by absolute thresholds to capture companies with considerable coal-related operations in absolute terms. Figure 4.2 shows that the remaining coal-related operations, as measured by both coal extraction and coal power capacity, are concentrated in a relatively small number of companies. Figure 4.2 further shows that the Fund is invested in six companies with extraction in excess of 20 million tonnes and two companies with coal power capacity in excess of 10,000 MW.7
It is stipulated in the coal criterion that the assessment as to whether a company falls within its scope shall attach weight to forward-looking assessments, including any plans that will reduce the thermal coal-related portion of revenues or operations and/or increase the renewable energy-related portion of revenues or operations. Moreover, Norges Bank may choose to place companies under observation under the coal criterion. Norges Bank notes that observation is relevant for companies that are held to exceed the applicable thresholds, but for which information on stated plans, initiatives or other material factors makes it likely that the company will move below the thresholds within a reasonable period of time. Examples of this are, according to the Bank, planned or recently completed acquisitions or divestments of companies and assets, publicly communicated shutdown plans, commencement of new, or modification of existing, production capacity, as well as drought, accidents or other specific events that may have affected the energy mix.
The Ministry proposes, based on an overall assessment, that the 30-percent threshold value for the relative portion of revenues or operations under the coal criterion be kept unchanged, but that such relative portions be supplemented by thresholds for absolute coal extraction and coal power capacity of 20 million tonnes and 10,000 MW, respectively. The Ministry proposes that the assessments under the criterion shall continue to be forward-looking. The Ministry will be monitoring the functioning of the absolute thresholds and in view of this consider potential threshold value reductions.
If carbon capture and storage turns out to be a cost-effective technology for reducing emissions from coal power production in the longer run, it may be appropriate to consider this when assessing companies against the product-based coal criterion.
4.4 The conduct-based climate criterion
Against the background of the Storting’s deliberation of a Private Member’s Motion, the Ministry of Finance appointed, in 2014, an expert group to assess the investments of the GPFG in coal and petroleum companies and the use of policy tools in relation to such companies. One of the group’s proposals was to add a conduct-based climate criterion to the Guidelines for Observation and Exclusion from the GPFG.
The climate criterion was added to the guidelines with effect from 1 January 2016. The criterion implies that observation or exclusion may be decided for companies where there is an unacceptable risk that the company contributes to or is responsible for «acts or omissions that on an aggregate company level lead to unacceptable greenhouse gas emissions».
The Ministry of Finance outlined the general interpretation of the climate criterion in the fund report in the spring of 2015,8 whilst at the same time emphasising that the detailed interpretation would be developed over time. In the report, the Ministry observed, inter alia, that:
The criterion will be inherently dynamic and will neither depend on industry or sector, nor on the type of greenhouse gas.
The criterion should reflect the consideration that norms may develop over time in line with, inter alia, changes in energy production and technological development.
Greenhouse gas emissions shall form the basis for an overall assessment under the criterion.
There must be a link between the acts or omissions of a company and the greenhouse gas emissions.
The expert group expected that the Council on Ethics would in practice focus on companies in industrial sectors with significant absolute emission levels, and that the energy sector and electricity generation from fossil energy sources would form a key part of such focus.
The expert group emphasised that it seems reasonable, in considering the severity of a violation of ethical norms in this regard, to focus, as one of several considerations, on emission intensity, and not necessarily on absolute emission levels. By emission intensity is meant emissions relative to, for example, production or sales.
The assessment shall be made at an aggregate company level. Such an overall company assessment is appropriate in view of the underlying premise of existing systems for curtailing greenhouse gas emissions and limiting global climate change, that activities in one area may be offset by activities in other areas, for example through emission allowance trading. Excluding a company that operates in conformity with the guidelines of such a system might be counterproductive. It may, at the same time, be difficult to assess this, since many companies are engaged in activities in several countries with various degrees of regulation.
It is appropriate for the overall assessment to take into consideration whether the greenhouse gas emissions of companies are subject to taxes, mandatory emissions trading systems or other regulations.
«Unacceptable» implies that the criterion is aimed at serious norm violations, in line with the established exclusion threshold under the Guidelines for Observation and Exclusion. The Ministry noted that the expert group stated that serious norm violations should for this purpose be assessed in the context of specific comparable operations, sectors and industries based on, for example, generally accepted international standards.
Both the expert group and a number of those submitting consultative comments noted that actively opposing, for example, international agreements on the reduction of greenhouse gas emissions may be an element to which weight should be attached in the overall assessment under the criterion.
The assessments shall, as for other conduct-based criteria, be forward-looking.
