The Ministry of Finance’s Ethical Guidelines for the Government Pension Fund – Global state that the overriding objective for Norges Bank’s exercise of ownership rights is to safeguard the fund’s financial interests. The exercise of ownership rights must also reflect the fund’s long time horizon and broad diversification, and therefore questions related to corporate finances and social and environmental issues are all to be included in this work.
A proper focus on the first four priority areas in the strategy, which encompass the protection of fundamental ownership rights (specifically, the right to vote, the right to nominate and elect directors, the right to trade shares freely, and the right to transparent information) are key to this work. If the rights we have as shareholders are not sufficient, or if they are not adequately protected, we cannot exercise the influence that an owner must have. This is an important reason why much of NBIM’s active ownership work has to do with corporate governance in the conventional sense, namely the systems through which companies are controlled and the associated rules and regulations on the exercise of ownership rights. If our rights as shareholders are not upheld in the areas which Norges Bank has singled out as particularly important, our other active ownership efforts will be of little value.
In its strategy for NBIM’s work on corporate governance, the Executive Board of Norges Bank has included work on other factors which may be financially significant in the longer term but cannot be identified in the financial accounts as easily in the short term and are therefore often referred to as “extra-financial”. This broad approach is supported by the fund’s Ethical Guidelines and is in keeping with a way of exercising ownership rights which is becoming increasingly common among large, diversified investors.
A commonly used collective term in this context is ESG (environmental, social and governance) issues. When Norges Bank addresses these issues, it is not as part of a political agenda or because investment management has been made subject to requirements which contradict or override return targets and risk limits. The reason why addressing ESG issues is increasingly being defined as the investor’s role is the relationship that exists between well-regulated and morally legitimate markets and companies on the one hand, and long-term returns for diversified investors on the other. Many of these issues are ethically important per se, but when an investor works on them, this will be first and foremost for financial reasons.
Both of the social and environmental issues singled out by Norges Bank fall well within this way of thinking. A highly diversified portfolio with returns decades into the future as its principal objective is vulnerable to the kind of societal problems of which the exploitation of children and a more general failure to safeguard the rights of future generations are an expression. Clearer demands of companies in the portfolio concerning their treatment of children, both directly and indirectly, are therefore a natural issue for NBIM to address: it is a long-term issue; it is morally important per se; in many countries, domestic legislation and compliance concerning child labour and the protection of children’s rights are limited, which makes the actions of companies (and especially multinational companies) particularly important; the issue has been addressed by investors only to a limited extent in the past; and the reputational and financial risk of not ensuring better behaviour in this area may be significant.
In keeping with the Ethical Guidelines for the Government Pension Fund – Global, it is also natural to single out environmental sustainability – threatened in our time not least by potentially serious climate change – as important to a long-term global investor. In order to contribute to this process, Norges Bank has chosen, taking the investor’s tools and interests as our point of departure, to focus on companies’ lobbying of the authorities in relation to long-term environmental change.
The following looks at these two priority areas.
Priority areas for NBIM’s corporate governance work
In the corporate governance strategy adopted by the Executive Board in 2006, Norges Bank singled out priority areas covering both ownership rights and importance for long-term returns d social and environmental sustainability. The key criteria for the selection of these priority areas included:
• the likelihood of an investor like NBIM being able to contribute to real change
• the possibility of identifying relevant companies, sectors and jurisdictions
• the possibility of attracting the support of other investors in order to increase the chances of success.
There are currently six priority areas. These are evaluated continuously, adjustments to the strategy may be considered, and new areas may be added. However, it is important for NBIM to build up active ownership expertise, and its efforts must not be spread so thinly that they become superficial or make it difficult to follow them up with the necessary thoroughness. For this reason, it is important to concentrate on a limited number of areas with which the bank can be engaged for some time.
