Historical archive

The Report from the Graver Committee

Historical archive

Published under: Bondevik's 2nd Government

Publisher: Ministry of Finance

Responsible investments

1. The Petroleum Fund – management for the future: proposed ethical guidelines for the Government Petroleum Fund

The people of Norway are in a unique position. For most Norwegians, life in material terms has never been better, and the last couple of generations have experienced an unparalleled rise in prosperity. Norway is in a particularly favourable position due to the rich abundance of oil and gas that was discovered just over thirty years ago.

The prosperity enjoyed by present generations carries obligations. Our oil and gas reserves are running out. Since these resources are limited, it is not fair that these riches only benefit the few generations that happen to experience their extraction. The wealth generated by these resources must be safeguarded for future generations. This is an important basis for the establishment of the Petroleum Fund.

It is a well-known fact that by exhausting the earth’s resources and eroding the conditions for life on the planet, we may be achieving prosperity now at the expense of the prosperity of future generations. Fossil fuels in particular cause problems since greenhouse gases are released during their production and use. Furthermore, while our prosperity grows, many people in other parts of the world live in poverty and need. In some cases, commodities and services for our consumption are produced by workers who are grossly exploited. The ecology of our planet is not likely to be able to withstand other countries copying the economic and technological developments we have experienced in order to close the gap between rich and poor. The way in which we generate and distribute wealth is important if we are to share the earth’s resources fairly and avoid jeopardising the prosperity of future generations.

The Norwegian state receives substantial revenues from the petroleum industry on an ongoing basis. The Government Petroleum Fund is an instrument that permits the state to use petroleum revenues without affecting the general income flow. At the same time, the Petroleum Fund serves as the state's instrument for long-term financial saving. The Petroleum Fund thus contributes to stable economic developments in Norway and ensures that future generations can benefit from our oil wealth. The Fund thereby fulfils an important ethical obligation that we as Norwegians must shoulder - to manage the resources we have in a way that ensures sustainable economic growth. In contrast to investing in education and fixed capital today to create wealth in the future, safeguarding value by maintaining financial wealth generates a return that can be used some time in the future. Investment in knowledge and fixed capital today can lay the foundation for the infrastructure necessary for wealth creation in the future or for the development of technology that can create wealth without overloading the environment as we do today. Saving some of the petroleum revenues means that the welfare gains from our petroleum wealth can benefit all generations without laying claim to the substantial resources that non-offshore investments would currently require.

The Committee has not looked into the issues raised by the choice between accumulating capital in a financial fund and using the revenues for other purposes. Nor has the Committee discussed the use of the Petroleum Fund for development assistance, etc. The proposed ethical guidelines presented here are based on the assumption that whatever the revenues were used for, some capital would be set aside for the purpose of accumulating financial wealth in the form of investment in foreign securities. The Committee has considered its objective to be to draw up guidelines to ensure that we fulfil our ethical obligations in our management of this financial wealth.

To create economic room for manoeuvre for future generations, a long-term perspective must be applied to the management of financial wealth. Ensuring long-term returns is both a major economic and technical challenge and an important ethical obligation. In the design of an investment strategy, it is wise to emphasise a sound balance between risk and return. Since it is impossible to know with any certainty how different sectors and companies will develop, it is wise to spread risk by distributing investments among a number of companies, sectors and markets. Achieving high returns over time is dependent on general economic growth. In other words, sustainable economic development is essential to a long-term return on a broad-based financial portfolio.

2. Ethics in the management of the Petroleum Fund

2.1 A basis of overlapping consensus

Norway is a pluralistic society and there is no consensus on one particular uniform ethical perspective. As a result, Norwegians do not all have the same justification for their various ethical points of view. We do not manage the Petroleum Fund only on our own behalf, but also on behalf of future generations. As such, the Fund carries hereditary rights and obligations. A defining characteristic of the Fund is that a substantial proportion of those on whose behalf the Fund is managed cannot choose its manager. This poses a particular challenge to the design of ethical guidelines for the Petroleum Fund and the principles on which they should be based.

The absence of a uniform perspective does not mean that there is no agreement on certain ethical principles. In many instances, Norwegians will arrive at the same answer to questions of ethics from different angles of approach. Most people, for example, agree that it is wrong to steal, whether they arrive at this conclusion from a sense of obligation derived from Christian ethics or on the basis of a utilitarian theory asserting that a society where people steal from each other will generate less happiness than the alternative. In these cases, we have what we might call overlapping consensus.

Decisions reached by society’s most important institutions are the result of political compromise, and it is unlikely that all the values reflected in Norwegian policy can be described as a coherent system of principles. If we are to ensure lasting support from the Norwegian public for the ethical foundation of the Petroleum Fund, the Fund’s ethical guidelines cannot be based on any particular political perspective or theory that might underlie concrete political decisions of a particularly ethical nature. One cannot, for example, conclude from the humanitarian aspect of Norwegian foreign policy that Norwegian foreign policy in general consists of selflessly promoting the interests of people in need. Other aspects of foreign policy are equally clearly motivated by the desire to promote Norwegian interests in the global community. If we are to ensure that the Fund’s ethical guidelines are firmly rooted in the values underlying Norwegian policy, we must look for the main normative characteristics that are consistent over time. Another reason for taking this approach is uncertainty as to the ethical standpoints that future generations will adopt.

2.2 Who do we have obligations towards?

Ethical obligations are something we have towards something or someone. Our obligations do not have to be the same towards different groups of people, but may vary according to our relationship to them and to the situation they are in. We normally feel a greater sense of obligation towards our own children than towards our neighbours’ children, for example, and a greater sense of obligation towards someone we have injured than someone we find lying by the side of the road. We must therefore determine who we have obligations towards and which obligations we have in relation to different groups.

There is broad agreement that all human beings are entitled to basic rights. A number of ethical theories assert that we have certain general obligations towards all human beings irrespective of our relationship to them. These general obligations spring from certain basic characteristics of all human beings, such as consciousness or the ability to feel pain or joy. Human rights are a reflection of this type of general obligation. We are obligated to respect certain fundamental rights all people are entitled to as human beings. The obligation not to violate another person’s basic rights has the same validity whether the person is a family member, a friend, a fellow countryman or a stranger.

In addition to such general obligations, individuals or groups of people with a particular relationship to others have rights by virtue of this relationship. What kind of relationships give rise to special obligations, and what these obligations are, is controversial both in theory and in political terms. Most people will, however, agree that we have certain obligations towards family members, descendants, friends, colleagues or fellow countrymen beyond the obligations we have towards all human beings. In particular, the obligation to level out financial inequality is often regarded as stronger within groups such as the nation state where individuals are closely linked to each other socially, financially and legally.

It has been claimed that not only people, but also other forms of life or the environment may have characteristics that require us to recognise ethical obligations towards them, and that our ethical responsibilities are not, therefore, restricted to human beings. The obligation to safeguard a sustainable environment can, on the other hand, also be viewed as a consequence of the duty to ensure that future generations have the same opportunities as those enjoyed by current generations. The fact that ethical demands as to our behaviour in relation to the environment can be justified in different ways is an example of the principle of overlapping consensus.

With a closer examination of the obligations we have in different situations, it may be useful to distinguish between the obligation to influence, to avoid complicity and to exercise retribution or punish.

One group of ethical theories asserts that we should primarily be concerned with the consequences of the choices we make. These theories are in other words forward-looking, focusing on the consequences of an action. The choice that is ethically correct influences the world in the best possible way, i.e. has the most favourable consequences. Every choice generates an infinite number of consequences and the decisive question is of course which of the consequences we should focus on. Again, a number of answers are possible. Some would assert that we should focus on individual welfare, and that the action that has the most favourable consequences for individual welfare is the best one. Others would claim that access to resources or the opportunities or rights of the individual are most important. However, common to all these answers is the view that the desire to influence the world in a favourable direction should govern our choices.

Another group of ethical theories focuses on avoiding breaching obligations by avoiding doing evil and fulfilling obligations by doing good. Whether the results are good or evil, and whether the cost of doing good is high, are in principle of no significance. This is often known as deontological ethics.

In relation to the Petroleum Fund, these two approaches will primarily influence choice in that deontological ethics will dictate that certain investments must be avoided under any circumstances, while teleological ethics will lead to the avoidance of investments that have less favourable consequences and the promotion of investments that have more favourable consequences.

A third ethical perspective emphasises retribution. Evil actions should be punished, doing good should be rewarded. In the view of the Committee, striving to achieve justice by using the Fund to penalise or reward is beyond the obligations that should be imposed on the Fund. In practical terms, this means that the Committee will not propose an approach whereby the Fund withdraws its investment from a company that has acted unethically in response to the unethical action. It is the opinion of the Committee that if the Fund withdraws its investment, it must do so because withdrawal is considered necessary to avoid complicity in unethical actions in the future.

The investments that should be avoided, in the opinion of the Committee, are those where the involvement of the Petroleum Fund implies a risk of complicity in grossly unethical actions.

It is not entirely clear which actions might be regarded as constituting complicity in unethical behaviour. If an action is directly necessary for the unethical behaviour to occur, this obviously constitutes complicity. This situation will rarely arise in connection with investments in equities and bonds because this type of disposal has no direct effect on a company’s capital flow. Thus, from the point of view of teleological ethics, it is not likely that a financial investor could be an accomplice in a breach of ethical norms. In terms of deontological ethics, an investment will also be unethical if the investor actively supports a company’s production or behaviour even if the support is not necessary for the unethical behaviour to take place. A person who holds the door open for a bank robber is an accomplice to the robbery even though the robber would easily have been able to get out through the door without help. Being the beneficiary of unethical behaviour cannot in itself be regarded as complicity. The robber’s children are not accomplices in his crimes even though the crimes finance their upbringing. Similarly, a person selling burglar alarms cannot be said to be an accomplice, even though the sale of alarms increases with the number of burglaries and the salesman thereby benefits from burglaries.

Except in those cases where complicity is necessary or reflects active support, an overall assessment of a number of factors must therefore be undertaken to determine whether a connection through an investment involves complicity in a company’s unethical behaviour. In this assessment, the focus must be on whether the investment is in equities or bonds, how systematic the unethical behaviour is in relation to the company’s activities, the information investors have or have access to and the opportunities that are available with regard to both seeking to discourage the unethical behaviour and to avoid being connected with those responsible.

It is reasonable to assume that by holding ownership shares in a company an investor contributes towards the company’s production of goods. It is not equally clear that an owner is also complicit in the company’s actions and behaviour. Some form of systematic or causal relationship must exist between the company’s activities and the actions to which the investor does not wish to contribute. Investment in a company cannot be considered to entail complicity in actions that were impossible to anticipate or be aware of or circumstances over which the company in question could not have any significant degree of control.

Even though the issue of complicity raises difficult questions, the Committee considers, in principle, that owning shares or bonds in a company that can be expected to commit grossly unethical actions may be regarded as complicity in these actions. The reason for this is that such investments are directly intended to achieve returns from the company, that a permanent connection is thus established between the Petroleum Fund and the company, and that the question of whether or not to invest in a company is a matter of free choice.

3. Correspondence and conflict in relation to ethical obligations

Since we, as owners of the Petroleum Fund, have different obligations towards different groups, situations may arise where these obligations conflict with each other. The requirement that fundamental human rights must be respected, which is an ethical obligation the Fund has towards all human beings, may be achieved at the expense of the return, which is an ethical obligation the Fund has towards future generations of Norwegians. However, the possibility of conflict is easily exaggerated. In a number of situations, there is no contradiction between the objective of long-term return and other ethical obligations.

3.1 Sustainability as a precondition for long-term return

The requirement for a long-term return gives rise to ethical obligations in relation to the requirement for sustainable development in a longer-term perspective. Sustainable development is a precondition for return on the Petroleum Fund’s financial investments in the long term. Historically, the sustained rise in welfare levels in Western countries in particular was achieved by high growth in fixed and human capital. At the same time, natural and environmental capital has been depleted. With growing pressure on the natural environment on a global basis and in individual countries, attention has been focused on the threat of irreversible consequences. This is an important reason why sustainable development has been included on the political agenda. The Brundtland Commission’s definition of sustainability is: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. This definition is based on human needs and stresses the importance of thinking globally and in a generational perspective. The main challenges the commission highlighted were global poverty and the environmental status of our planet. The commission emphasised that economic growth is an important precondition for solving social and economic problems in poor countries. The Brundtland Commission and the Rio and Johannesburg meetings stressed human welfare as a yardstick for sustainable development. Based on this, an understanding has developed that sustainable development is based on three pillars: the economic dimension, the social dimension and the environment. Combating poverty is the greatest single challenge the global community will be facing in the decades ahead.