The Standing Committee on Finance and Economic Affairs observed, in its recommendation on the report, that the criterion will be independent of industry or sector, as well as of the type of greenhouse gas, and also that it should reflect the consideration that norms may develop over time. The Standing Committee also noted that the criterion must be considered in the context of the product-based coal criterion (the 30-percent threshold), which was added to the guidelines with effect from 1 February 2016.
In the fund report in the spring of 2017,9 the Ministry of Finance provided an account of experience thus far with the conduct-based climate criterion and the product-based coal criterion. At that point in time, a recommendation under the climate criterion had yet to be made. The report summarises the key points of a letter from the Council on Ethics to the Ministry, in which it was stated, inter alia, that the climate criterion provides limited information on which types of emissions it is intended to encompass, and that unlike for most of the other criteria, there is not, according to the Council on Ethics, any regulatory framework or internationally recognised norm as to what is acceptable. The Council on Ethics characterised, against this background, its efforts as involving the establishment of norms, and the Council has deemed it necessary to spend some time on this, in order to enable the adopted interpretation of the criterion to be applied across industries and companies. The Council on Ethics also observed that the limited data available at company level is a challenge, and emphasised that it will therefore be necessary to base the assessments on both emissions data, where available, but also on other indicators, such as technology and raw material choices. The Council on Ethics further stated that:
«Even when emissions data are available, it will in heterogeneous industries be challenging to make company comparisons. The Council on Ethics is tentatively assuming that «aggregate company level» means that comparisons can be made between different companies, but in such cases on comparable activities, such as for example emissions relating to all production of comparable products.»
The Ministry noted in the report that the climate criterion addresses a field where there is a dearth of both available experience and relevant norms and standards, and took note of the challenges highlighted by the Council on Ethics in its letter. It was also observed that a thorough preparatory effort to interpret the criterion is a priority, subsequently to enable application of said criterion across industries and companies. The Ministry also concluded that «unacceptable» implies that serious norm violations are the target, in line with the established high exclusion threshold under the Guidelines for Observation and Exclusion, and that the assessments shall continue to be forward-looking. Key observations from the fund report in the spring of 2015 were also reiterated, including, inter alia, in relation to emission intensity and the interpretation of the term «aggregate company level».
In its recommendation on the report, the Standing Committee on Finance and Economic Affairs took note of the details provided on experience with the coal and climate criteria and noted that it «expects Norges Bank and the Council on Ethics to assess and improve this effort on an ongoing basis in accordance with the expectation communicated in the Storting’s resolution.»
4.4.2 The Council on Ethics’ and Norges Bank’s assessments
In May and June 2017, as well as in March 2018, the Council on Ethics forwarded the first exclusion recommendations to Norges Bank under the climate criterion. The Bank asked, in a letter of 2 May 2018, the Council on Ethics for a more detailed assessments as to which principles the application of the criterion shall be premised on, including which aspects of a company’s specific conduct should be considered unacceptable as far as the submitted recommendations were concerned. In a reply letter of 12 June 2018, the Council on Ethics provided additional information on which principles it had applied, and proposed a meeting to further the exchange of views. A meeting was held between the Ownership Committee of the Executive Board and the Chair and Deputy Chair of the Council on Ethics on 6 September 2018.
The Executive Board deliberated the recommendations from the Council on Ethics on 24 October 2018, but reached no decision. The Bank stated, in a letter of 7 November 2018 to the Ministry of Finance, that this must be considered from the perspective that there still appears to be diverging assessments in the Council on Ethics and Norges Bank as to how the criterion shall be applied.
The Council on Ethics’ and Norges Bank’s assessments and questions on implementation of the criterion will be outlined below, based on the letter of 7 November 2018 from Norges Bank to the Ministry of Finance, as well as the letters between the Bank and the Council on Ethics enclosed with the Bank’s letter to the Ministry. In conformity with the division of responsibilities on the observation and exclusion of companies from the GPFG, the Ministry has no knowledge as to which companies are subject to recommendations, or the specific contents of individual recommendations. However, it is publicly known that the Council on Ethics has completed its review of companies engaged in unconventional oil production and coal-based power production. The Council on Ethics will now be reviewing companies that produce cement or steel, and also take a closer look at international shipping emissions.
Norges Bank’s questions and assessments
Norges Bank asked, in its letter to the Ministry, how the climate criterion shall be interpreted as a conduct criterion. The Bank is of the view that the criterion, when compared to other criteria under the guidelines, does not provide a particularly precise definition as to what type of conduct shall give rise to an exclusion decision.
Norges Bank requested the Ministry to contribute to clarifying whether companies’ emissions are meant to be the primary basis for assessment under the criterion, as well as whether forward-looking assessments may attach decisive importance to greenhouse gas intensity, relative to an industry average, not being improved over time.