The first four areas generally concern ownership rights:
• the right to vote • the right to nominate and elect directors
• the right to trade shares freely
• the right to open and timely information
These rights are necessary if an investor is to wield real influence over a company. They are also essential for the work on social and environmental issues. At the same time, these rights are to some extent hindered or poorly developed in some markets, including otherwise well-developed markets such as Europe and the US. In 2007, NBIM took part in a major research project to map the most important obstacles to shareholders exercising the right to vote – their most clear-cut and obvious right – in companies outside their home country. Continuous improvement in international shareholders’ opportunities to exercise their ownership rights in full will remain a priority for NBIM in the future.
The other two priority areas concern social and environmental sustainability:
• children’s rights in the value chains of multinational companies, in particular limiting child labour and protecting children’s health
• companies’ lobbying of national and supranational authorities on questions related to long-term environmental change
These areas have been chosen because they tie in well with NBIM’s long-term perspective as an investor. They cover issues which are clearly ethically and socially important per se but are also important for the future functionality, legitimacy and profitability of global markets. |
Child labour and children’s rights
Norges Bank has chosen as a priority area children’s rights in portfolio companies’ value chains and operations, particularly in terms of the fight against child labour, but also in terms of measures to safeguard children’s rights and health in a broader sense. This work is being carried out in line with NBIM’s long-term perspective as an investor and the international standards on which its active ownership work is based. NBIM’s goal in this work, derived from the overriding objective of safeguarding longterm returns, is to bring about a lasting improvement in the life of affected children. This, in turn, has been translated into targets tailored to each individual company dialogue entered into by NBIM.
It is important to note that, in this context, the term “portfolio company” also includes a company’s subsidiaries and supply chain to the extent that these can reasonably be controlled or influenced by the companies in which NBIM is a direct shareholder. Increased transparency and better reporting in line with international standards, with realistic risk analyses and strategies for solving the problems, will normally be an important part of NBIM’s demands.
Financial risk
Given NBIM’s role as a long-term investor, it is particularly important to consider human rights issues, including children’s rights, from a financial risk perspective. Ethically, there can be few issues more important than upholding children’s rights, including efforts to promote children’s health and combat child labour. However, safeguarding children’s rights is also important to an investor financially: poor educational opportunities and health standards make for a weak and unsustainable basis for future production and employment, and this also erodes social stability in the markets concerned. This could have a negative impact on values for an investor at both company and portfolio level. Commercial activities which harm children’s rights and health also harm the market system by challenging its legitimacy. How a company’s board of directors and management tackle issues relating to child labour and children’s rights also provides a good indication of the company’s ability to manage risk, its internal procedures and its willingness to shoulder its social responsibilities. It is the clear responsibility of the board of directors to evaluate – and, as needed, report on – the financial effects which social issues, including those to do with children’s rights, have on the company’s activities and profitability.
Company dialogue
The main means of influencing companies is direct dialogue. By the end of 2007, NBIM had carried on or initiated engagement processes with close to 60 different companies in its portfolio on social issues, with the emphasis on child labour and children’s rights. Starting from analyses of high-risk sectors and regions, NBIM has decided to engage with companies in cases where they do not provide relevant and necessary information about how they comply with international conventions on human rights, including child labour, and information on how they manage risks related to social issues. Engagement is also initiated on the basis of specific corporate events. The dialogue takes the form of e-mail or postal correspondence, telephone contact, and face-to-face meetings.
Investors’ expectations
Matters relating to child labour and children’s rights are difficult for companies to handle because the causal relationships are normally complex and because companies often have little awareness of the ways in which they are infringing on children’s rights. It is therefore important for NBIM to formulate clear expectations to which companies can adhere. These expectations have resulted in a separate document which NBIM uses with portfolio companies: NBIM Investor Expectations on Children’s Rights. This document has been developed in dialogue with specialists in the field from organisations such as UNICEF, Save the Children and the ILO, and the document will be further disseminated through cooperation with UNICEF, the UN Global Compact and the UN Principles for Responsible Investment (UN-PRI) initiative. It has already been used in dealings with around 30 portfolio companies. The document sets out expectations towards companies concerning the most hazardous forms of child labour, compliance with standard requirements for the minimum age of workers, measures to safeguard children’s health and development, and the company’s management system and its suitability for addressing these issues. These expectations are based on the UN Convention on the Rights of the Child and ILO’s conventions on child labour. (The latter are also integrated into the OECD Guidelines for Multinational Enterprises and the UN Global Compact, on which NBIM bases its active ownership work.)