As a long-term owner, the Petroleum Fund must think in terms of long-term wealth creation for the companies it is invested in. Departing from generally accepted principles of right and wrong in order to achieve short-term profit will, in the longer run, impair a company’s reputation and profitability. Active ownership to ensure sustainable conduct is required not only because of the Fund’s long-term nature, but also because of its broad involvement in many companies. Given its ownership involvement in a number of companies, it may be financially detrimental to the Fund if a company engages in an activity that may cause damage to other companies in the portfolio through, for example, pollution.

Most of the large pension funds in the US and Europe have established guidelines for the exercise of ownership rights based on shared views, which are very similar to the principles of good corporate governance adopted by the OECD in 1999. The aim of these principles is to ensure that companies operate in the best long-term financial interests of all their shareholders.

Assessments of financial considerations for the Petroleum Fund in the long term are highly uncertain and general political and social assessments must be drawn on in addition to more classic assessments of financial relationships and corporate management structures. This means that the ethics of the Petroleum Fund must be rooted in democratic values and enjoy legitimacy in the political community. Anchoring the guidelines in internationally recognised standards will provide a democratic basis, as will the pursuit of transparency and the promotion of public debate around the fundamental priorities that are set and the criteria on which ownership management is based.

3.2 The Petroleum Fund as instrument

The Petroleum Fund cannot meet all our ethical obligations. Many of our ethical obligations can be more appropriately addressed by means other than laying down principles for the Fund’s investment strategy. This particularly applies to any obligations Norway might have to combat hardship and reduce global poverty. Many people would say that because of the wealth reflected by the Petroleum Fund, Norway has a particular obligation to combat hardship and poverty in the world. However, this is a question of how oil revenues should be used, and not how the capital to be set aside in the Petroleum Fund should be managed.

In this context, the Fund’s effectiveness and the cost of using the Fund should be considered in relation to other instruments at our disposal. It is particularly appropriate to use the Fund as an instrument in cases where ethical objectives can be realised more effectively and at a lower cost than if other instruments were used.

The Petroleum Fund is a large fund and is therefore influential, both directly and indirectly. The Fund can influence the activities of a company directly by exercising ownership rights. The fact that these rights have only so far been applied to a limited extent does not mean that the Fund has not influenced corporate developments. Not taking action is an ethical choice that can have as much of an impact as choosing to act.

At the same time, it is important to note that the Fund’s potential for direct influence is limited in that it is restricted to owning no more than three per cent of a company’s shares. This does not mean that the Fund is without influence – in many companies with a broad shareholder structure an investor with a shareholding of 3 per cent will be one of the largest owners – but it does mean that the investor cannot issue instructions to the directors or executives in a company if the investor disagrees with the way the company is operated. This limitation is most apparent when an investor wishes to influence a company to change a deliberate strategy that the management supports and is willing to defend in public. The Petroleum Fund currently owns an average of 0.2-0.4 per cent of the shares in the markets it is invested in. Ownership approaching 3 per cent will only be relevant in small companies.

The Petroleum Fund can also exert influence indirectly through the market. By explicitly communicating a decision not to buy a particular share, the Fund can send signals to company executives, other market participants and a company’s customers, particularly if the decision provides the market with information it did not have previously. The market consists of many different participants who together conduct a large number of transactions every day. The information that a single participant such as the Petroleum Fund is buying – or deciding not to buy – shares cannot in itself be expected to influence share prices in the long term. If the market perceives a participant to be particularly well informed about a company or an industry, however, this participant’s decision may have an effect on the market price. In other words, the effect will depend on the participant’s reputation as a knowledgeable player and on other market participants regarding the basis for the decision as relevant to their assessments. However, it should not be assumed that this effect is particularly pronounced.

The Petroleum Fund can also play a role as a model for other funds or investors. The size of the Fund may induce many other investors to track the Fund’s activities closely. The decision whether and how to introduce ethical guidelines in the Petroleum Fund may send an important signal and may cause other funds to follow suit.

The fact that the Petroleum Fund is a Norwegian state-owned fund poses particular challenges. Norway has a high profile in international efforts to promote human rights, labour standards and the protection of the environment. This reputation can be both a strength and a weakness. On the one hand, the Petroleum Fund’s status as a Norwegian fund may make it easier to take a leading role in promoting a more responsible investment policy. At the same time, Norway’s reputation could easily be impaired if the Petroleum Fund appears to be delaying the work on developing ethical guidelines that support the Norwegian effort to promote the above values. The possibility of using, reinforcing or, in the event, damaging Norway’s standing may impose special obligations on the Fund. If we look more specifically at the Fund’s existence and activities, it will be necessary to draw up ethical obligations:

  • to achieve the objective of long-term return
  • to prevent the Fund from contributing to breaches of general ethical obligations that are supported by the general public in Norway and in an international context
  • when the Fund is particularly appropriate as an instrument to fulfil our more general obligations.

4. Ethical obligations in practice

4.1 Basis for practical measures

According to the Committee’s mandate, it is “natural that issues relating to the environment, human rights, labour standards and the board and management of companies are assessed” in connection with the formulation of ethical guidelines for the Petroleum Fund. This provides a natural basis for assessing which subjects to include in the guidelines. The protection of the environment and respect for human rights and labour standards are values that on a general level are firmly rooted in Norwegian tradition and conception of justice, as reflected in Articles 100, 100b and 110c of the Norwegian Constitution.

Various kinds of practical measures have been adopted to promote these values and to fulfil the ethical obligations that spring from them. It is appropriate to refer to these measures when deciding which ethical obligations for the Petroleum Fund can be derived from the primary objectives of safeguarding the environment, human rights, labour standards and good corporate governance.

Such practical measures can be based on political decisions relevant to these values that are made by the Storting (the Norwegian parliament) and the government. Consequently, it will be possible to draw on most areas of domestic and foreign policy when determining the ethical requirements for the Fund. On the other hand, since many of the choices that are made are, as mentioned earlier, the result of political compromise, the values expressed in Norwegian policy cannot be described as a coherent system of principles. The content of these political compromises also varies over time. Consequently, a uniform set of ethical obligations cannot be derived from the decisions made in the different areas. This is also the case if the focus is limited to only one area, such as Norwegian foreign policy. Only parts of Norwegian foreign policy are based on altruistic values; other parts are directed towards pursuing Norwegian strategic, resource and economic interests. If we are to use the body of decisions made by our democratically elected bodies as a basis when establishing ethical requirements, the aim must be to find the main characteristics of these decisions that are consistent over time. As a result, the principles derived from these characteristics will be more abstract than the requirements laid down in specific areas.

In this context, the requirement of consistency in policy, which is often put forward in the discussion on ethical requirements for the Petroleum Fund, is also relevant. On the one hand, it is argued that the government should not strive to achieve results or lay down ethical requirements for the Fund that are not consistently applied to its other policy areas. It could be argued that the government’s policy is inconsistent if the state, on the one hand, owns Norwegian companies without requiring ethical conduct from these companies, and on the other, imposes requirements on the Petroleum Fund’s investments in foreign companies. Another situation that may seem inconsistent is if the state imposes requirements as investor that it does not impose as customer or licensor for the same companies. The Committee does not find this a conclusive argument against establishing ethical guidelines for the Petroleum Fund. A start has to be made somewhere. If it is important that the government seeks to influence market participants to adopt ethical practices and share responsibility for sustainable development, the argument that no similar measures are being implemented elsewhere cannot be used as an argument against beginning somewhere.

Furthermore, the state’s scope of action is different in its different roles. The state’s role as purchaser has been regulated through international legislation to a far greater extent than its role as financial investor. Some ethical requirements may therefore be more complicated to impose as purchaser than as owner. There may also be fewer options available as consumer than as investor.

This is illustrated by the discussion about whether it would be inconsistent to refuse permission for the Petroleum Fund to invest in the production of weapons that are used in the Norwegian armed forces and where the state itself is involved in production. In our view, this would not necessarily be an inconsistency. The decisive factor is the ethical reason for the standpoint that it is not unethical to have armed forces for the defence of a country together with an associated weapons industry. If one’s ethical reason for building up defence forces, purchasing weapons and developing a national weapons industry is self-defence, it can be argued that one has the right to take the necessary action to defend oneself against unjustified attack, even though the action taken is not, in isolation, ethically sound. Having ownership shares in the weapons industry beyond what can be related to the country’s defence policy, however, falls outside the scope of what is ethically justifiable on the basis of national security. It is therefore not necessarily inconsistent to argue that is it ethically justifiable to have a Norwegian defence industry that also participates in an international weapons market, while it may be unethical to have ownership shares in foreign weapons industries. The first is for the purpose of defence, the second is for profit. Whether or not the policy is consistent depends on the ethical reasoning on which one’s standpoint is based.

Nor is it necessarily possible to require consistency between the state’s role as investor and its role as licensor. The authority to lay down conditions for licenses to engage in commercial activity in Norway is regulated through the right of establishment laid down in the EEA Agreement. According to the Agreement, conditions for licences shall be laid down by law, they shall ensue from a necessary regulation of the activities to which the licence applies, and the conditions shall be proportionate. This implies that requirements as regards a company’s ethical conduct in other countries may not as a matter of course be imposed as conditions for obtaining a licence. As an investor, the state is not subject to the same restrictions. While establishing commercial activities is a right in relation to legislation that is binding on the state, no-one has a right to be part of the Petroleum Fund’s investment universe. It is not inconsistent for the state to impose ethical requirements where this can be done legally, but not to impose ethical requirements where to do so would be illegal. However, it would not be unreasonable to expect consistency between rules laid down for the Petroleum Fund and the state’s behaviour as financial investor in other contexts.

Another way of requiring consistency is to say that the Petroleum Fund should not invest in activities that are not in harmony with state policy as it is otherwise pursued. On this basis, it is argued that the Fund should not invest in companies involved in human rights violations or environmental degradation. However, it is difficult to derive a consistent ethical platform from the state’s overall policy and actions. In general, it is probably true to say that the expressed will to do good is greater than the ability and is often not followed up in practice. Furthermore, it is not the case that all the measures at the state’s disposal can achieve the same results in relation to making the world a better place. There may well be a situation where imposing ethical requirements on a company is far less effective than exercising more direct influence through legislation or other political instruments. It may then seem unethical to future generations of Norwegians if the Fund is required to bear costs simply to implement symbolic ethics-based measures in support of a policy that can be pursued more effectively by means of other instruments.

In summary, it is difficult to base the practical implementation of the Petroleum Fund’s ethical platform directly on policy laid down by the Storting and the Government in various areas.

4.2 International conventions and guidelines

Another possible basis for ethical obligations is provided by international conventions in the areas of human rights, labour standards and the environment. Such conventions are largely oriented towards states as states. In other words, they do not involve legal obligations for private legal persons such as companies or investment funds. On the other hand, they provide a specification of what international consensus has defined as minimum requirements that should be imposed with respect to fundamental rights all over the world, and the standards that should be applied to the protection of the environment and human life and health.

Work is also going on in various international fora to specify what these international rules should involve as regards obligations and standards for private actors in the market. Central documents and institutions are the UN Global Compact, the ILO, the OECD and the UN Sub-Committee on the Promotion and Protection of Human Rights. The Global Compact initiative was launched by UN Secretary-General Kofi Annan in Davos in January 1999.The Secretary-General challenged the international business sector to join with the UN in ensuring that international trade will be sustainable and in contributing to a globalisation that will have a positive impact on the majority of the world’s population. Five UN organisations, labour organisations, business organisations and non-profit organisations have been involved in developing the Global Compact principles. There are nine principles, derived from the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the Rio Declaration on Environment and Development.