Norges Bank also raised the question of whether an industry average may constitute a fundamental ethical norm. Norges Bank agrees with the Council on Ethics’ assessment that high absolute emissions or emission intensity may serve as a basis for selecting companies for assessment against the criterion, but believes, at the same time, that the criterion invites assessment of company-specific acts or omissions in relation to greenhouse gas emissions beyond the actual emissions. Examples may, according to the Bank, be how the company relates to the climate framework under which it operates, its conduct relative to international standards, as well as its handling of, and reporting on, greenhouse gas emissions.
Furthermore, Norges Bank asked the Ministry of Finance to assess whether there is a need for providing further details in relation to the Ministry’s earlier discussion of the significance of certain companies operating under climate schemes, including carbon taxes, or carbon pricing and emission allowance trading systems. Norges Bank stated that the Council on Ethics has not, in the recommendations made under the criterion, attached weight to whether a company is covered by mandatory emissions trading systems or other forms of emissions regulation. In Norges Bank’s understanding of the travaux préparatoires, factors such as whether a company operates under a climate scheme or a system involving carbon taxes, carbon pricing or emission allowance trading should nonetheless form part of the basis for assessment against the climate criterion. The same applies to how companies address relevant frameworks.
The Council on Ethics’ assessments
The Council on Ethics stated, in a letter to Norges Bank, that it is of the understanding that conduct relating to emissions is the key consideration, and that two qualifying aspects of a company’s conduct determine whether it can be recommended for exclusion: Firstly whether the company’s emissions are high, and secondly whether such emissions are substantially higher per unit produced than for companies with which a comparison is appropriate. In other words, the Council on Ethics considers emissions and emission intensity in themselves as being implications of conduct. The Council on Ethics has based such considerations on the production of relatively homogenous products, for which, inter alia, production methods and inputs nonetheless have a major impact on emission intensity.
The Council on Ethics thereafter considers the future risk, including whether the company has specific, credible and timed plans for reducing its emissions, within a reasonable period of time, to a level where emissions do not differ materially from that of other companies producing the same product. The Council is of the view that it is not sufficient for the company to have a general policy on reduction of greenhouse gas emissions in the distant future. In making such assessment, the Council on Ethics also attaches weight to the likely emissions reduction of companies with which it is appropriate to make comparisons, as well as the viability of the company’s plans in view of any industry challenges with regard to technological development.
The Council on Ethics notes that the Paris Agreement applies to countries, and does not involve commitments at the industry or company level. The Council on Ethics states that it has, in the absence of company-specific requirements for the reduction of greenhouse gases, taken the view that all companies with high emissions have a particular ethical obligation to contribute to meeting the target of a global temperature rise well below two degrees. Moreover, the Council has taken the view that if the emissions are unacceptable at the outset, emissions reductions beyond the industry average are warranted. In the opposite case, emissions would be equally far from the industry average subsequent to such reductions.
Furthermore, the Council on Ethics notes that it has concluded, based on an overall assessment, that it is now difficult to attach decisive weight to whether a company falls within the scope of an emissions trading system or other regulatory mechanism relating to emissions. The Council on Ethics emphasises that this has been a difficult issue. The Council has, in reaching this conclusion, attached weight to the wording of the fund report in the spring of 2015, developments in country commitments from the Kyoto Protocol to the Paris Agreement, as well as the practical implications of various interpretations.
The Council on Ethics notes that only 20 percent of global emissions are currently subject to some form of carbon pricing (taxes and/or emissions trading systems) and that emission prices in most jurisdictions are far below the levels necessary to meet the targets under the Paris Agreement. The Council on Ethics also notes that the EU ETS marks an exception, and that, inter alia, coal power will over time become unprofitable under this system. The Council is of the view that this may indicate that companies under a strict/ambitious climate framework should not be excluded from the Fund under the climate criterion.
On the other hand, the Council is of the view that it is difficult to take the position that companies within the scope of a climate scheme shall be treated differently from companies outside such scope, and that attaching weight to climate schemes in the assessment means that the Council would be moving away from the fundamental principle of grossly unethical conduct (high emissions and high emission intensity). In addition, the Council on Ethics is of the view that the climate scheme has changed, through the conclusion of the Paris Agreement, since the introduction of the climate criterion (when the Kyoto Protocol was applicable). Most countries now have nationally determined targets as part of the Paris Agreement, but these have been established on the basis of countries’ own situations, and the Council is of the view that it is not feasible to start out from one country’s targets and plans to assess whether these are sufficiently ambitious in terms of the targets under the Paris Agreement. Countries’ implementation of targets under the Paris Agreement will be subjected to international review, but the Council on Ethics argues that it is uncertain whether such assessments can be used as a basis for evaluating emissions from companies.
