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
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
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
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,
Tinto, and Wal—Mart
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."
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
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
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
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,"
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.
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.
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.
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
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
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
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
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
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
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
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