Ethics based on national commitment

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Your Royal Highnesses, Your Excellencies, Ladies and Gentlemen,

It is an honour and a pleasure for me to welcome you all to this conference. The weather may be cold and damp outside, but we wish you a very warm welcome.

Many of us in this room help manage large pools of wealth. Based on a rough calculation, we estimate a total of 750 billion USD among the audience here today. This is in itself a great responsibility.

As Minister of Finance I am responsible for the management of the Norwegian Government Pension Fund – Global. As you can tell, this name was not devised by marketing people, so I will shorten it to just “The Pension Fund” in the rest of my speech.

Norway has large incomes from the petroleum sector. It has taken nature hundreds of millions of years to produce oil and gas.

It is only recently that we have developed technology to exploit these resources and profit from them.

We cannot allow ourselves to spend this fortune during one or two generations. That is why we have set up a fund to manage this wealth in the first place. The Fund is currently valued at approximately 350 billion US dollars, which is about the same as Norwegian GDP. But it is just as important to ensure that we are not contributing to grossly unethical practices through our investments.

Although there are many differences between those investors gathered here, I believe that we have some common denominators and some common challenges. And – hopefully – also some common goals! This is after all what we have come together to discuss.

Responsible investment is not really a new concept. The roots of ethical investments can be found among religious movements. At the beginning of the 1900s, the Methodist Church began investing in the stock market, avoiding companies involved in alcohol and gambling.

In 1971, the first "modern mutual" fund, the Pax World Fund, was set up to avoid investments associated with the Vietnam War. Opposition to the apartheid regime in South Africa led to the promotion of ethical investment in the 1980s.

Thanks to persistent efforts from NGOs, journalists, politicians and civil society in Norway there was an increasing interest in the investments of our pension fund during the 1990s.

I am happy to notice that we also have many representatives from the civil society present today. Money talks!  When the two worlds of idealism and business communities meet,  we may develop ideas that can change the world.

My party, the Socialist Left Party, was at the forefront in the Parliament in proposing that ethical guidelines be made part of the management of the Pension Fund. We met some tough critique then. I am therefore all the more happy that this became a reality in November 2004. I am also very happy that the guidelines were endorsed by a unanimous Parliament.

We have invited you all to discuss how to best exercise responsible investments. There are dilemmas connected to this work and we will never be able to act 100 % consistent in all areas. But that should not lead us to the conclusion of doing nothing.

I believe we are now seeing the beginnings of responsible investment becoming mainstream in the investor community. I hope that this conference may strengthen this trend and contribute to our joint efforts to take on corporate social responsibility. 

Some of us are institutional investors. We manage funds on behalf of the ultimate owners, and we have to put their interests first. Should this be combined with corporate social responsibility?

Some have argued against it. The American economist Milton Friedman was one of them. I’m sure many of you have heard the famous Friedman quote: “The business of business is business”.

But business is not an isolated island. It is an integrated part of our communities. Not only are human rights violations or severe environmental damage inherently unethical, but in the long run it may also be bad for business. When one business uses child labour and prevents children from going to school, another business may face a lack of skilled labour in the future.

When one business tries to fix a pollution problem by hiding toxic waste in their back yard, that may postpone the cost of dealing with the problem. But the problem must be dealt with sooner or later. If you are in the market only for the short term, you may not care about this. But we will be owners in the company 10, 20, 30, even 100 years from now. Sooner or later, we will be faced with these costs. And in many cases, the cost of preventing pollution is a lot smaller than the cost of cleaning it up.

We are global investors. We are long term investors. We own a small part of the whole stock market. We are in almost every business. We believe social and environmental responsibility creates the best conditions for high, sustainable long-term returns. The business of business is responsible business.

What sort of ethics should an investor focus on? There is no single answer to that question. For the Pension Fund, we have taken as a starting point what can be seen as agreed ethical principles for the owners of the fund: namely the Norwegian people and future generations of Norwegians. 

The Ethical Guidelines thus represent values that we believe are shared by the majority of the Norwegian people. We believe that these values also enjoy broad support in the global community, as they relate to internationally recognised norms on corporate governance, human rights and the environment.

Our ethical guidelines build on a proposal from an independent committee appointed by the Government. It was headed by professor Hans Petter Graver, who is also with us here today. The committee identified two main ethical obligations for the Fund;

- firstly, the obligation to ensure financial returns so that future generations will benefit from the oil wealth, and

- secondly, the obligation to respect the fundamental rights of those who are affected by the companies in which the Fund invests.

The guidelines establish two policy measures to meet the ethical obligations: Active ownership and the exclusion of companies. I would like to give a few examples of how they have been implemented under the guidelines for the Pension Fund so far: 

There are more than 7000 companies in the Fund’s portfolio.