The Council on Ethics states that it will, where this is possible to identify, consider it an aggravating factor if a company in its lobbying takes a critical and negative stance on national and international climate initiatives and, for example, systematically withholds key information or makes misrepresentations.
Incomplete or inadequate information on company-specific matters will for all of the conduct criteria normally result in the Council on Ethics considering the future risk to be higher than if there is good access to information. Moreover, the Council on Ethics states that it is only in case of doubt that factors such as a company’s participation in industry-specific benchmarking, focus on technological development or participation in disclosure systems such as the CDP,10 may result in companies that are found to have unacceptable emissions being nonetheless considered acceptable.
4.4.3 The Ministry’s assessments
184.108.40.206 General premises
Application of the conduct-based climate criterion should be based on the following general premises:
The exclusion threshold
The established high threshold for exclusion of companies on the basis of the conduct criteria under the Guidelines for Observation and Exclusion from the GPFG shall remain in place.
Dynamism versus stability
The climate criterion shall be dynamic over time, to reflect, inter alia, changes in energy production, in technological development and in national and international climate schemes.
On the other hand, the basis for exclusions under the criterion should be sufficiently robust, thus implying that decisions will normally remain appropriate for a certain length of time. A company frequently oscillating between being above and below the exclusion threshold is a situation that should be avoided.
The criterion as a conduct criterion
Whilst the product-based criteria under the guidelines apply to the production of certain products, the conduct criteria are based on the conduct of individual companies. The climate criterion does not define the production of specific products as grossly unethical in itself. Instead, the relative emissions (emission intensity) of individual companies are considered an implication of their conduct (actions or omissions). Factors influencing emission intensity may, for example, include the choice of production method, including inputs and technology. It may in some cases be relevant to assess such conduct in view of the choices faced by the company in practice with regard to, inter alia, access to raw materials and technology, as well as geographical location.
Chain of policy measures, recommendations and decisions
The Council on Ethics is responsible for making recommendations on the observation and exclusion of companies from the GPFG. All factors of relevance to an overall assessment of companies under the climate criterion should be addressed in the recommendations from the Council on Ethics. The guidelines require the Council on Ethics to present draft recommendations to the companies. This affords the company in question an opportunity to correct any errors or omissions in the informational basis for the recommendation.
With effect from 2015, decisions in such matters are made by the Executive Board of Norges Bank. The purpose of this new division of responsibilities was, inter alia, to facilitate efficient cooperation between the Council on Ethics and Norges Bank, thus enabling various measures to be more readily considered in relation to each other and used in an appropriate manner in each case.
Where there is doubt as to whether the exclusion criteria are met, and especially with regard to future developments, the Council on Ethics may recommend observation. Before observation or exclusion is decided, Norges Bank shall assess whether other measures, including active ownership, may be better suited for reducing the risk of continued norm violation or may be more appropriate for other reasons. The overarching objective is to identify the most suitable measure for each case. Observation and active ownership decisions require extensive follow-up on the part of the Council on Ethics and Norges Bank, respectively.
Norges Bank would outline its reasoning in more detail in cases where the Executive Board decides to use a different measure than that recommended by the Council on Ethics; see section 6.7.
220.127.116.11 Overall assessment
Assessments of companies in the GPFG against the conduct-based climate criterion shall, in addition to being based on the premises discussed in the above section, be based on an overall assessment against the background of the following considerations:
Emissions, emission intensity and basis for comparison
As far as the other conduct criteria are concerned, the Council on Ethics may to a large extent start out from established ethical norms against which the conduct of companies may be assessed. For the climate criterion, there are no corresponding norms for unacceptable greenhouse gas emissions.
In order to be considered for observation or exclusion under the criterion, a company needs to have high emissions in absolute terms, both in aggregate and based on the type of industry under assessment. The company must also have significantly higher emission intensity than companies with which it is appropriate to draw such comparisons.
The Ministry expects that application of the climate criterion involves identifying the most relevant basis for comparison when assessing emission intensity, and that such basis may to some extent depend on what type of production is under assessment.
As with the other conduct criteria, forward-looking assessments are of key importance under the climate criterion. Their purpose is to assess the risk that the unacceptable conduct will continue. A key consideration will be whether there are specific and credible plans for how emission intensity shall be reduced to an acceptable level within a reasonable period of time.