The primary target group for the document is portfolio companies operating in areas and sectors where there is a particular risk of child labour and other infringements of children’s rights. Another target group is investors who share NBIM’s goal of safeguarding children’s rights as part of their ownership work. NBIM hopes, with the help of NBIM Investor Expectations on Children’s Rights, to move the issue of child labour and children’s rights higher up on the international agenda both in industry and among investors.
Critical markets and sectors
It is not possible to analyse continuously all of the 3,500 or so companies which NBIM has had in its equity portfolio to date, and even more difficult now that the number of portfolio companies is greatly increasing. Based on a risk perspective, the most critical markets and sectors are therefore selected for more detailed attention. More than 200 companies active in these markets and sectors have been subjected to analysis, including companies with activities in Asia, Latin America and parts of Africa.
To ensure a consistent and complete approach to these companies, NBIM’s corporate governance group has built up systems to provide an overview of analyses of and contact with companies. We gather information and reports on countries, sectors and individual companies from external sources and systematise them for our own use. In addition, we have developed a database containing information on voting and our own analysis of the issues, as well as information on holdings in each individual company, sector classification and so on. Internal tools of this kind are important both for NBIM’s reporting and as a basis for analysis of the portfolio and selection of companies for dialogue. They are used in all of the priority areas for corporate governance.
When it comes to engaging with companies, work during the opening phase has concentrated on portfolio companies with operations in Asia and Latin America, hereunder companies with operations in India and Brazil. Contact with companies is being stepped up continuously, both in these markets and in the other markets analysed. Company and market analyses are based on local market insight obtained from researchers, charitable and idealistic organisations, and our own investigations.
In India, it is primarily the textile industry and parts of agriculture which have been identified as sectors where child labour is widespread and remains a considerable and potentially growing challenge, despite greater public concern about child labour in India in recent years, and a stated government commitment to reducing child labour. Much of the problem, not least in agriculture, is to be found on small farms and in remote areas, making it difficult to gain a full overview of the situation. Even for a company with real ambitions to help solve this problem, bringing about rapid change is complex. Here, NBIM is demanding more extensive controls, better follow-up measures for children and clearer reporting to the outside world. This work has required both gathering information directly in India and engaging in dialogue with portfolio companies through their head offices. (See also separate box on the agricultural sector.)
Brazil is an example of a country where child labour, as defined in the ILO conventions, is prohibited by federal legislation (the legislation here is more stringent than in India). The authorities in the various states are trying to ensure that the law is not broken. Child labour has been in decline for several years but is still a real problem in some sectors and regions, including the mining industry and the supply chains for the iron and steel industry. NBIM has entered into dialogue with several companies to discuss how the risk of child labour is being managed in their supply chains and production. NBIM has presented its expectations regarding codes of conduct and reporting and has followed these up in dialogue with the companies. In several cases, the companies are showing a willingness to step up their work and contribute better reporting. (See also separate box about the the mining and steel industries.)
To date, this dialogue has yielded results in the form of the boards of directors and management of several of the companies in question committing to better controls and reporting. NBIM plans to monitor these companies’ results as reported to us in 2008. Good practices and results will, in turn, be used in dialogue with other companies.
The way ahead
There are two needs which NBIM has so far identified as particularly important when it comes to monitoring child labour and children’s rights:
1. collaboration between companies in the same sector and region on codes of conduct, monitoring and auditing
2. assuring the quality of external monitoring and auditing
This will require more follow-up from both the individual company and the companies together.