The Global Compact principles urge companies to promote and respect international human rights as far as possible, and ensure that they are not complicit in human rights abuses. The principles refer to all human rights, i.e. including those in central UN conventions on political and civil rights, economic, social and cultural rights, torture, racial discrimination, discrimination of women and children’s rights, and a large number of other global and regional human rights conventions. The principles then point specifically to freedom of association, the elimination of forced or compulsory labour, the abolition of child labour and discrimination in respect of employment and occupation. Lastly, the Global Compact principles urge companies to support a precautionary approach to environmental challenges, undertake initiatives to promote greater environmental responsibility and encourage the development and diffusion of environmentally friendly technologies.

The ILO Tripartite Declaration of Principles concerning Multinational Enterprises was adopted in 1977 and revised in 2000. The Declaration is not legally binding, but contains guidelines with the objective of promoting social and economic progress and contributing to the creation of employment opportunities in developing countries, including promoting awareness of fundamental principles and rights at work, promoting employment and protecting incomes, welfare and social security and strengthening the dialogue between the parties, i.e. the public authorities, the business sector and workers. The Declaration contains recommendations addressed to multinational companies and public authorities in the following areas:

  • employment
  • working and living conditions
  • freedom of association.

The OECD has developed Guidelines for Multinational Companies. The Guidelines provide voluntary principles and standards for responsible business conduct in a variety of areas consistent with applicable laws. Although many business codes of conduct are now publicly available, the Guidelines are the only multilaterally endorsed and comprehensive code that governments are committed to promoting. The Guidelines contain voluntary principles and standards for responsible business conduct in relation to economic, social and environmental conditions and are based on input from the business community, employees’ organisations, the public authorities and non-governmental organisations. The Guidelines contain a general recommendation to respect human rights and to abolish child labour and forced or compulsory labour. They also refer to the internationally endorsed core labour standards. In relation to the environment, multinational companies are urged to increase their efforts by means of measures such as improving internal environmental management, increasing the volume of environmental information made publicly available, and improving emergency response planning to deal with environmental impact. The Guidelines also provide recommendations on how companies should avoid becoming involved in corruption, by promoting employee awareness, developing management control systems and being open about their ethical policies. When dealing with consumers, enterprises should act in accordance with fair business, marketing and advertising practices and should take all reasonable steps to ensure the safety and quality of the goods or services they provide, through product information and labelling, transparency and co-operation with the public authorities on product safety. The chapter on disclosure and transparency reflects the OECD Principles of Corporate Governance and endorses and encourages progress in the improvement of companies’ social and environmental responsibility.

The UN Sub-Committee on the Promotion and Protection of Human Rights has proposed guiding principles for transnational corporations and other business enterprises with regard to observing human rights in the countries in which they operate.

The proposal is intended to establish a binding minimum level for the conduct of all companies, irrespective of size, location or industry. It states that companies have an obligation to promote human rights in their respective areas of operation, that they shall not discriminate against workers on the basis of race, gender, etc., that security arrangements shall observe human rights norms, that workers shall enjoy a safe working environment and other labour standards, and that companies shall not engage in nor benefit from war crimes, crimes against humanity, torture, forced or compulsory labour or other violations of humanitarian law. The proposal is based on treaties and conventions such as the central human rights conventions, conventions on humanitarian law, and voluntary guidelines from international organisations, such as the ILO Tripartite Declaration of Principles concerning Multinational Enterprises.

The Committee is of the view that ethical standards for the Petroleum Fund should be developed on the basis of the general themes and more specific measures included in the above documents. This will ensure that the standards are based on a solid foundation supported by international consensus. The themes that have been identified largely coincide with the issues on which there is broad consensus in Norway. By using these documents as a basis, Norway will also be supporting the work on these issues conducted by international organisations, which in itself is consistent with Norway’s interests and Norwegian foreign policy. By supporting these initiatives, the Petroleum Fund will also strengthen the signals and expectations that are already exerting pressure on international companies, thus increasing the potential impact of these standards on the market. It is also an advantage for enterprises that the expectations and standards they are required to meet are co-ordinated. In summary, these considerations imply that ethical guidelines should be based on international principles for the protection of the environment, human rights, labour standards and corporate governance as laid down in the UN Global Compact and advocated by the ILO, the OECD and the UN Sub-Committee on the Promotion and Protection of Human Rights rather than seeking to develop a separate basis founded on Norwegian national policy.

4.3 Ethical requirements for the Petroleum Fund

The Petroleum Fund should be managed in accordance with ethical guidelines that enjoy the firm support of the Norwegian people, as the Committee assumes is the case for the international documents mentioned above. The issue of investments that should be avoided may be assessed on the basis of both deontological and teleological ethics.

Given that the ethical requirements should enjoy broad public support, there are few restrictions on the Fund’s investments on the basis of purely deontological ethics, i.e. agreement that an investment is unethical under any circumstances. It is in fact difficult to find any examples of categorical ethical requirements that would win the support of the majority. Even a fundamental obligation such as the obligation not to kill other human beings would not find widespread support as a categorical obligation without exceptions.

On the other hand, there would be more support for ethical constraints of a less categorical nature. Most people would support a requirement prohibiting complicity in actions that may result in the loss of human lives unless there are strong reasons for such complicity and unless the decision is made on justifiable grounds. The recent debate on the reasons for supporting or opposing the war against Iraq is an illustration of this.

In judging whether or not actions that may provide support for unacceptable conditions are unethical, a number of elements must be taken into account, including how serious the situation is. On this basis, there is greater justification for refraining from actions that may support the production and use of inhumane weapons that particularly cause suffering among civilians, such as cluster bombs and nuclear weapons, than actions that may provide support for wasteful resource management, even though the latter will also be widely viewed as unethical. Emphasis must also be given to the degree of support or association with unethical conditions that one’s actions represent in relation to these circumstances. Finally, practical conditions must be given some emphasis, for example the availability of information and the existence of alternative paths of action.

Justification for the avoidance of complicity in unethical conditions may also be based on teleological ethics. In many situations, an action may have both good and bad consequences from an ethical point of view. For example, some people hold the view that legal, though highly controversial, types of weapons such as nuclear weapons and cluster bombs are not unequivocally unethical if they can contribute to a more effective defence of important ethical values. One’s own complicit action must also be evaluated. If this action also has a beneficial effect, it may be justified even though it involves complicity in a situation that in itself is unethical. The same can be said if the consequences of withdrawing investment result in an even worse situation where, for example, a completely unscrupulous actor becomes involved instead. In an approach based on teleological ethics, contributing to a situation will be advised against primarily in cases where the circumstances one is contributing to are unequivocally evil or where the possibility of achieving ethically sound results is limited.

Ethics do not only provide guidance with regard to which investments should be avoided. The result of an ethical evaluation may also be that the most ethically sound action is to retain an ownership position and exploit the possibilities this provides for achieving beneficial results. In circumstances where being in an ownership position is the only meaningful course of action, it would seem reasonable to conclude that the Fund has an ethical obligation to do so. An example of this is corporate governance, or contributing towards good management systems in companies and ensuring that management and governing bodies act in the interest of the owners.

Whether or not the Fund should have ethical guidelines is not, however, dependent on the Fund being the only meaningful instrument. The government has a number of instruments at its disposal to promote Norway’s ethical obligations. These instruments cover a wide range of areas, in both domestic and foreign policy. Even though the Fund only invests abroad, this does not mean that requirements that apply domestically will be irrelevant with regard to the Fund. This applies both to more absolute requirements such as promoting basic human rights, and to more relative requirements in connection with the promotion of sustainable development and reduced pressure on the environment. Other instruments at the government’s disposal will nevertheless often be more effective than what can be achieved by the management of financial wealth.

In many areas, the Petroleum Fund’s behaviour in a particular situation will provide support for the other instruments used by the government to promote a given policy. In Norway, policies to promote sustainable development have been developed in a number of areas. A central element of these policies is that central and local authorities, the business sector and civil society bear a responsibility for contributing to sustainable development. It might be argued that the state should not only fulfil the ethical requirements it imposes on private owners, but that the fact that the state is also an owner in the market provides an opportunity to increase the impact on the market of policies promoting sustainable development.

Insofar as efficiency considerations are relevant to the assessment of whether an ethical obligation exists, the obligation will be stronger in cases where the use of the Fund to fulfil ethical requirements is particularly appropriate. This means that in cases where the objectives of ethical practices and sustainable development, in the sense of combating poverty and ensuring social and ecological sustainability, coincide with the objective of long-term financial return, the obligation to utilise the Fund’s instruments will be especially strong. The same will apply in cases where there is a possibility of exerting particular influence on developments through co-operation with other investors that have expressed and developed ethical management and ownership practices.

5. Instruments in ethical fund management

5.1 A three-track strategy

The objectives of ethical guidelines for the Petroleum Fund are that the Fund’s long-term interests are safeguarded through the promotion of sustainable development and national investments that do not contribute towards unacceptable conditions. The Committee recommends that the ethical basis of the Petroleum Fund should be promoted using the following three instruments:

  • Exercise of ownershiprights to promote long-term financial returns based on the UN Global Compact and the OECD Guidelines for Multinational Enterprises.
  • Negative screening to prevent inclusion in the investment universe of companies that produce, either themselves or through entities under their control, weapons whose normal use is in violation of fundamental humanitarian principles.
  • Withdrawal from the investment universe of companies where there is an unacceptable risk as an owner of complicity in gross or systematic breaches of ethical norms within the areas of human rights and the environment.

The exercise of ownership rights refers to all activities performed by the Petroleum Fund to ensure that the Fund’s basic rights as owner of companies are respected, and to contribute to corporate governance that is in the best long-term financial interests of the Fund.

Negative screening means screening to identify companies involved in the production of products regarded as ethically unacceptable. These companies are excluded from the Petroleum Fund’s investment universe. Negative screening will thus be focused mainly on production of goods to which it is not considered desirable to contribute.

Withdrawal means that, after an individual assessment, a company is withdrawn from the Fund’s investment universe because investing in the company carries the risk of complicity in unacceptable conditions, particularly complicity in human rights abuses or other actions or omissions to act that must be regarded as grossly unethical.

Using these instruments involves either restricting the Fund’s investments to avoid unethical relationships, or fulfilling the Fund’s ethical obligations through the exercise of ownership rights where this is consistent with the Fund’s long-term financial interests. The difference between negative screening and withdrawal need not be substantial. The distinction between the two instruments nevertheless reflects the fact that companies may have a direct responsibility for some activities that may at the same time be screened out, for example the production of certain types of weapons. On the other hand, other matters, such as human rights abuses resulting from a company’s conduct, may be very difficult to capture using screening procedures. In its proposal, the Committee has assumed that this information will emerge on an ad hoc basis through the media and other channels, and will subsequently be assessed against the criteria for withdrawal.

The Petroleum Fund’s investment universe comprises about 26 000 companies, while its equity portfolio consisted of approximately 2400 companies at the end of 2002. Negative screening will basically be focused on the full investment universe , but is a dynamic process that in some cases, even after the instrument has been implemented, can also include companies that Norges Bank already has in its portfolio. To economise on resources, the withdrawal mechanism will mainly be focused on the companies included in the Fund’s portfolio at any time, but can in some cases include companies that are not in the portfolio at that time. Both instruments will affect the size of the investment universe the Fund has at its disposal at any time.

The advantage of both forms of exclusion is that one avoids complicity in unethical behaviour by simply not investing in the activities concerned. In addition, if investors indicate that companies will be excluded for ethical reasons, this may send a signal to companies that they must change their behaviour. The disadvantage of screening and withdrawal as instruments is that no assessment is made of whether the consequences of withdrawal will be more beneficial for those affected by the activities than continuing to invest. Conversely, the advantage of exercising one’s influence as owner is that one can actually have an impact on the situation of those affected by a company’s activities. The disadvantage is that there is a risk of complicity in unethical activities if the efforts to influence companies to change for the better are not successful.

The design and use of these instruments must be viewed in connection with the nature and content of the Fund’s ethical obligations. There is an important distinction between an ethical obligation that involves a duty to avoid complicity in unacceptable actions, and an ethical obligation to seek to remedy an unacceptable condition or behaviour. An obligation to avoid complicity will, as far as it goes, involve an obligation to refrain from investing, i.e. restrictions on investment options. An obligation to seek improvements may involve both an obligation to invest and an obligation to utilise the opportunities one has as an investor to fulfil this obligation. The obligation to invest will entail positive selection of companies to be invested in. The Committee has specified limitations on this approach below. The remaining channel of influence is the opportunity an investor has to exert influence by exercising ownership rights or disposing of holdings in a company in order to affect its conduct.