Norges Bank – Norway’s central bank – is operational manager for the Fund and thus responsible for exercising ownership rights.

We want to ensure that active ownership is effective. In my view we can best achieve this by concentrating on a few priority areas.
Three key areas have been targeted for the coming period:
- strengthening shareholders rights
- protecting children’s rights
- and protecting the environment.

Shareholder democracy is a basic precondition for an owner to have influence in any question or area.

Norges Bank is pressing a number of international companies in the agricultural sector to improve their record on child labour. As a concrete example, a leading multinational has recently sharply increased its focus on protecting children’s rights.
It has communicated to Norges Bank that our fund is the only major financial investor to raise this issue with them so strongly.

Also, several of the world’s major emitters of carbon dioxide are presently involved in dialogues with Norges Bank about their approaches to climate change and their lobbying positions. The aim of the bank is to ensure that they do not fight or hinder the international regulations for a sustainable future.

We cannot expect quick results or quick fixes in this area. But, when we use our ownership to influence the ethical standard in thousands of companies, it may make a big difference in the long run. There is also potential for positive change if we use the policy measures, active ownership and exclusion of companies, in combination.

So far we have excluded 25 companies based on recommendations from the Council on Ethics for the Fund. The majority of the companies excluded are producers of nuclear weapons, cluster munitions and anti personnel land mines. These are among the weapons the Fund is regularly screened for, based on their ability to violate fundamental humanitarian principles. Last week, the Ministry announced the exclusion of three companies related to the weapons criteria.

The Ministry has also excluded two companies based on the human rights criterion and three companies based on the environment criterion in the guidelines.

When we exclude a company, it is to avoid the Fund’s own contribution to what we perceive as grossly unethical activities. The main focus is to avoid contribution. We do not look to “punish” companies. We believe, however, that the possibility of exclusion may strengthen the active ownership and dialogue with companies.

We have seen examples where our decisions to exclude specific companies have received quite a lot of attention.
This was the case with Wal-Mart in 2006. It was also the case with the exclusion of Vedanta Resources (metals and mining company) with operations in India.
In the latter case, we have been made aware that the Supreme Court in India – in its deliberations regarding a civil action against Vedanta – took note of the decision of the Government of Norway to ban Vedanta for non compliance of labour laws and for violation of human rights.

 
We have placed great importance on transparency when establishing the Ethical Guidelines.  Annual reports from Norges Bank on the exercise of ownership as well as recommendations from the Council on Ethics are made public. So are decisions from the Ministry to exclude certain companies from the Fund.

All decisions are based on thorough research and analysis. We want to ensure that they are solidly based and that we have the trust of companies and other investors alike.
Companies that are under evaluation by the Council on Ethics are given the opportunity to comment on the Council’s findings and assessment. This helps ensure a thorough basis for a decision to exclude a company.

Our guidelines, and our application of them, are being noticed. In some cases they have been copied by other funds both domestically and internationally. This implies that their effect goes beyond the actual work carried out through the Pension Fund. We think this is very encouraging.

Transparency also allows NGOs, researchers and the press access to our considerations and decisions.

There is little doubt that our thoroughness, predictability and transparency in implementing the Ethical Guidelines is an important reason why this work is being noticed. We have an obligation to preserve credibility as a serious long- term investor with clear financial objectives. Only then can we hope to engage and inspire other investors, in order to influence on a larger scale.

What is best practice from a responsible investor point of view? This is a question I cannot answer with absolute certainty, at least not at this moment. Many of you have implemented ethical principles for much longer than the Pension Fund. We don’t presume to have found a perfect model. Again, I believe dialogue and cooperation is the best way to move ahead with these issues.

The Norwegian Government has decided to evaluate the Ethical Guidelines during 2008 to ensure that they function as intended.

There are some evident questions and dilemmas that need to be addressed in this process. Some expectations may not be possible to meet. As active owners, we need to focus on some key strategies in order to be efficient, rather than scratching the surface of many issues.

When we focus our efforts and stand by our priorities, we will be able to do more.

When we as investors are concerned about child labour issues today, companies must know that we will be concerned also next year and the year after that.

The threat to the climate is a particular challenge to us all, whether investors, companies, civil society or international organisations. Investors must play their part. And we need to make sure that we compliment – in the best way possible – the efforts of all other stake holders. This is one of the issues we will touch more on during this conference.

We are breaking new ground when implementing the ethical guidelines. We certainly have a lot of ground to cover and we are absolutely dependant on dialogue and debate in order to progress effectively. I hope that this conference can be a contribution to that end. 

Thank you for your attention!