At GPFG, Norway’s Roster of “Excluded” Companies Grows

February 27, 2015 by Loch Adamson

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Norway’s manifest of companies it shuns for environmental, social or governance issues is getting longer. But does it hurt returns? And does it change company behavior?


Norway’s manifest of companies it shuns for environmental, social or governance issues is getting longer. But does it hurt returns? And does it change company behavior?

It’s not a list a company wants to be on. Last month, the Council on Ethics for the Government Pension Fund Global, Norway’s sovereign wealth fund, issued its 2014 annual report, and with it a roster of companies recommended for "exclusion" from the fund’s portfolio on the grounds of their lines of business or perceived unethical activities.

The 243–page report singles out six new companies, adding to a growing pool of corporations eschewed by the $860.8 billion Government Pension Fund Global (GPFG), Norway’s sovereign wealth fund, which is run by Norges Bank Investment Management (NBIM). The newly banned companies range from an Indian utility intent on building a carbon-spewing generator near a world heritage site, to an allegedly corrupt Chinese railway. They join a bigger group of "excluded" fund names, including blue chips like Airbus Group, Imperial Tobacco Group, Honeywell International, Rio Tinto, and Wal—Mart Stores.

The recommendations shed light on a policy that dates back more than a decade, when the Norwegian government put in place what it refers to as "responsible" investment guidelines. Such screening for environmental, social and governance (ESG) issues had already been done for years by mutual fund managers and others like endowments. Norway’s Ministry of Finance sets the rules and the independent Council on Ethics, established by royal decree, makes its calls. NBIM screens separately.

Although the procedures have been overhauled recently, they still come down to gauging governance practices and deciding whether a company makes forbidden goods, violates humanitarian principles or engages in unethical acts, like corruption or environmental destruction.

Companies are excluded for making bad products like cigarettes or cluster bombs. Or they can be culled for contributing to any number of reviled activities, such as systematic human rights violations, like murder or torture; rights violations during war; wreaking "severe environmental damage;" selling military gear to restricted states; corruption; or violations of "fundamental ethical norms."

Killing Whales

On the surface, the goal is simple. "The intention of exclusions from our fund is really to avoid contribution to certain kinds of conduct," Eli Lund, head of secretariat for the Council, wrote in an email. "The primary intention is not to achieve change, but of course it is a very desirable side effect.

In practice it’s a tricky business. "In general, it’s somewhat easier to exclude them for binary reasons," says Meg Voorhes, director of research and operations at US SIF: The Forum for Sustainable and Responsible Investment, a Washington, D.C.–based advocacy group. "Are they producing nuclear weapons? Are they producing tobacco? Are they operating in the Sudan?" More subtle are issues like labor relations or human rights.

Give the Council this: It has taken its job seriously. By its own account, the Council can spend years researching a company, relying on sources ranging from non-governmental organizations, to the U.N. and even the Catholic Church. The Council delivers its findings to the management of each investigated company for comment and then awaits for a response. The government appointed a new five-person council for 2015 after the incumbents served out their terms.

For some, the process carries a whiff of hypocrisy. Missing from the list of prohibited activities, for example, is whale hunting. Norwegians kill hundreds of Minke whales each year, and catches are on the rise, according to Greenpeace International, the environmental watchdog. "In technical terms it’s legal," says Phil Kline, senior oceans campaigner for Greenpeace in Washington. "With the hunt escalating, organizations are wondering what they can do."

The whaling boats are independently operated, Kline points out, and the International Whaling Commission permits it. The $21.5 billion New Zealand Superannuation Fund, which also screens holdings using ESG criteria, recently called out GPFG for not excluding whaling. "I assume that whale hunting could be included in the conduct criteria 'severe environmental damage’, but there are no specific guidelines putting whales in a different position than other species," Lund wrote.

A weightier issue: GPFG’s wealth is a result of Norway’s enormous hydrocarbon extraction from the North Sea — which feeds global warming according to most mainstream scientific research. Yet the guidelines on environmental damage are not applied, for example, to most oil companies.

NBIM spokeperson Marthe Skaar responded by email that the central bank department had looked at the hydrocarbon issue. "We have looked at emissions of greenhouse gases," Skaar wrote. "We divested from 14 companies in the coal-mining sector in 2014." The fund has dumped shares of five companies with oil sand operations, two cement producers and one power producer that depended heavily on coal fired plants. The Council’s Lund wrote that Norway’s Ministry of Finance is expected to address hydrocarbon extraction in its annual white paper to parliament.

"Gross Corruption"

This year’s recommended exclusions by the Council are a varied lot. Cranbury, New Jersey-based Innophos Holdings buys phosphate from a state-owned Moroccan company that operates mines in the disputed northwest African territory of Western Sahara. The problem? "Most of the area is de facto controlled by Morocco," the Council states in its report. "But it does not follow from this that Morocco has sovereign rights over the area’s natural resources." GPFG held a 0.6 percent stake in the company as of year-end 2013. An Innophos spokesman declined to comment.