The Committee does not recommend the use of exclusion as a means of exerting influence. The Committee believes that the exercise of ownership rights might be more effective in influencing a company’s conduct. Disposing of holdings in a company in order to influence its conduct presupposes that the publicity around the Fund’s withdrawal would result in the company changing its practices. It is not realistic to believe that by excluding a company the Fund could contribute to reducing the company’s access to capital or causing demand for the company’s stock to decline in such a way that the company would be compelled to change its conduct. Negative publicity, on the other hand, might influence the company.

These arguments do not imply that withdrawing from a company for ethical reasons will never be a viable option. If the exercise of ownership rights in relation to a company whose conduct is unacceptable does not yield results, withdrawal may be an option for both financial and ethical reasons. In financial terms, a company that does not act in accordance with an owner’s expectations with regard to, for example, information or dialogue will not be attractive as an investment vehicle. This may result in the Fund disposing of its holdings in the company. An evaluation of whether, when and how this should be done should then be based on purely financial assessments performed independently by the portfolio managers according to the usual requirements with respect to financial performance. This does not require separate regulation in ethical guidelines. However, if ethical guidelines are in place, information may emerge that more often results in companies being excluded from the portfolio if their practices are unacceptable than if no ethical requirements and associated practices existed.

Withdrawal may also be appropriate for ethical reasons. In these cases, the company concerned must be evaluated with a particular focus on ethics. The basis for the evaluation must be the kind of unethical actions or practices that are pursued by the company, and what kind of association the Fund has with these activities through its investment. If the company is directly involved in gross human rights violations, for example, without making any effort to effectively change these conditions, an investment by the Fund would have to be regarded as unethical complicity.

Ridding the portfolio of clearly unethical investments should be the responsibility of the owner rather than the manager. In other words, it is not the manager’s responsibility to take the decision regarding withdrawal. The decision should be made by the Ministry of Finance based on an independent evaluation of the company according to the guidelines for withdrawal. Any information about or experience of the company that Norges Bank has in its capacity as manager of the Fund may of course be included in the Ministry’s evaluation.

With regard to the production of specific types of products regarded as unethical, the exercise of ownership rights will as a rule not be appropriate. Investing in a company so as to seek to influence the company to stop producing some of its production range, at least if these products constitute a significant element in the company’s business strategy, is not a viable option. Nor is it likely that such a strategy on the part of the investor will be particularly effective. Such behaviour cannot therefore be required on the basis of ethics. On the other hand, for many products an overview of the companies that produce them can be obtained. If one does not wish to invest in companies with a specific production, these companies can be excluded from a portfolio by using negative screening, thus removing them from the investment universe. Such screening procedures are, on the other hand, very difficult to use in relation to aspects of a company’s activities other than its products or basic operations.

The instruments available to a financial investor to promote ethical objectives are relatively limited. The Committee’s recommendation comprises two categories of instruments: the exercise of ownership rights and restrictions on investment options (negative screening and withdrawal of investments). There is, however, a third possible category: that the Petroleum Fund seeks investment vehicles based on ethical criteria, for example by filtering out a certain portion of the most ethically responsible companies in each industry according to specific criteria, or by overweighting its investments in industries with a particularly ethical focus.

In the view of the Committee, it is not an option to base the entire Petroleum Fund’s investment universe on positive selection of companies that are “best in class” or to operate within particular sectors in the field of social or technological development. Such a strategy would considerably reduce the number of companies the Fund can invest in, which would affect the Fund’s capacity to diversify risk. If investment options were to be restricted to, for example, the best 10 per cent of companies, the Fund’s ownership shares in and loans to some of these companies would increase substantially. This would require a different form of fund management, as the Fund would generally have such large holdings that it would be difficult to buy and sell equities freely, both because of the rules for investors with large shareholdings and because it would be impossible to dispose of such large shareholdings without incurring losses. If used, this kind of investment strategy must therefore be reserved for a portion of the portfolio, as is the case today for the Environmental Fund. The Committee has therefore not discussed in any detail positive selection as an instrument in connection with ethical guidelines for the Petroleum Fund as a whole. In the view of the Committee, the assessment of whether to use parts of the portfolio for positive selection on financial or ethical grounds is best made in connection with the evaluation of the Environmental Fund.

5.2 Exercise of ownership rights

5.2.1 Introduction

The exercise of ownership rights is part of operational fund management. As is the case for other aspects of fund management, ownership rights should for technical and supervisory reasons be exercised under the financial responsibility of the manager, within the general limits drawn up in the Ministry of Finance guidelines. The guidelines for the exercise of ownership rights are intended to contribute to a balance between long-term and short-term return objectives in the management of the Fund.

The exercise of ownership rights refers to the total activity for ensuring that owners’ basic rights are respected and that enterprises are governed in the best interests of the shareholders. Long-term return will generally benefit from a portfolio consisting of companies that demonstrate respect for universally accepted norms of ethical behaviour. This applies in particular to the Petroleum Fund, with its broadly diversified securities portfolio.

As the owner of a number of companies, the Petroleum Fund may suffer financially if a company engages in an activity that can harm other companies in the portfolio, for example through pollution. It is therefore in the long-term interests of the Fund to ensure that firms the Fund has invested in do not pass on costs to other firms in the portfolio directly or indirectly via society.

Long-term returns may also induce the individual company to be more concerned with social responsibility than more short-term returns. Breaking with generally accepted principles of right and wrong in order to achieve short-term profit might in the longer term damage a company’s reputation and profitability. Locating polluting activity in countries where emission standards are low may be profitable in the short term, but can also become expensive as multilateral environmental agreements set the standard for environmental legislation in a growing number of countries. A lack of focus on preparations for stricter international legislation will not necessarily reduce returns for a year or two, but may be potentially very harmful to the enterprise over the longer term.

The themes that receive most attention in the public debate on ethics will not necessarily coincide with the priorities that major asset managers focus on to protect the long-term interests of shareholders. In a number of issues where there is strong ethical involvement by various pressure groups, the link between ethics and financial return will be more tenuous than in the more classic ownership issues, such as requirements for accounting information and independence between boards and management. Because of the need to balance resource use against expected long-term gains, it is likely that issues where the aim of protecting the long-term interests of shareholders seems to be clearest will be given priority. In cases where the connection between ethics and long-term return is either unclear or negative, the exercise of ownership rights will not be an appropriate instrument for promoting ethical considerations. In other words, the exercise of ownership rights to achieve long-term return will not be the answer to all the ethical challenges Norway faces through its ownership shares in international business and industry, nor will it cause politically or ethically based criticism of the activities of the Petroleum Fund to cease. There will always be grounds for debate on the formulation of guidelines for the exercise of ownership rights and for managers’ behaviour within these guidelines.

Through its exercise of ownership rights, Norges Bank will have a responsibility to inform companies of the general expectations inherent in the guidelines and to ensure that companies have established internal procedures to verify that these expectations are being followed up. However, Norges Bank cannot guarantee that all companies at all times fulfil the ethical requirements or expectations specified in guidelines from the Ministry of Finance.

The Petroleum Fund should have high ambitions as regards the exercise of ownership rights since it is a large fund with a long-term investment horizon and is broadly diversified in companies in various countries and sectors. The exercise of ownership rights to improve governing systems in the relationship between owners and corporate boards and management can be expected to provide a long-term financial return for the group of institutional investors as a whole. For the individual investor, the link between the investor’s ownership management activity and expected performance is weak. However, for the Petroleum Fund the link can be expected to become stronger due to the Fund’s broad involvement in almost the entire investment universe, to its long-term strategy and to its size.

In the current model, the Ministry of Finance is responsible for the Fund’s absolute and long-term return since it defines the benchmark portfolio and risk limits for the management of the Fund. Norges Bank is responsible for relative return, that is, return that exceeds or falls below the benchmark portfolio return as a result of active management or deviations from the benchmark for cost effectiveness reasons. Frequent reporting of the results, which is both desirable and necessary, gives the Bank a natural incentive to focus on generating results, defined as an excess return compared with the benchmark index. Resources are allocated to Norges Bank to cover actual management costs up to a maximum limit, and the Bank prioritises these resources within this limit. The management structure should be designed to provide strong enough incentives for Norges Bank to give priority to the long-term exercise of ownership rights rather than engaging in other activities when the upper cost limit is reached.

One way of achieving this is for the Petroleum Fund’s owner to stipulate requirements for the manager’s reporting on how a mandate for the active exercise of ownership rights is fulfilled. By following up the manager and showing that the exercise of ownership rights is a central issue, the owner will be giving the manager a stronger incentive to give priority to the exercise of ownership rights in the manager’s own organisation.

5.2.2 Themes in relation to the exercise of ownership rights

Most large pension funds have laid down guidelines for the exercise of ownership rights based on commonly held views that are closely in accordance with the principles of good governance adopted by the OECD in 1999. The aim of the exercise of ownership rights is not that the owner should tell the company management how to run the company. Financial owners buy this expertise when they appoint company executives. The aim is to guide strategic choices and ensure that the company is being operated in the best interests of all the shareholders. deleted Proposals that will obviously detract from a company’s return are not likely to gain acceptance.

The following themes are common to the guidelines for corporate governance developed by the OECD, industry associations for the exercise of ownership rights and major asset managers:

  • Shareholders’ rights
    Investment managers’ guidelines will include requirements that basic issues with regard to corporate structure, such as amendments to articles, issues and the sale of a company, shall be decided by the general meeting, not by the board of directors. In addition, the guidelines usually regulate requirements concerning how a general meeting should be prepared and conducted. Because of their interest in protecting shareholders’ rights, financial investors will also normally focus on the principle of one share = one vote, and will be critical of “poison pills” or other structures that are intended to protect companies from takeover attempts.
  • Equitable treatment of shareholders
    In the interests of equal treatment, financial investors will support the right of investors to vote, if they so wish, through representatives of their own choice, in addition to the principle of one share = one vote. The principle of equitable treatment often also includes the requirement that members of the board and management disclose any financial interest they might have in transactions that involve the company.
  • Responsibility and composition of the board of directors
    Financial investors normally require that a company’s articles of association include clear instructions on the responsibilities of the board of directors. Particularly important is the responsibility for drawing up a clear business strategy and monitoring the management to ensure that the strategy is followed up. The board’s responsibility to impart information to the shareholders is also important to investors. Since the board of directors plays a decisive role in governance structures in relation to shareholders and management, financial investors will be keen to see that the board, in formal and in real terms, is independent of the managing director and other senior executive directors and that the board has been appointed on the basis of qualifications, and not on the basis of status, social ties or other factors that might undermine the real ability of the board to lead and monitor the management of the company. In addition, it will be important that the composition of the board as a whole protects shareholders’ interests in a balanced manner.
  • Reporting
    In order to send the best possible governance signals through voting at general meetings, financial investors’ ownership policy will impose requirements with regard to the quality and content of the company’s reporting. Requirements for comprehensive and complete accounting information and for regular reporting of performance, strategy, changes in ownership, remuneration for members of the board and management, key risk factors in the company’s activities, etc. will often be included in guidelines for the exercise of ownership.
  • Reward structures
    Reward structures for senior executives in companies are the shareholders’ most important financial incentive for ensuring the best possible correspondence between their own financial interests and the financial interests of those entrusted to implement the company’s strategy in the market. It is therefore not unusual for large investors to have very detailed rules for what they consider to be a reasonable reward structure. These rules will cover the size of and relationship between basic pay, bonuses and share-based option plans, among other things. The company’s owners will also impose requirements on the system itself for stipulating managers’ pay.

The relationship to employees, the authorities, the local community and the environment in general will also often be referred to in guidelines for the exercise of ownership rights. The connection between a company’s activities in these fields and the shareholders’ best financial interests is not as obvious as in the more classic areas that are normally regulated in investors’ guidelines for corporate governance. The wording of guidelines in these areas tends therefore to be less detailed than for many of the issues mentioned above. The Petroleum Fund faces a particular challenge here in relation to developing credible and sound guidelines.