NBIM will use the knowledge it has built up through analysis and dialogue to work for more exchange of experiences between companies. NBIM does this kind of work primarily through dialogue with the companies’ boards of directors. It is worth remembering that it is not NBIM’s role as an investor to micro-manage each individual company. NBIM’s role is to make sure that the long-term investor is heard, and that companies have the necessary strategy and reporting to get the job done.
Other geographical regions also represent challenges. In sub-Saharan Africa, child labour is a growing problem, partly as a result of the AIDS pandemic and the large number of adults of working age who are dying. At the same time, there are several sectors, such as the cocoa industry, which are organised in such a way that multinationals have limited control over the actual cultivation of crops.
Work on children’s rights at NBIM is a matter of being “patiently impatient”. On the one hand, NBIM demands improvements which are visible in the short term and can be seen in companies’ results from year to year. At the same time, NBIM and other players need to be aware that improvements often take time. The infrastructure is complex; in many places, child labour is an integral part of the economy; overly rapid change could actually make things worse for the children; and it can take time for changes to have an effect. It helps here that NBIM has a long-term investment horizon. We signal to companies that we, as shareholders, plan to work on this issue for many years to come, and that we wish to contribute to lasting solutions, not short-term publicity campaigns.
NBIM will also continue to focus on these issues when exercising its voting rights. Even today, companies are being followed up after their general meetings with a view to ensuring that they are listening to shareholders’ advice on social issues.
Other stakeholders
Many different parties are involved in and affected by companies’ activities and impacts on their surroundings. When it comes to social issues relating to companies’ activities, we find natural stakeholders among their employees, those working in their supply chains, investors, the local population where the companies operate, purchasers of the companies’ products and services, NGOs, politicians, experts and specialists. These stakeholders can often have different priorities, views and approaches, but often their interests coincide, and sharing knowledge and experience can be useful either way.
NBIM makes active use of the knowledge which other stakeholders can provide in order to strengthen its work to combat child labour in the operations and supply chains of portfolio companies. (The same applies to work on lobbying and climate change.) Exchanging information with others plays an important role when mapping problems in different regions. Global and local NGOs which fight child labour and organisations which inspect the suppliers of multinationals to check on labour conditions are a source of expertise from which NBIM can benefit.
In 2006, NBIM invited a number of Norwegian organisations and individuals with expertise in children’s rights and child labour to provide input for NBIM’s work in this field. The group included representatives of UNICEF, Save the Children and Childwatch. In 2007, the group gave its reactions to problems and priorities raised by NBIM within this priority area. The participants in the group also commented on the document NBIM Investor Expectations on Children’s Rights. NBIM also asked international organisations and initiatives, other investors and portfolio companies for comments while drawing up the document.
One of NBIM’s goals is for other professional investors to be engaged in issues concerning child labour and children’s rights. Among other things, NBIM will therefore be using the platform provided by the UN’s Principles for Responsible Investment (PRI) to encourage other investors to use NBIM Investor Expectations on Children’s Rights in their dialogue with companies. NBIM also cooperates with other investors on engaging with companies in specific cases. In 2007, for example, we were involved in an initiative related to iron and steel production. (See also separate box on the mining and steel industries.)
From time to time, NBIM contacts other investors who are behind shareholder proposals at general meetings. In the US, where shareholder proposals are most widespread, it is often the case that the company and the shareholder in question enter into a dialogue either before the proposal comes to a vote (with the shareholder sometimes withdrawing the proposal) or after the general meeting if the proposal attracts a given level of support. Such shareholders may be an important source for finding out about how the company is handling the matter.
Another side of the work in this priority area is mapping best practice, based on experience from companies and relevant organisations. The accumulation of better and more readily available information on best practice will increasingly be used by NBIM as a tool in its dialogue with companies in connection with their work on developing guidelines, control systems and reporting in relation to child labour and protecting children’s rights.
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Child labour in the agricultural sector
The agricultural sector accounts for no less than 70 per cent of child labour worldwide. According to the ILO, 130 million children aged 5-14 are employed on farms and plantations, many of them working long hours and exposed to harmful chemicals, rather than going to school.
