Does Divestment Work The Case of the Norwegian Government Pension Fund Driving Development: Business

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Does Divestment Work? The Case of the Norwegian
Government Pension Fund Driving Development
Business as a Force for Good? Global Compact
Network Nordic Countries, NHO May 18, 2009
Andreas FøllesdalNorwegian Centre for Human
RightsUniversity of Oslohttp//folk.uio.no/andr
easf
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Own background

• Professor Director of Research, Norwegian
  Centre for Human Rights, University of Oslo
• Member of the Norwegian Pension Funds Council on
  Ethics
• PhD Harvard University - Philosophy, with
  supplementary studies in International Human
  Rights Law, International Political Economy,
  Regime Theory
• Research on International justice, European
  Union, human rights, CSR..

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Overview

• 1. About the Norwegian Government Pension Fund
  and its Council on Ethics
• 2. A case of Exclusion Rio Tinto
• 3. Does Divestment work? Effects
• 4. Patterns and Future Trends (AF)

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1. About the Norwegian Government Pension Fund

• A Sovereign Wealth Fund
• One of the largest single-owned funds in the
  world.
• December 31 2008 Approx 2 275 billion
  (milliarder) NOK
• Is only invested abroad
• small ownership shares in over 7000 individual
  companies
• currently 50 pct. equities and 40 pct. fixed
  income.
• Ethical constraints on investments

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Two ethical obligations of the Fund

• Norwegian Parliament 2003-2004
• Future generations should derive benefit from the
  petroleum wealth
• gt achieve a sound return in the long term
• The fund should not violate the basic interests
  of others as a means to greater profit
• gt avoid contributing to violations of
  fundamental ethical norms

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A three-track strategy, division of labor

• A. Exercise of ownership rights (Norges Bank)
• to safeguard long-term financial interests, and
• pursue the UNs Global Compact and OECD
  Guidelines for Corporate Governance
• Ministry of Finance, on advise from Council on
  Ethics
• B. Negative screening
• gt Exclude companies from the investment
  universe that produce weapons whose normal may
  violate fundamental humanitarian principles
• C. Case by case exclusion of companies
• gt where there is an unacceptable risk of
  complicity in gross or systematic breaches of
  certain ethical norms

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C) Case by case exclusion

• To avoid an unacceptable risk of being morally
  complicit in future
• Serious or systematic human rights violations,
  such as murder, torture, deprivation of liberty,
  forced labour, the worst forms of child labour
  and other forms of child exploitation
• Grave breeches of individual rights in situations
  of war or conflict
• Severe environmental degradation
• Gross corruption
• Other particularly serious violations of
  fundamental ethical norms

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Case by case exclusion
Members of the Council
Chair Gro Nystuen, Humanitarian Law, Assoc Prof,
Norwegian Centre for Human Rights. Anne Lill
Gade, Product Safety Manager, Jotun, MSc
Freshwater Ecology, Chair Environmental Policy at
Federation of Norwegian Process
Industries. Bjørn Østbø, Director Corporate
Finance at First Securities Managing Director of
First's Bergen Office. Ola Mestad, Professor,
intl trade and contract law, oil and gas
law. Andreas Føllesdal, Professor, political
Philosophy, Director of Research, Norwegian
Centre for Human Rights
Negative screening of weapons that violate
fundamental humanitarian principles

• To avoid an unacceptable risk of
• being morally complicit in future
• Serious or systematic human rights violations,
• Grave breeches of individual rights in situations
  of war or conflict
• Severe environmental degradation
• Gross corruption
• Other particularly serious violations of
  fundamental ethical norms

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The Procedure

• The Council decides whether to consider case (
  60/year)
• Suggestions from NGOs, media, Ministry of
  Finance, or on Councils own initiative,
  supplemented by monitoring by external firm
• Information gathering, fact checks, site visits
• Draft recommendation
• - sent to the company for comments and correction
• Final recommendation sent to the Ministry
• Political discussion among Ministers
• Decision by the Ministry of Finance to sell
• Norges Bank sells the stock within 2 months
• Publication of reasoned commendation
  www.etikkradet.no
• Excluded companies reconsidered after interval

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2. Two casesCase 1 Complicity in the human
rights violations of subcontractors Wal- Mart

• To the Minister of Finance
• November 15, 2005
• Divestment from Wal-Mart Stores Inc because there
  is reasons to fear complicity in serious or
  systematic violations of human rights standards
  perpetrated by the supply chain, including
  hazardous child labour, semi-forced labour,
  hazardous conditions of work.

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• There are numerous reports of child labour,
  serious violations of working hour regulations,
  wages below the local minimum, healthhazardous
  working conditions, unreasonable punishment,
  prohibition of unionisation and extensive use of
  a production system that fosters working
  conditions bordering on forced labour, and of
  employees being locked into production premises
  etc. in Wal-Marts supply chain.
• All of the above examples represent
  violations of internationally recognised
  standards for labour rights and human rights.
  (18) including the prohibition of forced labour.

