3 Consequences for the Council on Ethics of including new companies in the benchmark portfolio of the Government Pension Fund – Global

Letter of 21 March 2007 from the Council on Ethics to the Ministry of Finance

We refer to questions from the Ministry of Finance as to the consequences for the Council on Ethics of including small companies in the benchmark portfolio of the Pension Fund. In practise, such a changeover will imply that the current benchmark index for equities, FTSE All-World, which encompasses in excess of 2,400 large and medium-sized companies, is replaced by the FTSE All-Cap. The benchmark portfolio is thereby expanded to include small companies that account, in aggregate, for about 10 pct. of the stock exchange value of the companies encompassed by the FTSE All-Cap. The number of companies in the benchmark portfolio will then increase to about 7,000. The Council assumes that the Ethical Guidelines shall be practised in the same manner for these companies as for the current portfolio.

The Council on Ethics has been in contact with EIRiS, which has two different agreements with the Council for monitoring of the portfolio of the Pension Fund. Through the first agreement, EIRiS monitors the portfolio with a view to identifying companies that produce weapons that shall be screened from the Fund. Through the second agreement, EIRiS performs daily news searches for information on companies in the portfolio that may be engaged in activities in violation of the Ethical Guidelines. EIRiS is of the view that it would also be possible to perform such assignments if the benchmark portfolio of the Fund is expanded to include small companies.

A larger number of companies being covered by the Fund will increase the costs of the Council on Ethics. It would seem reasonable to assume that the cost of monitoring the portfolio will increase in proportion with the number of companies. In addition, there may be a need for hiring consultants with a stronger regional affiliation, because it may be more difficult to obtain information on smaller companies. Moreover, it must be expected that the number of cases requiring further assessment will increase. It will therefore be necessary to strengthen the examination capacity of the secretariat through, inter alia, the increased use of external examiners to assist in the investigation of specific cases. It would appear reasonable to assume that the cost budget of the Council on Ethics will increase by NOK 3 million a year.

The Council has been in contact with EIRiS to clarify the prospects for carrying out a preliminary review of the new companies with a view to identifying companies that are involved in the production of weapons that qualify for exclusion from the Fund. It would seem realistic to carry out such an initial review prior to the new equities being purchased for the portfolio.

When the number of companies increases, there is also an increase in the risk that the portfolio will include companies that are engaged in activities in violation of the guidelines. Nor can it be ruled out that access to information on small companies is inferior to that on large ones. Nevertheless, the Council is not in possession of any information to suggest that investments in small companies are, in themselves, either more or less risky from an ethical perspective than are other investments.

Yours faithfully,

Eli Lund

Head of the Secretariat

Council on Ethics