NBIM has in 2007 initiated company dialogues in Asia related to child labour and children’s rights. Within the textile and agricultural sectors several multinational companies in NBIM’s portfolio have activities which carry a risk of serious violations of children’s rights, with accompanying financial and reputational risk for the companies and sectors.
In 2007, NBIM has, inter alia, visited organisations in India working on children’s rights and gathered information about the activities of multinational companies in relation to child labour there. This resulted in, among other things, extensive dialogue with a select group of companies which have production in the Indian agricultural sector. Child labour in agriculture is not against the law in India. The production units – farms – supplying the companies are often small and scattered across large parts of rural India.
External reports show that companies which have introduced guidelines and built up control systems to prevent child labour can point to a decrease in the incidence of child labour in their production, even where the control systems are not yet functioning optimally and significant challenges remain. The incidence of child labour in agriculture is lowest where NGOs and multinationals have worked together the longest on raising awareness and introducing controls. According to reports, it is multinational companies, not domestic companies, which have come furthest in combating child labour.
In its dialogue with companies, NBIM has attached importance to urging companies to further improve their guidelines, control systems and public disclosures concerning child labour, both in their production chain in general and in India in particular. Importance has also been attached to the opportunity for multinational companies to influence their national partners and local authorities. This dialogue is being developed and extended.
Laws and standards are essential in the fight against child labour. However, it is difficult for producers to have to comply with different rules depending on who they are supplying. As mentioned earlier, India has no prohibition against child labour as such in the agricultural sector. At present, it is also the case that companies to some extent build up their own control systems independently of one another. In light of this, NBIM wishes to contribute to better coordination, with the aim of more uniform guidelines and, in time, a more coordinated control system. This will strengthen the fight against child labour and increase the likelihood of market practices which also extend to domestic companies in the industry. Most NGOs and researchers are agreed that the multinationals have a real opportunity to influence market practices and, to an even greater extent than is the case today, lead the way in safeguarding social rights.
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Hazardous child labour in the mining and steel industries
The number of children employed in mining is estimated at around a million worldwide and is rising in some parts of the world. Due to the health risks associated with this work, it comes under the ILO’s definition of the worst forms of child labour.
Against this background, NBIM has focused on selected companies in Latin America. Brazil is one of the countries where child labour is to be found despite it having legislation banning child labour and an increasingly extensive infrastructure to ensure compliance with the law. (Brazil has experienced a significant decline in the total number of child labourers over recent years; ILO’s reports indicate that between 1992 and 2004 there was an approximately 35% reduction in the number of children between 10 and 17 engaged in labour.)
It is, inter alia, in the mining industry and the steel industry that child labour remains a problem, partly because production takes place in remote areas. In spring 2007, NBIM’s corporate governance group therefore conducted an analysis of companies in the portfolio which can be linked to child labour either in their own operations or through suppliers. The principal criterion was whether the company had a policy on child labour at all – in other words, whether the company’s board of directors had taken a clear decision to forbid child labour in the company’s operations. In such cases, a company will normally refer to its supporting or having signed up to one of the relevant international standards, such as the UN Global Compact or the ILO child labour conventions. Another criterion for the analysis was whether the company had a strategy to ensure that its suppliers complied with its policy on child labour.
After an initial review of the portfolio, the companies which had published neither a policy nor a strategy were contacted by NBIM. Readily available information on a company’s policy and strategy is needed by NBIM to assess the risk that it faces as an investor, and is therefore important to ask for. Of the companies contacted, NBIM decided to follow up on five which responded that they did not have a policy or strategy. These companies were contacted at board chairman level with a request for a meeting.
Meetings were held with the five companies in October 2007. In all cases, NBIM was put in touch with the target people at the companies for these specific questions, and in several cases also the CEO or representatives of the board. NBIM presented its requirements and expectations in relation to its financial interest in good risk management and legitimate systems in this area. By the end of the year, one of the five companies had decided to sign up to the UN Global Compact, and another was considering it. All five companies will be followed up in 2008, partly with requirements for reporting and auditing.
