Sovereign Wealth Funds as Serious Financial Investors

The role of Sovereign Wealth Funds (SWF) in the capital markets was one of the topics at the recent World Economic Forum in Davos. The debate has revealed some scepticism towards SWF. Key concerns relate to a lack of transparency and possible non-financial objectives for the investments. This is not the case with the Norwegian Government Pension Fund – Global.

Key factors in the management of the Norwegian fund include a high degree of transparency in all aspects of its purpose and operation, the Fund’s role as a financial investor with non-strategic holdings, an explicit aim to maximise financial returns, and clear lines of responsibility between political authorities and the operational management of the fund. The management aims for international best practice, and the exercise of ownership rights is based on internationally accepted principles such as the UN Global Compact and the OECD Guidelines of Corporate Governance and for Multinational Enterprises.

We believe that the Norwegian fund has a potential to positively influence international financial markets through enhancing market liquidity and financial resource allocation. Typical characteristics of SWF are long investment horizons, no leverage and no claims for the imminent withdrawal of funds. Hence, SWF have a strong risk-bearing capacity and an ability to accommodate short-term volatility. They may therefore act as a stabilizing factor in financial markets by dampening asset price volatility and lowering liquidity risk premia.

We believe transparency is a key tool in building trust, both domestically and internationally. Domestically it helps build public support and trust in the management of Norway’s petroleum wealth. Furthermore, openness about the fund management can contribute to stable international financial markets, as well as exert a disciplinary pressure on the management that improves its quality.

We support the ongoing work in the IMF and the OECD in studying the effects of SWF. Any work on developing a voluntary set of best practices for SWF should be carried out by the IMF, with the collaboration of relevant partners. However, we see no cause for regulations that would restrict the present investment activities of our Fund, or any regulation imposing restrictions on SWF over and above those applying to non-SWF investors.

The Fund is not an instrument for political posturing or with politicised investment decisions. Two years ago the Fund drew criticism from Iceland’s prime minister, when our manager Norges Bank expressed an investment view on some Icelandic securities. But that incident was an illustration of how a recipient country wanted to introduce politics into the investment process, not proof of a politicized investment decision on the part of the investor.

The Government Pension Fund – Global was established to manage Norway's petroleum wealth in a sustainable manner. Setting aside large parts of the petroleum revenues makes us better prepared to meet challenges related to rising pensions and health expenditures. The Fund, now valued at more than USD 350 billion, has become a major and influential player among institutional investors worldwide. Greater influence means greater responsibility in deciding how the Fund is invested.

We wish to be responsible investors and the political authorities have on behalf of the Norwegian people established ethical guidelines for the management of the Fund. We have two main ethical obligations for the Fund; firstly, the obligation to ensure financial returns so that future generations will benefit from the oil wealth. Secondly, the obligation to respect fundamental rights for those who are affected by the companies in which the Fund invests. Since we believe long-term returns will benefit from adherence to generally accepted norms of ethical behaviour, we see no contradiction between these two obligations. 

What then are these “generally accepted norms of ethical behaviour”? Norway is a pluralistic society and there is no consensus on one particular uniform ethical perspective. The ethical guidelines should therefore be based on some main normative characteristics. We believe that this is best achieved by anchoring the guidelines in widely recognised standards. The conventions and principles laid down by international organisations such as the UN, OECD and ILO make out such a consensus as they define what should in the least be required by companies regarding fundamental rights and protection of the environment, human life and health. 

We promote the ethical foundation through two types of instruments; through exercising ownership rights and through excluding companies from the Fund. In cases where it is possible for the Fund to encourage a company to put in place systems which will reduce the risk of ethical infringements, the use of ownership rights is the preferred option. In other cases, however, there will be no realistic hopes of changing grossly unethical practices. The exclusion mechanism is a defensive measure aimed at avoiding a situation where the Fund runs the risk of being complicit in ethically unacceptable practices. The ethical guidelines are applied in a totally transparent way, with full disclosure both of the criteria and how they are applied in individual cases.

I am pleased to see that the ethical guidelines as such, and our enforcement of them, are being noticed and in some cases copied by other funds both domestically and internationally. Needless to say, management culture is central to ethical business conduct and it is therefore important to have an open communication and an exchange of views on these issues. I am encouraged by the increasing importance of ethics in fund management internationally. This gives me confidence that ethics will become a permanent and vital part of fund management across borders and that investors may mutually inspire each other in this pursuit.