The assessments shall be in line with the overarching premise of a high threshold for exclusion of companies. Such forward-looking assessments may be complex and subject to considerable uncertainty, and will in all probability require discretionary assessment. It may, furthermore, be relevant to consider the company’s own plans and its assumed ability to deliver on, inter alia, the phase out of highly emission-intensive technologies, expected developments in the peer group, as well as anticipated developments in relevant technologies, standards and practices. As far as assessments of the company’s ability to deliver are concerned, it may for example be relevant to consider whether the company provides the Council on Ethics with adequate information, the company’s public disclosures on climate-related matters, as well as how the company’s plans are embedded in its organisation and in specific strategies.
It will also be relevant to consider the climate scheme applicable to the company, cf. the entries below on «Climate scheme» and «Basis for assessment and other factors» for further details.
The international climate framework will from 2020 be the Paris Agreement. This agreement encompasses all countries, and countries themselves decide their own contributions and implementation. The agreement stipulates that industrialised countries should have targets for absolute emissions reductions that cover their economy as a whole, whilst developing countries are encouraged to move in the same direction over time. National climate frameworks, such as regulation, taxes or emissions trading systems, will differ between countries and regions. The Paris Agreement includes provisions on voluntary collaboration between countries on emissions reductions to meet their emissions targets; see Box 4.3 on the EU’s and Norway’s climate framework.
Textbox 4.3 The EU’s and Norway’s climate framework
Norway introduced a CO2 tax as early as 1991, long before any international commitment. The EU developed its emissions trading system in advance of the first commitment period under the Kyoto Protocol (2008–2012). Norway has been an integral part of the EU emissions trading system (EU ETS) since 2008 via the EEA Agreement. The number of emission sources encompassed by the EU ETS has subsequently been expanded and the provisions under the system have been further harmonised. At present, 80 percent of Norwegian emissions are subject to a climate tax (of about NOK 500 per tonne of CO2 equivalents) and/or participation in the EU ETS, where the emission allowance price has been in the NOK 200 to 250 range per tonne since the summer of 2018.
The EU ETS, as well as the regulatory framework applicable to non-EU ETS emissions (the Effort Sharing Regulation), means that EU is in compliance with its international commitments. Norway wishes to collaborate with the EU on meeting the emissions target for 2030 under the Paris Agreement. Norwegian businesses contribute on a par with EU businesses to reducing EU ETS emissions. In addition, an agreement will provide Norway with a target for non-EU ETS emissions and for greenhouse gas emission and sequestration in forests and other land areas.1 The EU regulatory framework allows for several forms of flexibility, including scope for over-complying countries to sell their surplus to other countries.
Participation in the EU ETS is a key element of Norwegian climate policy. The Climate Act emphasises that putting the emissions target for 2030 and the objective of becoming a low-carbon society in 2050 on the statute book is not an obstacle to collaboration with the EU on emissions reductions. The effect of Norwegian participation in the EU ETS shall be taken into account in assessing whether Norway meets the objectives under the Climate Act.
At present, in excess of 40 percent of EU emissions and just over half of Norwegian emissions are encompassed by the EU ETS. The emissions trading system caps overall emissions from EU ETS businesses through the number of allowances made available in the market (issued). Companies need to use allowances to cover their annual emissions. The allowances can be traded between companies. This ensures that emissions reductions take place in the companies with the lowest costs of such curtailment. Which companies actually reduce their emissions is immaterial. The relevant issue is the overall emissions from all businesses encompassed by the EU ETS.
A key mechanism in the emissions trading system is the annual reduction in the total number of allowances issued. In the current period, the annual reduction is 1.74 percent of a quantity of allowances calculated for 2010. After 2020, the reduction in the quantity of allowances will be accelerated, to 2.2 percent per year. This implies that issued allowances in 2030 will be 43 percent lower than emissions from the EU ETS sectors in 2005. If the annual reduction in the quantity of allowances continues unchanged after 2030, the number of allowances made available to the EU ETS businesses will in 2050 be 84 percent lower than emissions from the EU ETS sectors in 2005, and thereby approach zero shortly after the middle of this century.2
1 The agreement will formally be a decision of the EEA Joint Committee recorded in Protocol 31 on cooperation in specific fields outside the four freedoms.
2 Moreover, there is a designated revision provision in the EU ETS Directive in relation to, inter alia, the global review under the Paris Agreement and assessment of the need for enhanced measures, including the annual reduction factor.
The climate framework facing a company will affect that company’s conduct (emissions at present and in future). Companies under a strict climate scheme will over time have lower emissions than corresponding countries under less strict schemes. Besides, capital goods often have a long lifespan. This implies that emissions measured at a given point in time under the same climate scheme may vary considerably between companies manufacturing the same products. There is reason to assume that such differences may persist over a number of years.
