5 Advice on investment strategy for the Government Pension Fund - Global regarding expansion of the Fund"s benchmark portfolio to include more emerging stock markets

Letter of 7 February 2008 from the Council on Ethics to the Ministry of Finance

We refer to an enquiry from the Ministry of Finance as to what implications the expansion of the benchmark portfolio to more emerging markets may have on the application of the Ethical Guidelines, including such issues as openness and transparency, as well as the possibility of monitoring the portfolio and verifying information.

The expansion may encompass all emerging markets included in FTSE"s indices for Advanced Emerging Markets and Secondary Emerging Markets, implying that 17 countries and approximately 800 companies are added to the benchmark portfolio. As an alternative, the expansion may comprise all companies included in the FTSE Advanced Emerging Markets Index, as well as the three major markets in the FTSE Secondary Emerging Markets Index, which means that the number of countries increases by 5 and the number of companies by some 450. The Guidelines shall be applicable to these companies in the same way as to the current portfolio. During 2007, the Ministry of Finance has expanded the benchmark portfolio to include companies classified as small-cap by FTSE, so that the number of companies in the Fund has risen from nearly 2,500 to around 7,000.

A further broadening of the benchmark portfolio requires the Council on Ethics to both monitor and assess more companies. Choosing the first expansion alternative - 17 new countries and 800 new companies - will make more demands on the Council on Ethics than the second, which only involves 5 new countries and 450 new companies. We have received confirmation that one of our information suppliers will be able to monitor the new benchmark portfolio, both with a view to identifying companies that produce weapons subject to negative screening from the Fund and with a view to identifying companies that may engage in other activities contrary to the Ethical Guidelines.

The experience from the last benchmark portfolio expansion shows that the general amount of information from the information supplier does not necessarily increase proportionately with the number of companies included in the portfolio. The access to information regarding small-cap companies and companies in emerging markets may be more limited than the access to information regarding large-cap companies in developed markets. This may be remedied through the Council on Ethics" more extensive use of consultants with regional affiliation and also more external examiners in the investigation of specific cases. This may be somewhat more expensive than the traditional monitoring effort. The Council on Ethics is not in a position to assess whether the access to information concerning the new companies under such measures will be as good as that pertaining to the companies previously included in the portfolio.

The use of this type of services, as well as a general upswing in cases requiring further investigations, will entail increased costs on the part of the Council on Ethics. It seems reasonable to take as a point of departure that the budgetary need will increase by some NOK 1.5 mill. per year.

Yours sincerely,

Eli Lund

Head of the Secretariat

Council on Ethics