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Report from a committee tasked with reviewing the ethical framework for the Norwegian GPFG: Values and responsibility – the ethical framework for the Government Pension Fund Global

Historical archive

Published under: Solberg's Government

Publisher Ministry of Finance

Today, the Committee mandated to review the ethical guidelines for Norway’s sovereign wealth fund publishes its proposals for amendments to the Guidelines for observation and exclusion from the Government Pension Fund Global and to the Management mandate for the Government Pension Fund Global. The committee presented its report to the Norwegian Minister of Finance Jan Tore Sanner.

“Our proposals build on the existing ethical framework for the Fund,” says Professor Ola Mestad, chair of the Ethics Committee. “Overall, the ethical framework has worked well. Nevertheless, we are proposing some adjustments in order to reflect the evolution of ethical norms over the past 15 years and to catch up with certain new issues that have emerged.”

The point of departure for the Committee has been that the GPFG constitutes the national savings fund of Norway. It is an ethical obligation unto itself to manage the Fund in ways that secure lasting value creation for current and future generations of Norwegians. Correspondingly, the GPFG must avoid being invested in companies that cause or contribute to serious violations of ethical norms. Violations may be linked to certain products or to companies’ conduct.

“Most of the criteria for observation and exclusion are construed to facilitate adjustment to emerging issues,” says Mestad. “Hence, their application must keep up with developments as they materialise. Notwithstanding, we do point to certain areas where particular attention is due by the Council on Ethics and Norges Bank, notably indigenous peoples’ rights and the use of surveillance technology. The Committee proposes changes in the criteria relating to arms production and corruption. Finally, the Committee suggests introducing a new conduct-based criterion on the sale of arms.”

Norges Bank’s responsible investment management compliments the work carried out by the Council on Ethics and Norges Bank collectively under the Guidelines for observation and exclusion of companies. Underpinning the Bank’s activities in this area are internationally recognised standards. The Committee proposes to introduce the UN Guiding Principles on Business and Human Rights (UNGP) into Norges Bank’s mandate in order to further clarify the foundational norms for the Bank’s work. The UNGP were launched in 2011 and have since become the prevailing standard in the area of human rights.

Responsible management of the Fund has evolved since 2004 and generates increased reciprocity between the applied measures. Good coordination between Norges Bank and the Council on Ethics is therefore important. The Committee proposes to expressly stipulate the requirements for this coordination. Transparency is another imperative component emphasized by the Committee.

The Committee has been tasked specifically with examining ways to handle investments in countries with divergent norms. In the view of the Committee no existing indexes are suitable for creating a general, ethical rules-based system in order to limit investments in designated countries or business sectors. Existing indexes have other objectives, and their reliability and accuracy for this purpose will hence be inadequate.

“The challenges that arise with diverging norms relate particularly to local companies with limited latitude for adjustments. For such companies, the measures must be tailored to the conditions under which the companies operate. The Committee underlines the importance for companies to be assessed against the same ethical standards and with the same level of thoroughness as today”, says Mestad.

Further details may be found in the attached summary.

The Committee’s proposals in brief (unofficial English translation)

The current framework builds on the Guidelines for Observation and Exclusion from the Government Pension Fund Global (GPFG) introduced in 2004, henceforward referred to as the ethical guidelines. Overall, the Committee considers that the ethical aspects of the management of the Fund have been largely successful. In light of the evolution in ethical norms and new issues that have emerged over the past 15 years, the Committee nevertheless proposes certain amendments to the ethical guidelines and to Norges Bank’s Mandate for Responsible Investment. The Committee bases its proposals on the premise that the GPFG will remain a responsible, financial investor, with diversified global investments and with the aim of achieving the highest possible return within an acceptable level of risk. Managing the Fund with the aim of securing lasting value creation for current and future generations is in itself an ethical obligation. At the same time, the GPFG must avoid being invested in companies that contribute to serious violations of ethical norms. Its ethical guidelines and mandate for responsible investment should continue to be rooted in international conventions and internationally recognised guidelines, where such exist.

The purpose of the ethical guidelines is to prevent the GPFG from being invested in companies that cause or contribute to serious violations of ethical norms. The Committee proposes to include in the guidelines a clause specifying this purpose. Both companies’ production of certain types of products and companies’ conduct may give grounds for observation or exclusion. In addition, the exercise of ownership rights is important. These measures must be seen in conjunction, and the threshold for exclusion should be high.