Companies’ emissions are affected by their choice of production method, including choice of technology for major investments. A company will, as a general rule, opt for the most profitable available solutions, in view of expected emission prices and other regulatory conditions. If a company chooses more emission-intensive technologies for such investments than the best technologies that are available, this may appear to be an omission. However, under an emissions trading system with a financially-binding allowance cap, increased emissions or omitted emissions reductions in one company will be offset by reduced emissions elsewhere in the system. It may therefore be assumed, under a strict and credible climate scheme, that the company takes the emissions cost, like other costs, into account in its investment and production plans. The public authorities have adopted a specific and credible plan on how to reduce emissions, which companies are required to adhere to.
This indicates that the threshold for exclusion of companies under a strict climate scheme should be higher than for other companies. As noted in the fund report in the spring of 2015, it might also prove counterproductive to exclude companies that operate in conformity with the applicable regulations of such a system.
As discussed in the fund report submitted in the spring of 2015, it is appropriate for an overall assessment under the climate criterion to pay heed to whether companies’ greenhouse gas emissions are subject to taxes, mandatory emissions trading systems or other regulations. Although it may be challenging to assess the strictness of a specific climate scheme, this implies that available information on regulation in a country or region must be taken into consideration and form part of the overall assessment, when assessing companies against the climate criterion.
The EU emissions trading system applies a reduction factor to the number of allowances issued annually, which entails that new allowances will no longer be issued shortly after the middle of this century. In addition, the system has strict compliance mechanisms. In the absence of international guidelines or standards in this regard, it would be appropriate to consider the EU emissions trading system, which may be classified as a strict climate framework on the basis of its rules, compliance mechanisms, linear reduction factor and emission allowance prices, as a norm or basis for comparison when assessing the framework faced by companies. This implies that companies whose emissions are subject to taxes, mandatory emissions trading systems or other regulations will, as a general rule, be treated equally across countries and regions.
Basis for assessment and other factors
Companies’ emission intensity and forward-looking assessments may constitute the primary basis for assessment under the climate criterion.
However, when companies act in compliance with applicable statutes and regulations and are subject to strict climate regulation such as the EU ETS, their emissions cannot in themselves be said to imply unacceptable conduct. Hence, additional factors would need to come into play in order for the conduct of such companies to be considered unacceptable under the criterion. The reason for this is that it must be assumed, under a strict and credible climate scheme, that companies will take emissions prices into account in their investment and production plans and that aggregate emissions from all companies will be reduced over time. Which companies actually reduce their emissions at any given time, and by how much for each company, is immaterial. The relevant issue is overall emissions from all companies falling within the scope of the climate framework.
It will also for other companies be relevant to consider any other factors as part of an overall assessment, although emission intensity and forward-looking assessments may constitute a sufficient basis for assessment.
A number of such other factors may be of relevance. The following listing is not exhaustive and additional relevant factors may be identified:
Relocation of high emission intensity production from countries with a strict climate scheme to countries with no climate framework («carbon leakage»).
Opposition to, or circumvention of, climate schemes.
Positive conduct under a climate scheme, such as the purchase of allowances in excess of the commitment or other contributions to emissions reductions in other companies/countries.
Inadequate reporting of, or on, greenhouse gas emissions, as well as any omissions, for example failure to make sufficient disclosures to the Council on Ethics.
How the company integrates climate considerations in its corporate governance, assessed in view of, inter alia, relevant international standards and guidelines, as well as the framework recommended by the Task Force on Climate-related Financial Disclosures (TCFD).
4.5 The conduct-based human rights criterion
In connection with the Storting’s deliberation of the fund report in the spring of 2018, the Standing Committee on Finance and Economic Affairs stated, in Recommendation No. 370 (2017–2018) to the Storting, inter alia, the following: «When the benchmark index for the GPFG is expanded to include countries where there is cause for concern about the human rights situation in general, it is important that the guidelines for observation and exclusion be reviewed and operationalised such as to make these sufficiently robust in relation to the challenges posed by such markets.» Against this background, the Ministry requested, in a letter of 28 June 2018, the Council on Ethics to provide an account of its application of the human rights criterion.
Under Section 3 a) of the Guidelines for Observation and Exclusion from the GPFG, observation or exclusion may be decided for companies where there is an unacceptable risk that the company contributes to or is responsible for serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour or the worst forms of child labour. The decisions are made by the Executive Board of Norges Bank, based on recommendations from the Council on Ethics. Five companies were excluded under the human rights criterion, whilst three companies were placed under observation, as at the end of 2018.