The following can serve as concrete examples of the possible practical consequences of the exercise of ownership rights where the emphasis is on ethical considerations:

  • The Fund can require companies in which it owns shares to carry out more comprehensive reporting on how the company’s activities affect key stakeholders, such as employees and local communities. Comprehensive reporting should comprise more information than is already required from the company under national legislation, for example in line with the proposals in the Global Reporting Initiative (GRI).
  • Together with other investors, the Fund can impose requirements on companies to establish systems to prevent the company from contributing through its operations to violations of fundamental human rights, environmental degradation or the acceptance of bribes. This may be particularly appropriate in companies operating in countries or sectors where these problems seem to be especially widespread. Working to ensure that firms that risk being involved in these problems have systems in place to prevent this is highly likely to be consistent with the objective of protecting long-term shareholder values.
  • In a system that involves corruption, the company’s values, and thereby also the shareholders’ values, are wasted. Corruption is considered one of the most important obstacles to the improvement of living standards in poor countries. In this sense, financial considerations and ethical considerations go hand in hand. The Petroleum Fund, alone or in co-operation with others, can chart whether companies have adapted to, or will adapt to, the business principles developed by, for example, the anti-corruption organisation Transparency International.
  • Furthermore, such a dialogue can include specific areas or incidents that the investor is aware of and wishes to cease. An investor can obtain information about the risk various companies are exposed to in these areas, or in relation to these incidents, either as a natural part of the body of information about companies in investors’ active management, or via the media, non-governmental organisations or consulting firms that gather information about companies’ unethical practices.
  • The international focus on environmentally hazardous substances, POPs in particular, gives both relevance and legitimacy to a dialogue with the producers and users of these substances on strategies for phasing out their dependence on internationally prohibited chemicals, on systems for assessing the health and environmental effects of chemicals under development (including long-term effects), and on the development and use of less harmful alternatives. Stricter environmental standards, stronger consumer demands and potential future claims for compensation provide financial incentives for the development of more environmentally-friendly alternatives.
  • In February 2003, the results of the Carbon Disclosure Project were published. This is an international survey conducted on behalf of 35 institutional investors from among the world’s 500 largest companies about how they are addressing the threat of climate change and the future financial risk they estimate this will entail for the company. A more active policy for the exercise of ownership rights will enable the Petroleum Fund to participate in similar initiatives to chart companies’ approach to ethical and environmental challenges that are expected to have a substantial financial impact in the long term.
  • A similar initiative, which it would also have been possible for the Petroleum Fund to participate in if there were more scope for the active exercise of ownership rights in the guidelines, is the recommendation to the pharmaceutical industry from a number of investors, such as USS, PGGM, ISIS Asset Management and Henderson Global Investors, concerning how the industry should co-operate with the international community to combat the spread of HIV/AIDS in many poor countries. The Global Business Coalition on HIV/AIDS also urges all companies to participate actively in combating HIV/AIDS both to safeguard their own financial interests and to demonstrate social responsibility.

5.2.3 Democratic basis for the exercise of ownership rights

Assessments of financial considerations for the Petroleum Fund in the long term will involve considerable uncertainty. Since companies’ ethical standards will also influence the share price in the long term, financial considerations must also draw on general political and social assessments. This means that the ethics of the Petroleum Fund must be rooted in democratic values and enjoy legitimacy in the political community. Anchoring the guidelines in internationally recognised standards will provide a democratic basis, as will the pursuit of transparency and the promotion of public debate on the fundamental priorities that are set and the criteria on which ownership management is based.

A linking of the Petroleum Fund’s financial objectives with ethical considerations may be based on internationally accepted ethical norms as they are reflected in, for example, the UN Global Compact guidelines and the OECD Guidelines for Multinational Enterprises. In both these sets of guidelines, the target group is precisely companies all over the world. The same applies to the UN draft Code of Conduct for companies in the field of human rights. An unequivocal advantage of basing ethical guidelines for the exercise of ownership rights on these documents is that they cover a wide range of issues within the fields of human rights, labour standards and the environment. Furthermore, they have been drawn up by international organisations whose members include the vast majority of the countries on the Petroleum Fund’s list. The documents also express objectives that are generally accepted in the international community. In the long term, it would be difficult to raise substantial financial objections to the proposal that companies should conform to an ethical standard that enjoys wide international support.

It is the view of the Committee that guidelines established for the exercise of ownership rights must be laid down by bodies responsible toNorway’s democratically elected bodies. The main guidelines for the management of the Petroleum Fund are anchored in the Storting. General principles governing how the exercise of ownership rights on the basis of ethical considerations may be used as an instrument to achieve long-term financial returns must also be anchored in the Storting. It is possible to exercise ownership rights on the basis of ethical considerations within the existing management structure by requiring Norges Bank to include the ethical dimension in their guidelines for voting and other active exercise of ownership rights. The guidelines should be formulated in relatively general terms and be integrated into the main guidelines laid down by the Ministry of Finance for the exercise of ownership rights in the Petroleum Fund on the basis of financial considerations. The unit that implements the exercise of ownership rights must draw up more detailed guidelines within the general framework. Norges Bank should also develop its standpoint on the connections between long-term returns and social and environmental factors, such as the importance of combating corruption and social need, the use of hazardous chemicals, energy use and development of alternative forms of energy. Such strategic positions will provide a basis for democratic debate and provide an anchor for the Bank’s exercise of ownership rights. They could also be included in the instructions to external managers and could send important signals to the market. However, the Committee does not find it appropriate for Norges Bank or the Ministry of Finance to set requirements with regard to, for example, reporting or management systems that companies, for example, must meet within a certain time limit if the Petroleum Fund is to remain an investor in these companies. Such requirements would be difficult to draw up in a reasonable manner without either determining the content of the portfolio on the basis of positive selection, or introducing what would amount to screening of companies on the basis of their conduct. The reasons why the Committee believes this is not a sound approach are given above. Exclusion of companies should therefore be utilised on the basis of either purely financial assessments or individual ethical assessments based on the withdrawal mechanism proposed by the Committee, and not on whether the companies comply with standards laid down as a component of ownership management.

In addition, good reporting on how ownership rights policy is exercised must be required. Reports should contain information about guidelines drawn up by the manager and how these guidelines have been followed up, including the votes that have been cast at companies’ general meetings on behalf of the Petroleum Fund. Moreover, a reporting system must be developed to ensure that detailed information is provided on Norges Bank’s dialogue with companies without thereby reducing the possibility of achieving results in the dialogue with individual companies.

5.2.4 The use of instruments in the exercise of ownership rights

The ordinary channels through which an owner can influence a company are dialogue, voting rights and board representation. In some cases, buying and selling ownership interests can have an influence. The Petroleum Fund’s use of instruments must be seen in relation to the Fund’s position as financial investor. As financial investor, the Petroleum Fund will normally not wish to be represented on corporate boards because board members receive inside information, which limits the scope for buying or selling equities when the Fund so desires. The Petroleum Fund must instead draw up a corporate governance and sustainable development policy as a key instrument in its exercise of ownership rights that will ensure that the board and management act in a way that serves the shareholders’ long-term interests. The exercise of ownership rights presupposes that the Fund wishes to continue to be an owner of the company. The Petroleum Fund is ultimately free to dispose of its holdings in a company if it is not satisfied with the board’s and management’s performance, and if ordinary channels of ownership influence have not led to improvements. In such cases, there may be reason to believe that poor management will affect the company’s share price, even in the long run.

The Petroleum Fund’s channels of ownership influence are thus to vote at general meetings for or against proposals that are tabled by corporate management or by various shareholders/shareholder groups, and to establish a direct dialogue with corporate management. Dialogue with other shareholders outside the general meeting increases the possibility for individual influence as investor.

There are several conditions that must be in place before there is reason to believe that an individual investor’s viewpoints will gain acceptance by the company board and management and among other investors:

  • The investor must have knowledge of the companies and expertise on the conditions he wishes to influence.
  • The investor must be able to put forward a convincing argument on the relationship between the factors cited and the long-term return for shareholders.
  • The investor must be in a position, either alone or in collaboration with others, that compels corporate management to give weight to his views.
  • Activity should be focused so that measures target sectors that are deemed to be particularly important to address, rather than applying general requirements to all the companies in which the Fund invests.

It is not sufficient to have sound knowledge of the corporate conditions that the investor is seeking to influence. For the corporate board, management and other shareholders to be induced to use resources in an attempt to investigate and improve the conditions in question, the investor has to make a convincing case that there is a relationship between the measures for improvement and long-term earnings and returns.

The exercise of ownership rights based on recognised ethical norms requires a different type of knowledge than what is common among investment managers. If the exercise of ownership rights is to be effective, so that it actually promotes ethical objectives and not aspects that are irrelevant in this context, more precise knowledge about what international norms imply is required, in addition to knowledge of what constitutes a breach and of the necessary remedies. In the absence of precise knowledge in this area, the exercise of ownership rights risks becoming a purely formal ritual or being based on populist trends and demands.

It will often be easier to gain acceptance for views shared with other owners, the board or management, than views held solely by the Petroleum Fund. If one chooses to promote a dialogue with companies on a topic that is not prioritised by other investment managers, the possibilities offered by concerted action will be lost. On the other hand, this approach may lead to a division of roles between the various investors involved. Different investors work on the basis of different interests, and such a division of roles already exists to some extent today.

5.3 Negative screening and exclusion

5.3.1 Negative screening General overview of negative screening

Negative screening involves excluding companies from an investment portfolio according to specified criteria. This is a tool for excluding companies on the basis of a few simple and objective facts. As explained above, the Committee argues that negative screening is above all appropriate when one wishes to avoid contributing to the production of clearly unethical products and production processes.

An assessment of whether to exclude companies from the Petroleum Fund on the basis of their products or production processes must start with the question:

  • Which products or production processes are so unethical that the Petroleum Fund should not contribute to generating them?

This immediately leads to another question:

  • Which criteria should one apply to determine whether a product is unethical to the extent that one should not contribute to its production?

The Committee is of the view that negative screening, which aims at capturing all companies involved in the production of a product, is a strong tool. The Committee would thus argue that negative screening criteria should be elaborated on the basis of products that are clearly opposed by the Norwegian authorities and where active efforts are being made to limit or prohibit them internationally.

Norway has become actively engaged in the international work on disarmament and on conventions that prohibit certain types of weapons. Investments in companies that produce anti-personnel mines are prohibited under the Mine Ban Convention and are thus illegal. The same applies to chemical and biological weapons. In addition to this, negative screening criteria can be based on the prohibition against the use of certain types of weapons, ammunition and warfare methods and on general humanitarian principles. This approach may entail, for example, that the Petroleum Fund does not invest in companies that produce cluster bombs or nuclear weapons.

As regards the environment, there are only three conventions that are sufficiently concrete to be suitable for negative screening of products, i.e. the Montreal Protocol on Substances that Deplete the Ozone Layer, the Stockholm Convention on Persistent Organic Pollutants and the environment protocols under the Convention on Long-range Transboundary Air Pollution. The aim of all three is to eliminate the production, consumption and emissions of defined substances and products within 10-15 years.

The Committee’s recommendation on negative screening based on the above-mentioned conventions on weapons and the environment is discussed further below.

Beyond this, it is difficult to establish a set of general, precise and unequivocal criteria for excluding products from the Fund, something which is absolutely necessary in order to eliminate doubt as to what should be excluded. This does not preclude the possibility of pursuing a specific line of argument in favour of excluding certain types of products. The disadvantage of basing product screening on a specific line of argument in order to exclude a product is that it may be difficult to achieve overlapping consensus on the justification, and it may therefore be questioned whether this reflects general Norwegian values. On the other hand, it is difficult to differentiate between the ethical discussion and the more general political discussion. The final choice of products to be excluded from the Fund using negative screening must therefore be approved by our elected bodies to ensure that the decisions have the necessary legitimacy. Weapons and negative screening

Different types of weapons, ammunition and warfare methods are prohibited under existing international law. This applies, for example, to chemical and biological weapons, incendiary weapons (e.g. napalm), non-detectable fragments (plastic projectiles that escape detection by X-rays), and blinding laser weapons. It is unlikely that companies in the Petroleum Fund’s investment universe are involved in the production or sale of such weapons. However, it cannot be ruled out that the Petroleum Fund has investments in companies that produce chemicals (e.g. herbicides), or laboratory equipment or other products that can be used to produce or spread chemical or biological weapons. Because these are products that are used in useful and legitimate industries, it is not desirable to exclude such components by means of negative screening.