The product-based criteria entail that producers of certain types of weapons, of tobacco and of coal are excluded from the GPFG. It is proposed that the weapons criterion be amended in certain areas and that the list of its relevant weapon types, which is currently included in the Ministry of Finance’s annual White Paper to the Norwegian parliament (Storting), be encompassed in the guidelines themselves. Further, it is proposed that lethal autonomous weapons be added to this list. With autonomous weapons, the decision to apply the use of force is not directly subject to meaningful human control. This ensues erosion of accountability and is, in the Committee’s view, problematic as a matter of principle. Further, the Committee proposes that the production of certain types of submarine and other platforms that may be used to deliver nuclear weapons be encompassed by the criterion. The producers of such platforms are not currently excluded.

The conduct-based criteria in the guidelines encompass human rights, individual’s rights in war and conflict, corruption, environmental damage and greenhouse gas emissions. The criteria are formulated so as to provide room for their application to new issues arising in the areas concerned. The Committee underlines that prudence must be demonstrated with respect to indigenous peoples’ rights and the use of surveillance technology, etc. It is proposed that the examples hitherto set out in the human rights criterion be removed to make it clear that the criterion encompasses all types of human rights. It is proposed that the corruption criterion be expanded to also encompass other types of serious economic crime.

The Committee proposes the inclusion of a new conduct-based criterion for the sale of weapons to states involved in armed conflict where there is an unacceptable risk that the weapons are used in military operations that constitute serious and systematic violations of international humanitarian law. The Council on Ethics will be tasked with identifying relevant companies on the basis of a broad and authoritative assemblage of information.

Although the existing government bond exemption has had little real significance for the GPFG, the Committee does not advocate the provision’s removal. The GPFG is broadly invested and it is difficult to foresee developments several years ahead in time.

Norges Bank’s responsible investment practices support the ethical guidelines. It is proposed that the UN’s Guiding Principles on Business and Human Rights (UNGP) be added to Norges Bank’s mandate to clarify the norms underpinning the Bank’s responsible investment practices in the area of human rights.

The Bank’s responsible investment efforts include the publishing of expectation documents, shareholder dialogues, records of voting at general assemblies, support for research and the divestment and generates a reciprocity between the measures that did not exist to the same extent before. Good coordination between Norges Bank and the Council on Ethics provides the basis for considering the measures in conjunction and to use the most appropriate measure in each individual case. The Committee proposes that the requirements for interaction between the Council on Ethics and Norges Bank be made clearer.

Transparency is a basic premise for public confidence in the management of the GPFG. The publication of the Council on Ethics’ thoroughly reasoned recommendations contributes to transparency in a way that is unique internationally and must be continued. Norges Bank’s reporting on its responsible investment practices has evolved considerably in recent years. The Committee proposes that the publication “Responsible investment” or similar disclosures be included as a requirement in the Bank’s management mandate. This would give the report and the area as a whole clearer anchoring with Norges Bank’s Executive Board.

The issue of climate change is relevant for several aspects of the GPFG’s management. It is an important financial risk factor that must be considered in the Fund’s management. Furthermore, climate considerations are an important part of Norges Bank’s responsible investment practices and ownership efforts. The ethical guidelines contain a separate product-based criterion for coal and a conduct-based greenhouse gas emissions criterion. The climate criterion is relatively new, and the Committee makes an effort to clarify the understanding of it. The reciprocity between the measures is particularly evident in the climate area and shows the importance of a holistic approach.

Every company must be assessed against the same ethical standards. This also applies to companies in emerging markets. General restrictions on investment in emerging markets or in individual countries would be difficult to implement in an ethical framework for the GPFG. Numerous such rankings exist, but none that the Committee finds to be suitable as a starting point for rule-based investment restrictions. Considerable uncertainty attaches to the rankings and indexes, and their accuracy is variable. In countries with divergent norms, challenges relate particularly to local companies and companies that are in some way under government control. Such companies often have little latitude and information about them may be difficult to acquire. It may therefore be necessary to tailor the application of measures with respect to such companies, with assessments concentrating more on the latitude they do have and their willingness to mitigate the impact of the conditions under which they operate.

 The amount of information available on companies does vary. In situations where the risk of norm violations is considered to be high, a paucity of information about the company, particularly if the company demonstrates an unwillingness to clarify the situation, may in itself contribute to the risk of it contributing to unethical behaviour being deemed unacceptably high. Nevertheless, such a risk-based approach should be limited to exceptional situations. The Council on Ethics should not recommend the general exclusion of certain types of company, business sectors, etc. The Committee maintains the view that the Council on Ethics must continue assess companies individually.

Chapter 1 of the Report is available in English