The role of the Fund as a responsible owner is expressed through guidelines and frameworks governing Norges Bank’s responsible investment practices. The mandate from the Ministry refers to international principles and standards such as, inter alia, the UN Global Compact and the OECD Guidelines for Multinational Enterprises; see Box 4.1. Both of these standards include human rights principles applied by Norges Bank in its responsible investment practices.
Human rights are an important focus for the responsible investment practices of Norges Bank. In 2016, the Bank published an expectation document on human rights, in which it is stated that the Bank as a financial investor expects companies to respect human rights in accordance with the United Nations Guiding Principles on Business and Human Rights (UNGP). The Bank expects companies to implement relevant measures in their business strategy, risk management and reporting. Norges Bank has also published a separate expectation document on children’s rights, and has since 2008 made annual assessments of how companies with operations or supply chains in sectors and countries with a high risk of child labour report on their children’s rights involvement. Part of the information gathered through the Bank’s children’s rights assessments captures how companies report on social issues and human rights in general. Moreover, the Bank integrates human rights in its active ownership in general, including in company dialogue, in voting, via industry initiatives and by contributing to the development of international standards.
The Council on Ethics provided an account of its application of the human rights criterion in a letter of 13 November 2018 to the Ministry of Finance. The letter outlines, inter alia, how the criterion is operationalised, including the Council’s interpretation and approach, as well as certain specific operationalisation challenges in relation to expansion of the benchmark index; see section 4.5.2. The Ministry’s assessments are presented in section 4.5.3.
4.5.2 The Council on Ethics’ application of the human rights criterion
The Guidelines for Observation and Exclusion refer to a number of examples of what may be considered serious human rights violations. The Council on Ethics makes the general observation that the criterion encompasses very different categories of violations, from murder and torture, to poor working conditions and violations of the freedom of association and the freedom of speech. The Council therefore bases its assessments on whether there are violations of internationally recognised conventions and authoritative interpretations of such conventions. In addition, it makes use of guidelines from UN agencies, the OECD, the World Bank, etc.
The guidelines stipulate that acts or omissions need to be «serious» or «systematic» in order to qualify as human rights violations. Serious violations, as interpreted by the Council on Ethics, are those violating bodily integrity,11 whilst systematic violations involve acts or omissions on a significant scale.12 The Council emphasises that it takes the view that a small number of human rights violations may be sufficient for a company to be excluded if such violations are deemed serious, whilst it is not necessary for the violations to be equally serious to qualify for exclusion if these are held to be systematic.
The guidelines for the observation and exclusion of companies stipulate that a company may qualify for violation of the conduct-based guidelines if it is responsible for or contributes to such violation. The Council on Ethics states that it has assumed that the exclusion threshold is lower for a norm violation which a company is directly responsible for than for a norm violation to which the company contributes, but for which government bodies or business partners are directly responsible. If there is a risk of serious human rights violations, such as for example forced labour or the worst forms of child labour, the Council on Ethics takes the view that companies may in principle be held responsible for violations taking place in, for example, the supply chain.
Whilst the guidelines focus on individual companies, the legal obligations under international human rights conventions apply to states. The Council on Ethics assesses whether the relevant company acts in such a manner as to represent a contribution to violations of internationally recognised human rights, and does not consider the extent to which the state is responsible for possible human rights violations in any given case.
The Council on Ethics’ application of the human rights criterion is, in all key respects, aligned with the Council’s application of the other conduct-based criteria; see section 4.2. The Council on Ethics aims to perform an evaluation of its application of the human rights criterion during the course of 2019.
In its letter, the Council on Ethics highlights certain factors that may represent challenges to the Council in connection with the inclusion of additional countries with higher risk of human rights violations in the benchmark index. When the Council on Ethics was established in 2003, the Fund was invested in 27 developed markets and about 3,000 companies. As at the end of 2018, the Fund is invested in more than 9,000 companies in over 70 countries. This development has, according to the Council on Ethics, resulted in the Fund being invested in more companies with operations in countries that pose high ethical risk, and also affects the Council’s role as researcher, analyst and advisor.
Which countries are included in the benchmark index for the GPFG depends on the assessments of the index provider; see section 2.1. The management mandate requires all markets to be approved by Norges Bank before investments can be made. These assessments are predominantly based on characteristics of the marketplace. The Council on Ethics’ experience suggests that there is not necessarily any correlation between well-functioning financial markets and a well-functioning state governed by the rule of law which is capable of protecting the rights of its citizens.
Moreover, the Council on Ethics makes the observation that information access is generally low in many countries. This makes it challenging to obtain sufficiently reliable or neutral sources to substantiate and document, on the balance of probabilities, norm violation relating to human rights. Poor information access is, according to the Council on Ethics, especially prevalent in closed, repressive countries, in which, more generally, concerns about the human rights situation are somewhat elevated. Challenges with regard to limited and unreliable information are also a feature of certain industries, such as the defence industry or high-technology industries.