It should be added here that NBIM has also taken part in an initiative taken by a British fund manager, through the secretariat of the UN Principles of Responsible Investment (UN-PRI). This so-called Iron and Steel Initiative has consisted in coordinated company contact through which relevant companies have been asked about their knowledge about and measures against slave labour, including possible child labour, within the Latin American coal industry. The coal in question is being used in the production of pig iron, which is subsequently sold to steel producers who, in turn, sell to multinational companies with well-known brands. NBIM signed letters to 15 companies in its portfolio, along with more than 10 other investors. By the end of the year, most of these companies had responded, and some had taken part in direct talks with the investors, in several cases with NBIM among the participants. On the basis of the dialogue established, the initiative will be followed up in 2008 with a view to obtaining clearer responses from the companies where necessary and further assessing the efficacy of the steps being taken by the companies or their supply chains. |
The environment and lobbying
An investor with a global portfolio will be exposed to factors which affect the market’s general functionality and profitability. A factor which NBIM as an investor must assume will have relevance for the portfolio’s value is climate change that could lead to major changes in the world’s ecosystems, large-scale migration, natural disasters, and the potential for increased social unrest or poor access to resources for large parts of the world’s population.
At the same time, the Government Pension Fund – Global is not intended as an instrument of environmental policy. As manager of the fund, NBIM must find ways of raising environmental issues which naturally promote investors’ interests and contribute to long-term value creation. It is against this background that Norges Bank has chosen to make companies’ lobbying of the authorities on environmental issues a priority area.
Climate change
There has been growing consensus in recent decades that climate change due to concentrations of greenhouse gases such as carbon dioxide (CO2) in the atmosphere may have significant consequences for society and the environment in large parts of the world. However, there has been disagreement over how high the CO2 concentrations could actually become, how much of this is man-made, the temperature effects of different CO2 levels, the workings of the climate system, and how dramatic the consequences might be. As time has passed, this disagreement has abated. The scientific consensus – as expressed, for example, in the reports of the UN-sponsored Intergovernmental Panel on Climate Change (IPCC) – is sufficiently strong, and the potential consequences have been found to be so serious, that there is also growing agreement on the need to act quickly. In practice, this means that concentrations of CO2 in the atmosphere need to be stabilised, and that emissions of CO2 and other greenhouse gases need to be reduced. According to the IPCC and others, these reductions need to be substantial and swift.
In its 2006 Annual Report, NBIM noted that an investor’s contribution to long-term sustainable financial returns could include a focus on climate change. This is because serious climate change could have a significant negative effect on NBIM’s global portfolio. It is natural here to refer to, inter alia, the reports of the IPCC and the Stern Review(1, which suggest that proactive implementation of measures to reduce greenhouse gases will result in a substantially lower cost to global society than the likely cost of inaction.
It has been important for NBIM to concentrate its efforts in this area in a way that can produce tangible results. In this light, an investor urging individual companies to make voluntary reductions in emissions is of limited value. It is the overall level of emissions which must come down, and this requires legislation and international agreements. The necessary technological advances will also, in all probability, depend on legislation which helps to make this technology profitable.
It is the political authorities locally and globally which together hold the key to effective regulation regimes with a global impact. The investor does not have environmental policy as such as part of its toolbox and must leave it to the political authorities to set the limits for companies’ activities, including their emissions. However, investors can encourage companies to introduce long-term strategies to meet these environmental threats and, at the same time, prepare for future legislation. Perhaps the most important thing companies can do to help prevent dramatic environmental change globally is to contribute to – or, at least, not fight – the necessary political initiatives. We know that large companies play key roles in the design of environmental policy in some countries through their lobbying. In itself, it is both natural and legitimate for companies to seek to influence the authorities on such issues. But an investor can reasonably expect that this influence coincides with the interest of investors in putting into place effective legislation which can reduce the risk of serious negative economic consequences of climate change.
