Government Pension Fund Global: The Ministry of Finance does not exclude PetroChina

The Ministry of Finance has decided not to follow a recommendation from the Council on Ethics for the Government Pension Fund Global (GPFG) to exclude the company PetroChina Co. Ltd. from the fund’s investment universe.

On 26 May 2010, the Council on Ethics for the GPFG recommended to the Ministry of Finance that the company PetroChina Co. Ltd. be excluded from the GPFG portfolio. The case raises some fundamental questions. The company is not directly involved in the unethical activities. These are linked to another company. Following a detailed assessment, the Ministry of Finance has concluded that the connections between the two companies are not such that they should be regarded as a single entity. Accordingly, the Ministry of Finance has decided not to follow the recommendation of the Council on Ethics.

The basis for the Council on Ethics’s recommendation was that there is an unacceptable risk of involvement in current and future human rights violations in connection with the construction of oil and gas pipelines in Burma. The Council on Ethics concluded that there is a high risk of human rights violations by the Burmese authorities in connection with the construction of the pipelines, and that the companies responsible for construction, risk involvement in these violations.

Organisational overview and responsibility
The company in which the GPFG owns shares, PetroChina, is not directly involved in the activities on which the Council on Ethics based its recommendation. It is Southeast Asia Crude Pipeline Company, another subsidiary of PetroChina’s parent company, China National Petroleum Corporation (CNPC), which is constructing the pipelines in cooperation with, among others, the state-owned Burmese company Myanmar Oil and Gas Enterprise (MOGE). The main issue in this case is therefore whether PetroChina can be held accountable for human rights violations to which its parent company, CNPC, may be involved through its subsidiary Southeast Asia Crude Pipeline Company. CNPC, which is 100 percent state-owned, owns 87 percent of PetroChina.

Subsidiaries not normally responsible for parent companies’ actions
The starting point for assessing whether a company can be said to contribute to grossly unethical actions or omissions in the context of the ethical guidelines is whether the company is involved in the unethical activities either directly or through controlling ownership interests. This means that parent companies will normally be deemed responsible for the actions of their subsidiaries, while subsidiaries will not normally be deemed responsible for the actions of their parent companies. An individual assessment must be undertaken in each case. The Council on Ethics has deemed that PetroChina and CNPC can be regarded as a single entity in this context. The reason given for this conclusion is that the companies have a great degree of personnel and organisational overlap, and that the companies have close financial links. The Council on Ethics therefore concluded that PetroChina is responsible for breaches of ethical standards committed by its parent company CNPC.

Should not be assessed as one company
In its assessment, the Ministry of Finance takes as a premise that large international corporate structures differ greatly in terms of their degree of integration, and that organisational, and thus staff-related, overlap of corporate functions arises relatively frequently. Moreover, it is not unusual for leading employees of a majority shareholder in a company to occupy leading positions in the governing bodies of the subsidiary. PetroChina and its majority shareholder CNPC appear to be closely linked. Nevertheless, the Ministry of Finance has concluded that PetroChina’s links with CNPC are not such that the two companies should in practice be regarded as a single entity.

Link between company and potential violations not clear enough
Following an overall evaluation, the Ministry of Finance has concluded that any link between PetroChina and the possible ethical violations is too weak to justify the exclusion of PetroChina from the GPFG portfolio. The Ministry would emphasise that the situation in Burma remains very worrying, and that Norway supports the restrictive measures implemented by the EU. The Ministry would also point out other restrictions which apply to the GPFG portfolio and which affect investments linked to Burma: investments in Burmese government bonds and in companies which sell weapons to the Burmese regime.

 

Read more:

• Recommendation of the Council on Ethics
• The Council on Ethics for the Government Pension Fund Global
• List of all companies which are excluded from the fund’s investment universe