For large multinational companies operating in countries with an elevated degree of government control and low tolerance of government criticism, the Council on Ethics will normally have access to some information from international networks of non-governmental organisations (NGOs) and Western media that follow up on the large companies. For the local companies that operate and are domiciled in such countries, on the other hand, there is often very limited access to information.
The implication of dissimilar information access may often be, according to the Council on Ethics, the unequal treatment of companies in which the Fund is invested.
The Council on Ethics also observes the challenges associated with companies that operate in countries with different sets of norms than those underpinning internationally recognised conventions and appurtenant authoritative interpretations. Companies may thereby in different ways become implicated in human rights violations whilst at the same time being in compliance with local laws. The Council on Ethics is thereby confronted with the dilemma between recommending exclusion of companies based on violations of international norms, and thus running the risk that its recommendations are perceived as criticism of the authorities, or only assessing those violations that a company can itself influence. The latter may be perceived as legitimising violations that would in other contexts have resulted in an exclusion recommendation.
The Council on Ethics also states that if the sum total of policy measures at the disposal of Norges Bank and the Council on Ethics is not sufficient for proper ethical risk management in especially exposed countries, the question may be posed of whether responsible investment requirements are satisfied. The Council on Ethics sees a need for further examination of these issues.
4.5.3 The Ministry’s assessments
The Ministry is of the view that it is important for the human rights criterion to be followed up in a consistent, predictable and principled manner in relation to the companies in which the Fund is invested. The Ministry has taken note of the Council on Ethics’ assessment that a small number of violations may be sufficient for a company to be excluded under the human rights criterion if such violations are deemed serious, whilst it is not necessary for the violations to be equally serious to qualify for exclusion if held to be systematic. The Ministry has also taken note of the assessment that the threshold may be lower for norm violations for which a company is directly responsible than for norm violations to which a company contributes.
The Ministry has also taken note of the challenges and dilemmas highlighted by the Council on Ethics in its application of the human rights criterion in some countries. The Ministry notes, in this context, that the Government is proposing the appointment of a committee to review the ethically motivated guidelines for the Fund.
Besides, the Ministry has initiated a review of the framework for the equity investments in the Fund, including the geographical composition of the benchmark index; see section 3.4.
North Korea and Syria are currently excluded from the investment universe under this provision.
Meld. St. 13 (2017–2018); The Government Pension Fund 2018.
The background to the petition resolution was that the Standing Committee on Finance and Economic Affairs noted, in its recommendation (Recommendation No. 370 (2017–2018) to the Storting), inter alia, that it was observed by several organisations in the public consultation that the GPFG continued to hold investments in coal industry companies, and raised the question of whether the coal criteria are sufficiently tight to accommodate the Storting’s intention that the Fund shall not be invested in coal. The Standing Committee on Finance and Economic Affairs referred to the comment in Recommendation No. 326 (2015–2016) to the Storting, in which the Standing Committee stated «that the application of a new product-based criterion should also be subject to development over time based on, inter alia, changes in energy production and technological matters», and requested that this be followed up in coming years.
Meld. St. 21 (2014–2015); The management of the Government Pension Fund in 2014.
The German organisation Urgewald is behind the website www.coalexit.org, which includes a database (Global Coal Exit List) of information on companies with coal-related operations and provides information on about 770 companies that represent an estimated 88 percent of global coal production and 86 percent of global coal power capacity. This information is used by many investors and funds in addressing responsible investment and climate risk.
Companies with extraction and power capacity in excess of the said levels are considered to be the companies with the largest coal operations in the world. According to the Global Coal Exit List, 20 million tonnes of coal extraction corresponds to the coal consumption of a country such as Italy. A coal power capacity of 10,000 MW requires the burning of more than 20 million tonnes of coal annually.
Institutional investors that have introduced coal criteria primarily use relative threshold values corresponding to those applied for the GPFG. The Ministry is aware of a small number of large investors which have supplemented the relative thresholds with absolute thresholds, and which have done so at levels corresponding to those mentioned here, for example the European insurance companies AXA and Generali.
Meld. St. 21 (2014–2015); The management of the Government Pension Fund in 2014.
Meld. St. 26 (2016–2017); The management of the Government Pension Fund in 2016.
Formerly the Carbon Disclosure Project.
Torture, murder, deprivation of liberty, the worst forms of child labour, forced labour, etc.
«Systematic» implies that such infractions are not considered isolated violations, but represent a pattern of conduct.