The Committee recognises that it would be in violation of Norway’s obligations under international law to invest in companies that produce, use or sell chemical weapons, biological weapons and anti-personnel mines. The same is assumed to apply to the weapons and types of ammunition mentioned in the UN Convention on Conventional Weapons (non-detectable fragments, certain mines and booby-traps, incendiary weapons, blinding laser weapons). The Committee is of the view that the Petroleum Fund cannot invest in any companies that are involved in the production of such weapons and types of ammunition.

However, there are a number of weapons that are not clearly prohibited under international law, but that it would be unethical to produce or use based on values and perceptions that are deeply anchored in Norwegian society. This applies to nuclear weapons and cluster bombs.

It must be argued that there are particular historical reasons why the nuclear powers have nuclear arms without this being in flagrant violation of existing international law. Norway does not have nuclear weapons, does not wish to have such weapons and advocates nuclear non-proliferation and disarmament. It would be compatible with a long-term and consistent Norwegian policy in this area to avoid investing in companies that produce such weapons. Norway has pursued a clear and unequivocal nuclear weapons policy since the end of the Second World War. A basic tenet of this policy is that nuclear weapons are prohibited on Norwegian territory in peacetime. Norway’s ratification of the Non-Proliferation Treaty and other related treaties reflects its commitment to nuclear disarmament and non-proliferation over the past five decades. The Committee therefore proposes that the Petroleum Fund should not be invested in companies that produce key components of nuclear weapons. To the Committee’s knowledge, government defence organisations and private companies do not currently produce nuclear weapons and in all probability they no longer produce key components. However, members of the US Congress have taken an initiative to support research with a view to the potential production of small nuclear weapons, so-called “mini-nukes”. The idea is to use such weapons in warfare and not only as a deterrent. Such a strategy will necessarily lead to the collapse of the non-proliferation regime, and rapid global use of nuclear weapons. If the proposal receives political and financial support, the production of such weapons could start in a few years. The Petroleum Fund could therefore provide a signal effect by limiting its investment possibilities with regard to the development and production of such small nuclear weapons.

Cluster bombs consist of many submunitions that are dropped on a target. The intention is for all the submunitions to explode on impact, but experience shows that this often does not happen. Many submunitions fail to explode and remain on the ground as potential mines that can be easily exploded by chance contact with civilians. The reason that they are not covered under the Mine Ban Convention is that anti-personnel land mines are defined as a munition designed to be exploded by the presence, proximity or contact of a person. A cluster bomb is designed to explode immediately, i.e. it becomes a mine when it fails to function as designed. The Storting has taken a clear negative stance on the use of cluster bombs, and these weapons are no longer used by the Norwegian defence forces. As cluster bombs represent such a sizeable humanitarian problem, and as it can in principle be argued that they are encompassed by the ban under humanitarian law on weapons that do not distinguish between military and civilian targets, the Committee recommends that this weapon be excluded from the Petroleum Fund’s investment universe. The Committee therefore proposes that the Petroleum Fund does not invest in companies that produce cluster bombs.

The Ministry of Finance already uses negative screening to avoid investing in companies that produce chemical and biological weapons and anti-personnel mines. Moreover, the Committee recommends that screening be used to avoid Fund investment in weapons with non-detectable fragments, incendiary weapons, blinding laser weapons, nuclear weapons and cluster bombs. The Committee also recommends that the possibility for expanding exclusion to include new types of weapons or ammunition is maintained. Screening is also a method for singling out production to which it would be wrong to contribute under any circumstances. The Committee is aware that very few companies will be identified when the portfolio is screened using these criteria.

The Committee has considered the possibility of applying negative screening to military weapons in general. The Committee has concluded that there would not be sufficient support for such a proposal in terms of overlapping consensus among the Norwegian population. Defining screening criteria

No matter which screening criteria are applied, one must decide how strict the criteria ought to be. The criteria must be determined partly on the basis of general considerations as to the ethical implications, and partly on the conditions prevailing in each industry concerned. The focus here will be on the Committee’s specific proposals for weapons criteria.

An important question is the extent to which parts of the prohibited products should be affected and to what extent related products must be excluded. It is not obvious what the definitions of nuclear weapons and cluster bombs include.

It may be difficult to determine which companies produce nuclear weapons and cluster bombs, and which companies produce components and their parts. A dividing line has to be drawn between subsidiaries, associated companies, companies that have invested in the producing companies, etc., and companies that cannot be held responsible for production, but that sell or in other ways market the product.

It is clear that not all products used in the production of a weapon can be covered by negative screening. There are a number of components that can conceivably be used for many different purposes. Even if a screw, a wheel bearing or gasket is specially designed for a given weapon, the producer most probably manufactures specially ordered parts for a large number of different products. It would be excessive to attempt to cover all producers that supply parts for the product. Key components such as the explosive device or the triggering mechanism of a cluster bomb clearly fall within the definition of what is excluded. Each case would require a concrete assessment as to what constitutes a key component and what does not.

The basis for the assessment must be the justification for the negative screening. The justification for excluding certain types of weapons is that Norway is not to contribute to the production of such weapons through the Petroleum Fund. If the concept of complicity is extended too far and too indirectly, it will become fragmented and diluted in that “almost everyone” is deemed to be contributing. This will undermine the force of the ethical argument against contributing to such production. Thus, only key components and typical parts should be excluded. For example, there is no point in excluding a screw producer. It is our view that, for example, F-16 aircraft should not be excluded even though these aircraft are designed to carry nuclear weapons. Norway has bought such aircraft for entirely different reasons.

The delimitation with regard to which products and companies should be covered by negative screening will have limited practical implications in relation to the production of nuclear weapons. Today, there is no legal production of large atom bombs or their components. In general, the development and production of such weapons are carried out under the aegis of governments and to a limited extent by private companies. However, this situation may rapidly change in connection with the development and production of small nuclear weapons. It is therefore important to follow developments in order to be able to identify and exclude companies that may become involved in the production of nuclear weapons in the future.

The Committee is of the view that production of components that can also serve other, legitimate purposes (dual-use goods) should not be subject to negative screening. Production of and trade in such products are, however, subject to procedures defined in international control regimes on non-proliferation and export control. These procedures include the obligation to notify the sale of dual-use goods and prohibit the sale of certain types of these goods to actors other than the official nuclear powers. Companies that produce and sell products contrary to these control regimes are thus guilty of ethically unacceptable practices to which the Petroleum Fund should not contribute. Such practices should thus lead to exclusion from the portfolio (see Chapter 10 for further discussion). substances and persistent organic pollutants

Norway is involved in the international efforts to ban ozone-depleting substances and POPs (persistent organic pollutants). The Montreal Protocol on Substances that Deplete the Ozone Layer sets out a timetable for reducing and stopping the production of each ozone-depleting substance (generally by 2010). The Stockholm Convention is a global convention drawn up to protect human health and the environment against very toxic POPs. The convention stipulates the phasing out of the 12 most hazardous POPs, including PCBs and dioxins, by 2010. In other words, there is international consensus that these substances are so hazardous to human health and the environment that their production should be discontinued. Many countries, including Norway, have already banned such substances.

As Norway has contributed to an international ban on the production and use of such substances, it could be argued that the Petroleum Fund should not invest in companies that contribute to their production. However, it can also be argued that the main problem does not concern the regulated substances, but rather the substances that have the same properties but that are not yet covered by international conventions. This is particularly relevant for the large group of POPs, where brominated flame retardants (e.g. PBDE) and PFOA/PFOS compounds are examples of new groups of substances that have come into focus because of their potential health and environmental effects.

Experience shows that with the development of knowledge and analytical methods the negative health and environmental effects of a growing number of substances will be discovered. Experience gained from international co-operation shows that it can take a long time before such substances are incorporated into conventions and protocols, which means that negative screening will always be lagging behind developments. It is therefore much more important to focus on measures that can prevent or limit the damaging impact of environmentally hazardous substances. The Committee therefore concludes that negative screening would not be an effective strategy for addressing the challenges associated with these substances. Tobacco

The negative health effects associated with tobacco are numerous and well documented. The costs to society are considerable, both in terms of decreased labour productivity and in terms of the strain on the health services caused by an increase in sickness. Norwegian authorities have pursued a restrictive policy aimed at reducing the use of tobacco, including taxes on tobacco products, information campaigns and restrictions on smoking. Norway has also been involved in international tobacco prevention efforts through its work on the international convention on tobacco control recently negotiated within the WHO. The convention is part of the global effort to reduce health problems and tobacco-related deaths, and aims at controlling tobacco production and consumption by means of provisions restricting the marketing and labelling of tobacco products.

It can be argued that tobacco is an unethical product and that the Petroleum Fund should not contribute to the production of tobacco. Negative screening can be justified on the basis of the detrimental health effects associated with the use of the product, the costs to society and the international consensus on limiting and preventing the health damage associated with tobacco as expressed in the WHO convention on tobacco control.

On the other hand, it can also be argued that it is not unethical to contribute to the production of legal products, and that there is thus no basis for excluding companies that produce tobacco from the Petroleum Fund. It is, however, relevant, as it is for other companies, to consider whether tobacco companies should be excluded from the Fund if it transpires that the companies have acted unethically. If it is established that tobacco companies violate labour standards and human rights, engage in improper marketing practices or other unethical practices, the exclusion mechanism could be used. In that case, it is not the product per se, but the unethical practices to which the Petroleum Fund should not contribute.

The Committee held divergent views on whether tobacco should be excluded from the Petroleum Fund through negative screening. There are arguments for and against such a strategy and the Committee has sought to clarify the arguments on which negative screening and use of the exclusion mechanism may be based. The Committee would also point out that these arguments in no case pertained to the individual’s right to use tobacco.

5.3.2 Exclusion

It would be unrealistic to draw up a set of screening criteria that captured all violations of human rights and labour standards. For example, companies do not provide information on their contribution to human rights violations, and such information will, to a large extent, have to be based on other sources. Such information is incidental and difficult to substantiate. Another complicating factor as regards negative screening is that companies’ actions change over time and corporate structures are continuously changing as a result of mergers and acquisitions. For these reasons screening using ethical criteria only excludes a fairly arbitrary selection of companies with unethical practices, and they may prove not to be the right companies.

Under today’s exclusion mechanism, companies are excluded if investing in them is in violation of Norway’s obligations under international law. Norway’s obligations under international law are set out in the international conventions to which Norway is a party. A general prohibition under international law does not necessarily apply under Norwegian law. In most cases of human rights violations, Norway is only responsible for violations that occur under Norwegian jurisdiction. There are other international conventions that are formulated in such a way that Norway can be held responsible for violations that occur outside Norwegian jurisdiction. The international conventions on anti-personnel mines and chemical and biological weapons contain broad provisions concerning complicity according to which the ban can apply to government investments in companies that produce such weapons. Some provisions in the UN Convention on the Rights of the Child and the ILO Convention on the Worst Forms of Child Labour require government action and can also mean that government investments in such activities can be said to be in violation of the conventions. In other words, the exclusion mechanism only concerns violations of conventions that are also violations of Norway’s obligations under international law. The mechanism therefore has a relatively limited scope.

The Committee proposes to expand today’s exclusion mechanism so as to include not only investments that may constitute a violation of international law for Norway, but also companies that contribute to violations of international standards in general and other grossly unethical corporate practices. Exclusion from the investment universe should also apply to companies if, for example, ethical considerations are increasingly incompatible with an optimal return on the Fund’s investments, or if there is no significant hope of changing the unethical practices through ethical ownership. In that case, the only way of avoiding complicity is by disposing of ownership interests. Examples of such unethical practices are grave violations of human rights and labour standards, gross corruption and deliberate or qualified severe environmental degradation.

Corporate responsibility for unethical practices and investor responsibility

In the above, the Committee has argued that holding equities in a company implies ethical participation in the company’s production. If one does not want to contribute to the production of cluster bombs, one should refrain from investing in companies that produce such weapons. It is less clear to what extent ownership also contributes to a company’s actions and practices. In order to contribute to an action, the investor has to be able to anticipate it. There must be some form of system or causal relationship between the company’s activities and the actions to which the investor does not want to contribute. Investments in a company cannot be said to contribute to actions that the investor could not possibly have anticipated or been aware of, or conditions over which the company in question does not have any appreciable control.