Against this background, NBIM has engaged in dialogue with a selection of its largest portfolio companies in relevant sectors, including some of the world’s biggest emitters of greenhouse gases, concerning how they seek to influence future climate legislation through their strategy and lobbying activities. This is an area which is often controlled from the company’s central management and board of directors. In most cases, therefore, this dialogue has brought us into direct contact with the most important individuals in the companies in question.
Analysis and dialogue
In 2007, NBIM conducted analyses of the portfolio to identify companies which are particularly active in lobbying the authorities on climate issues. Legislative processes were also analysed. The emphasis has been on the US, because most researchers and observers assume that future legislation in the US will be of particular importance for both overall reductions in emissions and the path that other countries will take. Against this background, NBIM’s corporate governance group has been in close contact with researchers and other experts in both climate policy and lobbying.
Based on analyses of more than 100 companies, NBIM has held meetings with around 20 companies in its portfolio during the year. These are companies in the oil, coal, gas, electricity and transport sectors. All are major contributors to greenhouse gas emissions and have been identified as key lobbyists. The dialogue has been mainly with the companies’ boards of directors and senior management. In this dialogue, NBIM has attached importance to technological development and alignment with new emission and taxation regimes, as well as companies’ position on lobbying. NBIM has stressed its interest as an investor in having effective legislation put into place within a reasonable time span. This dialogue has continued into 2008 with most of the companies.
The signals coming back from these companies show that NBIM’s message and position are being taken seriously, and that our emphasis on lobbying is attracting attention. In several cases, the companies themselves have raised difficult The signals coming back from these companies show that NBIM’s message and position are being taken seriously, and that our emphasis on lobbying is attracting attention. In several cases, the companies themselves have raised difficult.
The way forward In 2008, NBIM will continue the dialogue described above. In the US in particular, but also in several other jurisdictions, potentially crucial debates on key climate measures are due to take place in 2008 and into 2009. The portfolio companies with which we have engaged in dialogue are – and will remain – among the key players in this work. Our dialogue with these companies is ongoing, the aim being to continue to emphasise the interests of long-term and diversified investors in this issue, and to discuss the technological and strategic alignment of these companies with the demands of tomorrow. NBIM plans to carry out this work both alone and in co-operation with other investors. It is probably more difficult to measure results in this area than in the other priority areas. Our work is partly about raising awareness and partly about the long-term strategy of individual companies. When the results do begin to show, it will therefore not always be clear what is a direct result of NBIM’s input. Nevertheless, work in this priority area has a clear goal: investor-friendly and robust strategies in each individual company and sector to meet the challenges of climate change. This is to be reflected in the way in which companies work with the authorities as the latter attempt to put into place regulation which lead to substantial reductions in emissions of greenhouse gases.
In 2007, a number of companies in NBIM’s portfolio altered their public stance on climate issues. Many of them have made changes to the way in which they lobby national authorities, and we are also seeing changes in the way in which they are preparing for new technology. NBIM believes that it has contributed to this process. It will be decicive for future legislation what kind of position companies take on climate proposals coming up for consideration in individual countries, as well as the international processes leading up to, for instance, the international Copenhagen summit in 2009, which will follow up on the 2007 Bali meeting. As a financial investor, NBIM will encourage relevant companies in the portfolio, with an emphasis on the energy and energyintensive sectors, to introduce strategies which ensure a good return for their investors and also support a sustainable development.
| Challenges in NBIM’s dialogue with companies
Companies in the energy sector currently find themselves caught in a crossfire: on the one hand, they need to meet the growing need for energy in both the developing world and the industrialised world; and on the other, they need to adjust in a reasonable and pragmatic way to possible climate change and give their contribution to limiting such change and its effects.
This formed the backdrop to many of the meetings which NBIM held with leading energy companies on climate issues and lobbying in 2007. The point of departure for the discussion was management’s own view of this crossfire. Where are the opportunities and constraints in terms of technology, new energy sources and different business strategies? What does this mean for the individual company or sector? How can the knowledge we have today be translated into a specific business strategy? And how should companies relate – and contribute – to new legislation?