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Complicity In the companys interest

• In the view of the Council, the type of violation
  focused on in this recommendation in Wal-Marts
  business operations has been undertaken with the
  intention of increasing the companys profits.
• The Council considers that even though all
  companies aims at maximising their profits, it is
  ethically unacceptable to do so by committing, or
  tacitly accepting, serious and systematic
  violations of ethical norms. (21)

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2 Case Environmental degradation - Rio Tinto

• Exclusion recommended February 15, 2008
• At Grasberg mine in Indonesia, Freeport mines
  copper using a natural river system for tailings
  disposal. Moreover, there is a great risk that
  acid rock drainage from the companys waste rock
  and tailings dumps will cause lasting ground and
  water contamination.
• The Council found that continued ownership in
  Freeport would imply an unacceptable risk of the
  Fund contributing to severe environmental damage.
  
• Rio Tintos response confirms the companys
  investments and role in the Grasberg mine, but
  disputes the Councils assessment that the mining
  operation causes severe environmental damage.

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• In its reply to the Council Freeport claimed to
  comply with all national environmental
  regulations.
• In this context the Council found it relevant to
  point out that the environmental standards
  required by Indonesian authorities fall
  significantly short of current rules in
  Freeports as well as Rio Tintos home countries,
  where riverine disposal is prohibited.
• The Council placed great importance on the fact
  that riverine disposal is internationally
  considered an unacceptable discharge method for
  mine waste, due to the environmental damage it
  provokes. The World Bank no longer finances
  projects which make use of riverine tailings
  disposal. Neither does The International Finance
  Corporation accept this method. .
• On these grounds, the Council judged Freeports
  practice as clearly in breach of accepted
  international norms. The Council is of the
  opinion that Freeport through this conduct is
  taking advantage of the low environmental
  standards and the lenient law enforcement in the
  country where it operates.

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3. Does Divestment work? Effects

• On future Norwegian generations
• benefit from the oil wealth while respecting the
  vital interests of others at some costs
• increased transaction costs, probably reduced
  yield?
• On companies
• Share prices show small dip, corrected within a
  week
• Shaming?
• On victims of human rights violations,
  environmental degradation
• Short term little?
• Though possibly
• if shaming works
• if risk of exclusion boosts impact of ownership
  activity
• Longer term Might contribute to standard setting
  and procedures for shareholder responsibility, to
  reduce the incentives for competition at the cost
  of fundamental norms, human rights etc.
• Other ethical and green funds copy the
  Norwegian Pension Fund
• WHY and HOW might standard setting etc matter?
• Eg in building a better human rights regime?

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Indirect impact 1) On excluded companies

• Some companies, such as Wal-Mart, spend scarce
  resources to find out how to be dis-divested.
• Why?

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Indirect impact.. 2) Vedanta

• Norway dumps Vedanta from oil fund Reuters, OSLO
  
• NORWAY has dropped British mining and metals
  group Vedanta Resources from its 350 billion oil
  fund at the recommendation of the funds ethics
  council, which blamed it for environmental damage
  and human rights violations, the finance ministry
  said.
• Vedanta Aluminium Ltd. sought to use 723.343 ha
  of land (including 58.943 ha of reserve forest
  land) in Lanjigarh Tehsil of Kalahandi District
  for setting up Alumina Refinery. They were
  stopped, and ultimately went to the Supreme Court
  of India
• The Supreme Court of India, New Delhi, November
  23, 2007 rejected Vedantas application.
  Referring to the recommendation of the Council on
  Ethics, the Supreme Court stated that
• . We do not wish to express any opinion on the
  correctness of the said Report. However, we
  cannot take the risk of handing over an important
  asset into the hands of the company unless we are
  satisfied about its credibility

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Indirect impact 3) Added clout to Active
Ownership

• The risk of future exclusion with the shaming
  it entails adds to the impact when the Fund
  seeks to engage with management to change the
  problematic practices

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Indirect impact 4) Other Funds

• Several other Ethical and Green Funds
  automatically follow the recommendations of the
  Norwegian Pension Fund

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4. Patterns and Future Trends (AF)..

• Toward more effective human rights and
  environmental regimes for corporations
• Why?
• Economic globalisation the mobility of
  capital
• Political globalisation - Governments have
  chosen to have less de facto control over
  tariffs, monetary policies, and taxation levels.
• Opportunities and power - and therefore tasks
  and responsibilities - has shifted from
  governments toward corporations
• Governments and NGOs say
• Corporations can no longer avoid taking
  responsibility when governments are unable to
• especially since governments weakness is
  partly due to the increased power of corporations

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4. Patterns and Trends Toward more effective
regimes?

• Conditions
• Public standards and decisions.
• Predictable and credible threats of divestment
• Requires publicity and carefully reasoned
  decisions.
• Substantive norms that enjoy wide spread
  acceptance
• The operationalizations and quasi-judicial
  judgments must be convincing to the general
  public and relevant stakeholders.
• New division of labour
• What roles of NGOs, businesses, governments,
  investors?
• Tendencies
• Networks of ethical investors
• Consolidation of norms and their
  operationalization
• Beyond CSR statements On-the-ground
  factfinding
• Information sharing
• Coalitions of investors, consumers, early mover
  corporations

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