Violations of human rights, environmental provisions and other fundamental ethical standards will often be a result of a company’s lack of focus on such issues. Ethical infringements can be a result of inadequate routines for dealing with for example corruption, human rights or the environment, rather than a deliberate corporate strategy to make use of methods that most people would consider unethical. Dialogue with the companies can provide a channel of influence that induces them to devise systems for minimising such actions. The exercise of ownership influence could in such cases prove to be more effective in influencing corporate practices than disposing of ownership interests in a company.

The Committee therefore recommends fairly restrictive criteria for deciding which companies should be subject to possible exclusion. If a company that has committed a violation has implemented measures to prevent similar events from occurring in the future, ownership interests in that company do not contribute to unethical practices. If these measures are implemented after the Petroleum Fund has discussed the matter as part of its exercise of ownership interests, it can in fact be said that the Petroleum Fund has satisfied an ethical obligation to deal actively with unethical practices in its investment universe. This may suggest that exclusion should be limited to the most serious cases where the company in which the Petroleum Fund has invested is directly responsible for unacceptable breaches of standards, and there are no expectations that the practices will be discontinued. The basis for a decision on exclusion

From the Petroleum Fund’s perspective, exclusion of a company is a defence mechanism to avoid a situation where the Fund is contributing to ethically unacceptable practices. Procedural requirements and the factual basis for a decision on exclusion must be seen in this context. Given the purpose of exclusion, the assessment must focus on the company’s future strategy and practices. This means that a decision on exclusion cannot be based on absolute certainty. Expectations must be formed on the basis of probability analyses and forecasts. The decision must be based on an assessment of the degree of ethical risk the Fund should bear. This means that an acceptable ethical risk level for the Petroleum Fund’s investments must be established, and that this risk level must serve as a basis for a concrete ethical risk assessment when there are indications that the risk level may be exceeded.

The establishment of an ethical risk level must be based on the fundamental ethical requirements relating to human rights, the environment and the social standards that are discussed above. The assessment must also take into account that given the way international markets function today, any investment will involve ethical considerations. In other words, the Petroleum Fund cannot be required to invest only in companies with ethically unimpeachable conduct. On the other hand, the acceptance of this risk cannot serve as an excuse for inaction with regard to investment in companies engaged in clearly unethical practices. The challenge lies in striking a balance between the two extremes.

Criteria should therefore be established for determining the existence of unacceptable ethical risk. These criteria can be based on the international instruments that also apply to the Fund’s exercise of ownership interests. Only the most severe forms of violations of these standards should provide a basis for exclusion. This means that not all violations that a company is accused of having committed or contributed to are relevant to the assessment of whether a company should be excluded from the Petroleum Fund. Only gross or systematic violations of fundamental human rights or labour standards, severe environmental degradation, gross corruption or other gross violations of fundamental ethical standards should trigger an assessment of exclusion. We are referring to:

  • Gross or systematic violation of human rights, such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour and other forms of child exploitation
  • Gross violations of individual rights in war or conflict situations
  • Severe environmental degradation
  • Gross corruption
  • Other particularly serious violations of fundamental ethical norms

There are several factors that must be taken into account in an ethical risk assessment. First, the nature of the actions one risks contributing to must be evaluated. If the actions are very serious from an ethical viewpoint, a higher degree of diligence on the part of the Petroleum Fund will be required than in the case of actions that are not as serious. A high degree of diligence will require an active investigation when there are indications that a company in the portfolio is engaged in unethical practices, but also action in the form of exclusion of a company from the portfolio as a precautionary measure.

Second, available information on the company’s actions to date must be examined. Normally, there will be indications of whether the company’s unethical practices are likely to continue in the future. In that case, maintaining investments in the company could imply contribution to future unethical actions. According to normal management analyses and procedures, the Fund must have a sound factual basis for assuming that a company has been guilty of unethical actions. When there is doubt about the factual basis, about the company’s ability and willingness to remedy the situation or about whether the exercise of ownership rights will be an effective instrument for change, it would still be appropriate to exclude the company. It is clear that no company is legally required to be part of the Petroleum Fund’s investment universe. When the state as owner of the Petroleum Fund decides to exclude a company from the Fund’s investment universe, this is not subject to a formal decision under the Public Administration Act. Moreover, information on the company’s actions is not procured in order to make a decision as to the company’s past actions, but to determine to what extent the company will represent an unacceptable ethical risk for the Petroleum Fund in the future. This decision will depend on the level of ethical risk that the state is willing to accept on behalf of the Petroleum Fund. Thus, a decision to exclude a company from the portfolio for ethical reasons does not necessarily imply an accusation that a company has engaged in unethical activities or that it is unethical to invest in the company, but that pursuant to the guidelines drawn up for the Petroleum Fund, the ethical risk associated with inclusion in the portfolio is unacceptable. Contribution and delimitation of corporate responsibility

In some cases, the question may arise as to whether it is unethical to invest in companies that are not directly involved in unethical practices, but where there is a risk of unethical actions on the part of sub-contractors or companies in which the Petroleum Fund portfolio companies have controlling interests or ownership interests or other links. Ethical responsibility can also be applied to persons that act in the interest of the company, for example government security forces. It is not appropriate to set clear limits as to which links of this nature should result in exclusion and which should not result in exclusion. This must be assessed on a case-by-case basis. A guiding principle for the assessment should be whether there are factors that indicate complicity in an ethical sense or whether the use of alternative measures is appropriate.

If the links are so close between a company in the Petroleum Fund’s portfolio and a company where there is an ethical risk that the two can be identified with each other, the company’s legal structure cannot be decisive in the ethical assessment of complicity. Factors that could be decisive for such identification are the size of the ownership interests, whether the companies act as one externally, and whether shareholdings in one of the companies have implications for the other. Even if there is no identification, it may still be reasonable to argue that complicity exists. However, it would not be sufficient to argue that a company has small ownership interest in a company that is guilty of gross breach of ethical standards. Where ownership is concerned, it is reasonable to require that the company has actual control over the entity involved in unethical action before complicity on the part of the Petroleum Fund can be invoked.

When the link is not ownership, but a customer-supplier relationship, the assessment may be different. From the point of view of efficiency, it is often the case that an important customer has greater influence on a sub-contractor than many others. In the case of companies that make extensive use of sub-contractors with a high ethical risk, it can be argued that the investments should not be withdrawn if it is possible to influence the practices of their sub-contractors. Even if a company has unethical sub-contractors, it may be sensible to refrain from excluding investment unless there is a pattern where the company uses the sub-contractors with dubious practices without seeking to influence the situation. The situation will approach complicity if the customer relationship is long-term or repeated after the unethical practices have been identified. If the customer relationship is of lesser importance or transitory, for example a hotel that is used for child prostitution, emphasis should be placed on whether the company is facilitating this type of violation or contributing as a result of improper passivity.

Particular problems arise in connection with companies that have activities in states where severe human rights violations occur. Such violations can also occur in connection with the companies’ activities, for example through the use of security forces that commit abuses to protect the company’s property and installations, deportation of people and environmental damage to facilitate the company’s projects, or arrest and persecution of workers who are seeking to promote trade union rights. Complicity on the part of the company can be invoked only if direct action is taken to protect the company’s property or investment and if the company has not taken reasonable measures to prevent the abuse. Fixed income investments

The Petroleum Fund has invested 60 per cent of its capital in bonds. The main category of bond issuers is governments. Other important issuers are international organisations such as the World Bank, agencies, utility companies, financial institutions and industrial enterprises.

The regulations governing the Petroleum Fund stipulate which markets the Fund is permitted to invest its capital in. It is important to be aware that the country list only limits the markets and the currencies in which the bonds must be denominated. Providing the bond issuer has an acceptable credit rating, the Fund may invest in their bonds irrespective of the country of the issuer.

The exercise of ownership rights does not apply to bonds since they do not confer any ownership rights on the bondholder. Negative screening and exclusion can nevertheless be applied to bond investments. Bonds issued by financial undertakings, industrial enterprises or other enterprises should be treated on a par with equity investments. Since the main argument in support of screening or exclusion is to prevent complicity in the production of a specific product, or to avoid being associated with unacceptable conduct on the part of a company, it is difficult to argue that there is in principle an ethical distinction between equity investments and bond investments. It can thus be argued that equities and bonds in the same companies should be treated equally.

Governments and international organisations must be treated separately. Norway has economic and diplomatic relations with most countries in the world. With the exception of the countries to which international sanctions regimes apply, contact is maintained even if Norway disagrees with the country’s policies, for example in the area of human rights. Ordinary foreign policy channels are far more important for influencing foreign governments to change their policies in the desired direction than exclusion from the Petroleum Fund’s investment universe. In many cases, trade and contact provide better channels of influence than isolation.

It is also difficult to justify a ban on investments in individual countries’ government bonds on the basis of overlapping consensus. Even though there may be general agreement that a country’s policies should be criticised in some areas, there is not necessarily general agreement that the country as a whole should be denounced, or agreement on the appropriate forms of reaction in such cases.

If the UN decides to impose sanctions against a country in the form of binding trade restrictions, etc., the sanctions will after implementation in Norwegian law normally entail a prohibition against investment in the country concerned. If the Petroleum Fund has the possibility of investing in bonds issued by such countries, the consequence would be that they would be subject to exclusion. In such cases, the criterion of overlapping consensus would also be satisfied.

5.4 The Petroleum Fund’s Council on Ethics and International Law

The responsibility for decisions concerning exclusion of companies and negative screening should lie with the Ministry of Finance. Under the present exclusion mechanism, it is the Ministry of Finance that makes decisions on exclusion based on recommendations from the Petroleum Fund’s existing Council on International Law. This division of responsibility should also apply to an exclusion mechanism based on ethical criteria.

The Committee is of the view that it is appropriate to base the establishment of an exclusion mechanism using ethical criteria on the existing exclusion mechanism for the Petroleum Fund. The Petroleum Fund’s Council on International Law assesses, on assignment from the Ministry of Finance, whether individual investments constitute a breach of Norway’s obligations under international law. As a basis for the assessment, Norges Bank can request information from the companies concerned about the allegations that have been made. The Council is a body of experts in the field of international law and economics that makes an assessment both of the facts in a given case and of whether these are contrary to international law. An expanded expert council that is to assess whether a company is in breach of ethical standards should apply the same approach as today, i.e. assess the allegations concerning identified companies and determine whether the factual findings satisfy the criteria for exclusion from the Fund.

The Committee is of the view that the Council should determine which companies should be subject to negative screening and which companies should be subject to the exclusion mechanism. The Council should be free to decide whether a closer assessment of a company should be conducted. The Council’s assessments can, even when the Council does not choose to recommend exclusion, be made available to Norges Bank, and be useful in the exercise of ownership rights.

The Council can be responsible for undertaking negative screening or use consultants to provide it with assistance. Under the exclusion mechanism, the Council should also be responsible for procuring available information. It is the Committee’s view that the possibilities for applying screening criteria to identify all companies engaged in unethical practices are very limited. Information that may justify exclusion will probably to a large extent come to light on an ad hoc basis in the form of input from such sources as non-governmental organisations or the media.

The Council should have sufficient expertise in the areas to be assessed. This may require that the Council be expanded to include five members. The Council must be provided with sufficient time and resources so that the relevant procedures can be performed thoroughly. The Council’s tasks will be expanded in relation to the current situation. Experience shows that it is not possible to rely fully on external services. It is also important for the legitimacy of the mechanism that the Council is provided with the necessary independence and possibility to develop its expertise. The Committee is therefore of the view that the Council should have its own secretariat and sufficient resources to conduct its analyses.

When the Council recommends that a company should be excluded, this is done on the ground that the ethical risk associated with investment in the company is unacceptable. In other words, the Council does not have to prove that a company is guilty of unethical practices. Even if the decision to exclude a company does not affect the rights and obligation of the company concerned, the company should as a matter of routine have the opportunity to respond to a recommendation from the Council and to the reason for the recommendation. Such a dialogue with the company could improve the quality of the information on which any decision on exclusion is based, and will also provide useful information for the risk assessment that is to be made.

The Council’s recommendations to the Ministry of Finance should be available to the public. The publication of the Council’s final report is in line with both current practice and the principle of freedom of information. The Ministry of Finance should have the right to postpone public disclosure if this is necessary for the disposal of equities or bonds in a financially sound manner.

