Responsible shareholder
With more than NOK 500 billion invested in shares, distributed among over 3300 companies in more than 30 countries, the Norwegian government, through the Government Pension Fund - Global (previously the Government Petroleum Fund), is one of the world's largest institutional shareholders. Even though the government's ownership share in each company is not large (0.3 per cent on average), ownership confers both influence and rights.
It is Norges Bank's ambition to be a responsible shareholder, exercising its rights in a considered , active and ethically conscious manner, thereby safeguarding the interests of the Fund's owners, the Norwegian people. It is for these reasons that Norges Bank is intensifying its efforts with regard to corporate governance: ethics in fund management is not only about withdrawal and screening, but also about active corporate governance.
With influence comes responsibility
Even though the primary aim of the fund is to ensure a solid long-term return, the Fund's guidelines explicitly state that this aim shall be pursued within the framework of sustainable development in economic, environmental and social terms, and within the limits set by humanitarian principles, human rights and other fundamental ethical norms.
As part of its realisation of this ambition, the Ministry of Finance has established a Council on Ethics, which recommends companies for exclusion that are clearly in breach of the ethical guidelines for the Fund through their products or business operations. Examples are the production of certain types of weapons, grave human rights violations, serious environmental damage or gross corruption.
In cases such as these, the Ministry of Finance can decide not to invest in the company, or to withdraw from a company in which the government already has an ownership interest, as was the case recently for companies involved in the production of nuclear weapons.
Varying ethical standards
However, responsibility does not stop there. Once the Ministry of Finance has removed the worst cases, the Fund will still be a shareholder in many companies of varying ethical standards. This is where corporate governance comes in. Norges Bank exercises corporate governance on a continuous basis with a view to securing the financial assets in the Fund and, when appropriate and possible, contributing to improvements of an ethical, social and environmental nature.
This is achieved partly by voting at general meetings, by informing companies about the Bank's principles for corporate governance, by contacting companies directly when the Bank's principles are at stake, and by cooperating with other institutional investors.
The new corporate governance group
To improve both capacity and competence in this field, Norges Bank has established its own corporate governance group, of which the authors of this article are members. The group has expertise in both finance and ethics. The aim of the group is to secure our rights and interests as shareholders. Norges Bank has decided to include ethics explicitly in the group's work and this has attracted attention both in Norway and abroad.
Ethical standards
This does not mean that the corporate governance group's task is to be a "moral watchdog", responsible for excluding companies from the investment universe. This responsibility lies with the Ministry of Finance and the Ministry's Council on Ethics, at least with regard to serious violations of ethical norms. The corporate governance group assesses how well companies in which we are shareholders are operated and run - and ethical standards are an essential part of this.
There are, of course, companies that have been able to make a profit, in the short or even medium term, from cutting ethical corners or performing obviously unethical or illegal actions. Norges Bank, however, is a very long-term investor, and it is thus the return in the market in the long term, over many generations, that is important.
With our many investments spread over many parts of the world, we also have purely financial reasons for favouring global developments that are sustainable "in the economic, environmental and social sense", as it is expressed in the guidelines for the Fund. The guidelines also state that the "Fund's financial interests should be consolidated by using the Fund's ownership interests to promote sustainable development".
Transparency and independence
An important task for the corporate governance group is therefore to identify ethically relevant factors that affect the company's ability to provide the best possible returns for its shareholders in the long term.
Examples of such factors are how willing and capable the board and management of a company are in safeguarding the interests of all their shareholders; whether a company practices adequate openness, transparency and control; whether a company treats its employees in such a way that they achieve optimal performance over time; that the company takes the environment into account, both locally and globally; and that it avoids corrupt, illegal and other unethical and inefficient business practices.
For all these reasons, 1) openness vis-à-vis shareholders and 2) the competence of the board and its independence in relation to corporate management are essential elements that Norges Bank will continue to promote.
Conflict situations
We can also envisage cases where the link between long-term returns and ethical considerations is not immediately obvious - although we should of course keep in mind that safeguarding long-term returns is in fact an ethical consideration in itself, since it is a question of safeguarding wealth for future generations. In this kind of conflict situation, reactions from sources other than the investor, such as legislation, political pressure and activism from international non-governmental organisations, might be more appropriate.
However, the investor can also play a role in these situations by insisting that the company is open about its activities, that it adheres to the law, that it is run competently, and that its board is in a real sense independent of its management. These are all important elements of corporate governance, and they are elements that we know from experience foster greater honesty and transparency, and that can thus result in substantial ethical gains.
Achieve influence
Much can therefore be achieved, both ethically and financially, by pursuing active contact with companies, often in collaboration with other investors, based on well-planned communication strategies. High-profile media coverage or a strong focus on individual cases are, however, regarded by many responsible investors as unproductive. And if the aim is to exert influence, withdrawal from a large number of companies will not be an effective strategy either
It is therefore important for the Fund's owners - the Norwegian people - to remember that responsible investment involves more than withdrawal and negative company screening. Withdrawal and negative screening are important as clear statements of what the Government Pension Fund as investor cannot be a party to under any circumstances. At the same time, the Fund must participate in processes and use its vote to influence companies in which it invests.
The nation's savings
This involves a painstaking effort over time, and results are seldom available in the short term. However, Norges Bank is well under way in its determined effort to safeguard the long-term interests of the nation's international savings.
As manager of one of the world's largest institutional funds, it is our ambition that this work will also attract the attention of those economic agents we want to get through to more than any others - the companies themselves.