Among other things, NBIM has engaged in dialogue with a number of companies in the US. The US is the single largest country in NBIM’s portfolio, and many of the companies there will be affected by future climate measures. The US also plays an important part in forming the premises for future environmental policy worldwide. There are still several contentious issues when it comes to future climate legislation in the US, and many of the companies in NBIM’s portfolio are concerned about these issues, which include: Should there be a price ceiling for emission allowances – so-called “safety valves” – and if so, what kind of ceiling, to avoid individual companies and sectors being hit particularly hard by a quota trading system? Are the reductions in emissions in the most relevant proposals sufficient? Will the administration of possible quota trading schemes be and remain effective? For NBIM, it is important to understand the consequences that any legislation would have for companies in our portfolio, and to understand how these companies relate to this legislation in their lobbying activities. As an investor, NBIM is not a political player with its own view of how domestic legislation in the US or other countries should be formulated. However, NBIM represents a type of investor with a real financial interest in seeing effective climate legislation within a reasonable timeframe. The signals that NBIM sends to relevant companies in its portfolio, and the dialogue that we have concerning future strategies and technology, are therefore important as a contribution to achieving the environmental sustainability on which NBIM’s portfolio will depend in the longer term.
The International Energy Agency (IEA), an organisation set up by the OECD in the wake of the oil crisis in 1973, estimates in its World Energy Outlook 2007 that if global energy consumption continues on its current path, demand for energy will be 50 per cent higher in 2030 than today due to population growth and increased needs. Around 85 per cent of the world’s energy supply is fossil-based at present, and the world is set to remain dependent on fossil fuels despite a projected increase in energy production from renewable sources. The increase in the consumption of fossil fuels between now and 2030 could be as high as 55 per cent.
These figures stand in stark contrast to the recommendations in the fourth report of the International Panel on Climate Change (IPCC), also published in 2007, which forecasts a need for significant reductions in emissions compared to “business as usual” if the worst consequences of climate change are to be avoided. The discussions which NBIM has had against this background with relevant companies in its portfolio have been constructive and had a positive tone. It is important to remember in these discussions that the infrastructure for generating and transporting energy generally represents a very long-term investment. A power station can be in operation for more than 50 years, sometimes as many as 70. The conflict between the long-term satisfaction of demand, new investment and climate factors has become increasingly clear, not least when it comes to coal-based energy. Many planned coal-fired power stations in the US have been put on hold.
In addition, new technologies such as integrated gasification combined cycle (IGCC) power stations, which turn coal into gas, have yet to be tested on a large scale and have proved uncertain due to very high development and testing costs. Nevertheless, many researchers believe that gasification offers a better and more energy- efficient way of capturing CO2 than traditional methods. Carbon capture and storage (CCS), which involves storing CO2 underground, presents significant technical challenges, whatever the method, and considerable time and expense will probably be needed before the technology can be used on a large scale.
There are also new opportunities in renewable energy, but these are mainly relatively small projects which can serve only limited areas, at least to begin with. There also remain challenges in the storage of renewable energy, such as the storage of solar and wind energy for when the weather is overcast or still. In 2007, there was also a lively debate about ethanol and other biological fuels, but here too there are as yet no quick and easy energy-efficient solutions capable of meeting real needs.
All of these issues have been part of the discussions which NBIM has had with companies. By stressing the long-term investor’s expectations for – and dependence on – robust legislative solutions, combined with in-depth discussion of the technological possibilities, we are trying to make companies more aware, especially when it comes to their lobbying of legislators.
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1) The Stern Review was commissioned by the UK government and published its report in October 2006. The work was led by economist Sir Nicholas Stern. Some calculations and conclusions in the report have met with criticism. However, there seems to be broad agreement with the report’s more general conclusion that effective action to combat climate change today will cost less than the future price of more dramatic forms of climate change.