5.5 Financial and administrative consequences

5.5.1 Financial consequences

Exclusion and negative screening

Negative screening on a certain scale could entail financial consequences in the form of lower risk-adjusted performance, reduced opportunities for engaging in active management and higher transaction costs as a result of selection. Reference is made to the report drawn up by the professors of economics Thore Johnsen and Ole Gjølberg in the annex to this report. Johnsen and Gjølberg have studied the literature on the effects of ethical screening on performance, and supplemented this with their own analysis of this topic. The authors of the report summarise their work as follows:

“Placing special restrictions on portfolio composition, including SRI restrictions, will not have any considerable (negative or positive) effects on performance during a cyclical upturn. However, this conclusion may easily change in a cyclical downturn. If a fund manager is subject to SRI restrictions by the fund’s owners, all parties should be aware of the significant downside risk associated with these restrictions. The magnitude of this will depend on how extensive the restrictions on selection are. In addition, there is reason to believe that the downside risk will depend on the selection strategy applied.”

If the number of companies that is screened out of the portfolio and their underlying values are small in relation to the Fund’s total investment universe, a sizeable effect on overall risk will not be expected. Even a small decline in the performance of a fund as sizeable as the Petroleum Fund is still costly. For example, a decline in return of 0.01 per cent will entail an annual cost of about NOK 23 million given the size of the Fund’s equity portfolio at 31 December 2002. If the number of ethical criteria increases, a larger number of companies and a larger portion of the Fund’s total market value will be affected, and the change in risk will have a noticeable impact on the portfolio. Estimates of this type are always based on theoretical assumptions and hypotheses concerning future returns. The results of the estimates must be weighed against ethical considerations. If they have a broad and stable basis, the Committee would argue that it is unethical not to honour one’s obligations because of assumptions concerning a possible decline in returns. When the consequences of ethical considerations become more pronounced so that it is possible to firmly establish that there is a direct cost, the question arises as to whether there are better ways of achieving the defined ethical objectives than by placing a financial burden on the Petroleum Fund. It is therefore important to estimate the possible and likely consequences of different ethical criteria in order to determine how relevant financial assessments are for each choice. For a portfolio as broad as that of the Petroleum Fund, it is not possible to demonstrate empirically the negative consequences for the portfolio’s diversification properties resulting from the exclusion of a few companies.

Exercise of ownership rights

Several studies show that there is a positive relationship between good governance and long-term returns on equities in a company. These results are linked to a general commitment to corporate governance for the enhancement of long-term financial performance and not necessarily to ethical considerations in the exercise of ownership rights. The objective of the Petroleum Fund’s exercise of ownership rights will also be to improve long-term performance, but it does not seem meaningful to quantify this. However, we may expect that a greater focus on corporate governance activities will not have negative financial consequences.

5.5.2 Administrative consequences

Negative screening and exclusion

If companies are excluded from the investment universe, they must also be removed from the benchmark index Norges Bank employs to measure performance in order to establish a basis of comparison for active management. This applies to the benchmark index for both equities and bonds, i.e. FTSE World for equities and Lehman Global Aggregate for bonds. The exclusion of entire sub-sectors from the benchmark index for equities, given the sector classification in the FTSE share index, is simple from an administrative viewpoint. Index data do not have to be adjusted at company level. If screening involves a different approach, for example defining sectors other than those utilised by the FTSE, or defining the content of a sector concept differently, the index data would have to be adjusted at company level. Frequent changes in the number of excluded companies would require a greater allocation of resources for maintaining and controlling the benchmark index in Norges Bank. Specially designed benchmark indices would have to be constructed either by index suppliers or Norges Bank. If the scale of negative screening and exclusion increases, this could lead to an increase in management fees for external managers. As long as the scale of these mechanisms is limited, the additional costs will be very moderate.

Negative screening and exclusion will also give rise to direct costs irrespective of fund management. At present, the Ministry of Finance incurs costs of about NOK 2 million in connection with the Environmental Fund and the exclusion mechanism, in addition to the Ministry’s use of internal resources. The Committee’s proposal means that most of the direct costs will be incurred by the Petroleum Fund’s Council on Ethics and International Law. Information procurement will be greater than at present, and the number of cases will increase. The Committee estimates that the costs associated with expanded tasks and the need for an increase in resources for the Petroleum Fund’s Council on Ethics and International Law should amount to NOK 4-6 million during the start-up phase. The Council should be allowed to decide how these resources are prioritised, for example for establishing a secretariat, commissioning external studies, etc. The direct costs for the Ministry of Finance could be reduced by about NOK 1 million as a result of the proposal.

Exercise of ownership rights

Increased exercise of ownership rights by Norges Bank means that the Bank must allocate resources to this. The Committee finds it difficult to quantify the costs and is of the view that Norges Bank must be free to determine its use of resources internally and externally. However, the Committee refers to the study in annex 8 (section 8.5.2) on resource use in other large, comparable funds.

6. Proposal for ethical guidelines for the Government Petroleum Fund

1 Basis

The ethical guidelines for the Government Petroleum Fund are based on two premises:

  • The Petroleum Fund is an instrument for ensuring that a reasonable portion of the country’s petroleum wealth benefits future generations. The financial wealth must be managed with a view to generating a sound return in the long term, which is contingent on sustainable development in the economic, environmental and social sense. The Fund’s financial interests should be consolidated by using the Fund’s ownership interests to promote sustainable development.
  • The Petroleum Fund should not make investments that entail an unacceptable risk that the Fund is contributing to unethical actions or omissions, such as violations of fundamental humanitarian principles, gross violations of human rights, gross corruption or severe environmental degradation.

2 Mechanisms

The ethical basis for the Petroleum Fund shall be promoted using the following three mechanisms:

  • Exercise of ownership rights to promote long-term financial returns based on the UN’s Global Compact and the OECD Guidelines for Multinational Enterprises.
  • Negative screening from the investment universe of companies that either themselves or through entities they control produce weapons whose normal use violates fundamental humanitarian principles.
  • Exclusion of companies from the investment universe where there is deemed to exist a considerable risk of contributing to:
    • Gross or systematic violation of human rights, such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour and other child exploitation
    • Gross violations of individual rights in war or conflict situations
    • Severe environmental degradation
    • Gross corruption
    • Other particularly serious violations of fundamental ethical norms

3 Guidelines for ethics in the exercise of ownership rights


The primary objective of Norges Bank’s exercise of ownership rights for the Government Petroleum Fund is to safeguard the Fund’s financial interests. The exercise of ownership rights shall be based on a long-term horizon for the Fund’s investments, and broad investment diversification in the markets that are included in the investment universe.


The exercise of ownership rights shall primarily be based on the UN’s Global Compact and the OECD Guidelines for Multinational Enterprises. Norges Bank’s internal guidelines for the exercise of ownership rights shall stipulate how these principles are to be integrated into the exercise of ownership rights.


Norges Bank shall draw up a separate report on its exercise of ownership rights in connection with its ordinary annual reporting. An account shall be provided of how the Bank has acted as owner representative – including a description of the work to promote special interests relating to the long-term horizon and diversification of investments in accordance with Sections 3.1 and 3.2.


Norges Bank may delegate the exercise of ownership rights to external managers in accordance with these guidelines.

4 Guidelines for negative screening and exclusion


The Ministry of Finance shall make decisions on negative screening and exclusion of companies from the investment universe based on the recommendations of the Petroleum Fund’s Council on Ethics and International Law.


The recommendations and decisions are to be made public. The Ministry can in certain cases postpone the time of public disclosure if this is deemed necessary in order to ensure a financially sound implementation of the exclusion of the company concerned.


The Petroleum Fund’s Council on Ethics and International Law shall be composed of five members appointed by The King. The Council shall have its own secretariat. The Council shall submit an annual report on its activities to the Ministry of Finance.


The Council is to issue recommendations at the request of the Ministry of Finance on whether an investment is in violation of Norway’s obligations under international law.


The Council is to issue recommendations on negative screening of one or several companies on the basis of the production of weapons whose normal use is in violation of fundamental humanitarian principles.

The Council is to issue recommendations on the exclusion of one or more companies from the investment universe on the basis of actions or omissions that involve:

  • Gross or systematic violation of human rights, such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour and other forms of child exploitation
  • Gross violations of individual rights in war or conflict situations
  • Severe environmental degradation
  • Gross corruption
  • Other particularly serious violations of fundamental ethical norms

The Council is to raise matters under this section on its own initiative or at the request of the Ministry of Finance.


The Council is to gather the necessary information on an independent basis and ensure that the matter is elucidated as fully as possible before a recommendation concerning screening or exclusion from the investment universe is issued. The Council can request Norges Bank to provide information as to how specific companies are dealt with in the exercise of ownership rights. All enquiries to such companies shall be channelled through Norges Bank. If the Council is considering an exclusion recommendation, the draft recommendation, and the grounds for it, shall be submitted to the company for comment.


The Council shall review on a regular basis whether the grounds for exclusion still apply and can on receipt of new information recommend that the Ministry of Finance reverse the exclusion decision.


Norges Bank shall receive immediate notification of the decisions made by the Ministry of Finance in connection with the Council’s recommendations. The Ministry of Finance can request that Norges Bank inform the companies concerned of the decisions taken by the Ministry of Finance and the reasons for the decision.

Annex 1

The Committee’s mandate and members

By Royal Decree of 18 October 2002, the Norwegian Government appointed a Committee to propose ethical guidelines for the Government Petroleum Fund. The Committee was assigned the following mandate:

“In accordance with the Storting’s decision of 21 June 2002, the Committee shall put forward a proposal on a set of ethical guidelines for the Petroleum Fund. It is natural that issues relating to the environment, human rights, labour standards and the board and management of companies are assessed in this connection.

The Committee shall further define the concept of ethical guidelines and assess the purpose of these guidelines for the Petroleum Fund.

The Committee shall identify the extent to which the management of other large international funds employs ethical criteria and assess the experience and results of the funds that apply ethical guidelines.

The Committee shall assess the scope of application of the ethical guidelines, including the financial instruments and the geographical areas that should be covered. Furthermore, the Committee shall consider how the application of the guidelines should be delimited in relation to companies that to varying degrees own, are owned by or engage in business with companies that do not satisfy the guidelines.

The Committee shall assess various alternatives for formulating ethical guidelines, including the exercise of ownership rights, investment limitations, etc. An account must be given of the information requirements that follow from various types of guidelines and whether this information is available or applicable to all financial instruments in which the Fund can invest.

The Committee shall assess the financial and administrative consequences of various guidelines, including the implications of the guidelines for the Fund’s expected return, risk and costs.

The Committee shall place emphasis on proposing guidelines that are clear and objective and possible to control on the basis of available information in capital markets. Moreover, the guidelines should delineate a clear division of responsibility between the Ministry of Finance and the operational manager of the Fund. Requirements concerning financial verifiability of management performance shall not be undermined as a result of the ethical guidelines.

The Ministry of Finance may supplement or revise the mandate.

The Committee shall submit its report by 1 June 2003.

The members of the Committee are as follows:


Hans Petter Graver, professor, Oslo

Other members

Jarle Bergo, Deputy Governor of Norges Bank, Enebakk
Alexander Cappelen, senior lecturer, Bergen
Ola Löhman, consultant,Sweden
Janne Haaland Matlary, professor, Oslo
Gro Nystuen, research fellow, Bærum
Bente Rathe, self-employed, Trondheim
Lasse Ruud, managing director, Oslo
Per Sandberg, senior engineer, Skien
Anne Kristin Sydnes, senior adviser, Oslo

The Secretariat was headed by Yngvar Tveit, Ministry of Finance.

The following persons have participated in the secretariat: Helge Eide, Norges Bank, Tormod Cappelen Endresen, Ministry of Foreign Affairs, Hilde Jervan, ECON analyse, Eli Lund, Ministry of Finance and Birger Vikøren, Norges Bank.

The Committee held eight meetings, four of which spanned two days. The Committee also held meetings with non-governmental organisations to collect input for its work. The Committee has also called on persons with expertise in various fields in order to achieve the soundest possible decision-making basis for the proposal. Furthermore, the Committee has arranged a seminar on ethical guidelines in fund management with the participation of non-governmental organisations, consultants and fund managers from Norway and abroad, where issues pertaining to ethical guidelines were discussed and elucidated from different points of view.