China Ocean Resources, is a Seoul-listed owner of a 40-vessel deep-sea fishing fleet. The Council report says China Ocean’s fleet targets threatened shark species, whose fins are prized for soup, and otherwise engages in unlicensed illegal fishing. The company told the Council it was basing the assessment on outdated information. Efforts to contact China Ocean were unsuccessful.

New Delhi-based NTPC, a large Indian power company, is in a joint venture that plans to build a coal—fired power plant in Khulna, Bangladesh near the Sundarbans national conservation area, the world’s largest mangrove forest, parts of which are a world heritage site. The Council decided the plant posed an unacceptable risk of "damage to the unique natural values in the protected areas of the Sundarbans mangroves." NTPC did not respond to emails seeking comment.

Noble Group, a Hong Kong—based commodities firm, in which the China Investment Corp. owns a 9.4 percent stake, was called out for its involvement in efforts to convert New Guinea tropical rain forest into palm oil plantations. GPFG held more than $50 million in stocks and bonds in the company at year end 2012. Beijing-based China Railway Group was excluded for the unacceptable risk that it was responsible for "gross corruption." Even the Chinese government was investigating, according to press reports. GPFG held 0.47 percent of the company’s stock at year-end 2013. Neither Noble nor China Railway returned emails seeking comment.

Lastly, the Council brought its hammer down on Tahoe Resources, a Reno, Nevada company that runs a metals mine producing in southeastern Guatemala. Protests have resulted in at least 5 deaths and 50 injuries since the opening of the mine, which is opposed by some locals. The company blamed outside criminals, according to the report by the Council, which excluded Tahoe based on the possibility that it was contributing to human rights violations. GPFG owned 0.59 percent of the company as of year-end 2013. A Tahoe Resources spokesman declined to comment.

Changing Behavior

On February 5, NBIM announced that it had — independently of the Council — sold shares in a further 49 unidentified companies in 2014 based on ESG criteria. There was no overlap with the Council’s recommendations. The GPFG is a minority investor in more than 9,000 companies.

Exclusion stirs controversy. One exchange came after Wal-Mart Stores and its Mexican affiliate were added to the prohibited list in May 2006. "The recommendation to exclude Wal-Mart cites serious/systematic violations of human rights and labour rights," the Ministry of Finance said at the time. The Council said Wal-Mart had employed minors, allowed hazardous working conditions at many of its suppliers, pressured employees to work without compensation, discriminated against women and attempted to block unionization efforts.

The U.S. Ambassador to Norway at the time, Benson Whitney, took issue. He accused Norway of singling out U.S. companies for exclusion, and a lack of rigorous vetting. "An accusation of bad ethics is not an abstract thing," Whitney told the New York Times at the time. "It is essentially a national judgment of the ethics of these companies." More than a quarter of the over five dozen identified and excluded companies are based in the U.S. Lund said many of the U.S. companies excluded by the Council make weapons or tobacco. "We are not targeting American companies in particular," he wrote.

Israeli companies get whacked too, with four sanctioned. Elbit Systems was excluded for violations of ethical norms, and Africa Israel Investments, Danya Cebus, and Shikun & Binui for rights violations in situations of conflict. New Zealand’s Super Fund shuns the same companies. "All the Israeli companies are excluded based on their activity on the West Bank or in East-Jerusalem," Lund wrote.

Trailing Returns

Does exclusion change behavior? "The answer is maybe," says professor Larry Catá Backer of Pennsylvania State University. "There have been cases where the exclusion served as additional pressure on companies already facing pressure elsewhere." In other cases, not much has changed. Tobacco companies, for example, continue making cigarettes, and defense companies will continue to manufacture cluster bombs.

Backer says exclusion can affect consumer demand and raise the cost of capital by increasing the perception of investment risk when a company seeks to raise money in bond markets. It may also spark investigations in the locations where the company operates.

Certain sectors are more vulnerable than others. "The ones that are most affected are high-value consumer industries," says Backer. Mining and other companies farther removed from the consumer, probably feel less pressure.

Do exclusions damage returns? Sometimes. A study released this month by researchers Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School shows that over the past 115 years U.S. tobacco stocks outperformed overall U.S. stocks, returning 14.6 percent annualized versus 9.6 percent. Other studies show no statistical difference in the performance of socially screened mutual funds compared to unscreened ones. Generally, it depends what sectors are hot over a particular time period or whether growth or value stocks are in fashion.

NBIM says its screening reduces risk. "Our risk-based approach means that we exit sectors and areas where we see elevated levels of risk to our investments in the long term," says Skaar.


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