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Norway puts its money where its ethics are

Rights, corruption and ecological issues factor into choices made by a giant investment fund fed by oil wealth.

November 19, 2007|Tom Hundley | Tribune foreign correspondent

OSLO — Last year, the Church of Norway asked the Norwegian Government Pension Fund to consider divesting the fund's holdings in Caterpillar Inc. The reason: Caterpillar was selling the Israeli army bulldozers used against Palestinian civilians.

Given the avalanche of negative publicity that swamped Wal-Mart Stores Inc. last summer, when the pension fund dumped its stock in the giant retailer after concluding it was complicit in human rights violations, Caterpillar had reason to be concerned.

But the pension fund's council on ethics, which consisted of a philosopher, a human rights lawyer, a product safety expert, an economist and an international law expert, took a long look at Peoria, Ill.-based Caterpillar and gave the U.S. industrial giant a clean bill of health.

Another Illinois company was not so lucky. On the advice of the ethics council, the pension fund last year sold off its shares of Chicago-based Boeing because the aerospace giant makes components for nuclear weapons.

All of this might seem like a harmless bit of feel-good Scandinavian moralizing were it not for the fact that the Norwegian Government Pension Fund, worth about $350 billion, is one of the largest piles of investment capital in the world.

Nearly triple the size of Vanguard's 500 index fund and rapidly closing in on TIAA-CREF's $400-billion-plus College Retirement Equities fund, Norway's pension fund is the biggest owner of stocks in Europe and has quietly emerged as a global financial force.

Its money comes from Norway's vast North Sea oil wealth. As the world's third-largest oil exporter -- only Saudi Arabia and Russia sell more -- Norway rakes in about $1 billion a week. But instead of using it to underwrite a lavish lifestyle for its royal family or wielding it as a political weapon, the Norwegians are quietly amassing a nest egg to pass on to future generations.

The fund was established in 1990. By late 2004, when its influence in international markets become impossible to ignore, Norway's legislature established the ethics council and spelled out guidelines that prohibited the fund from owning stock in companies responsible for "violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damage." First to be banished were companies involved in the manufacture of cluster bombs, land mines and nuclear weapons. In addition to Boeing, these included General Dynamics Corp., Raytheon Co., Lockheed Martin Corp. and a host of other mainly U.S.-based defense contractors.

Critics point out that the Norwegian government, in particular its defense ministry, still does business with several of the blacklisted companies. For Gro Nystuen, a human rights lawyer and Oslo University professor who is a member of ethics council, this is not a contradiction.

"There's a big difference between owning stock in a company and doing business with a company," she explained. "We are not saying these are bad companies [but] we should avoid being complicit in unethical acts as much as possible."

Divesting from companies involved in the manufacture of cluster bombs and other weapons that Norway does not like was "a fairly binary decision -- either you are producing these components or not," said Martin Skancke, director general of the Norwegian Finance Ministry's asset management department, which oversees the fund.

By contrast, the decision to dump Wal-Mart was "a much tougher call," he said.

The rationale, according to the ethics council's published report, was that Wal-Mart runs its business operations "in a manner that contradicts internationally recognized human rights and labor rights standards, both through its suppliers in a number of countries in Asia, Africa and Latin America, and in its own operations."

When Wal-Mart failed to respond to the ethics council's request to address the allegations, the fund quietly dumped its $415-million stake in the company.

That drew loud protests from many, including Benson Whitney, the U.S. ambassador to Norway, who said the council's vetting process was unfair, lacked transparency and could have "serious economic implications."

Critics also have noted that most of the companies on the blacklist are American, but Nystuen denies any anti-American bias. "According to the guidelines, 35% to 40% of the portfolio has to be invested in American companies. If we divest Wal-Mart, we buy something else in America," she said.

The Caterpillar case posed a trickier problem for the ethics council. After reviewing the Church of Norway's concerns about the use of Caterpillar bulldozers by the Israeli army, the council concluded that while it was clear Israel used the equipment to commit human rights violations, Caterpillar and its equipment were not at fault and it would be "problematic" to hold the company accountable for all uses of its equipment.

Norway's pension fund began life as the Petroleum Fund, but the name was changed in 2005 because it was felt that anything involving oil sounded too much like easy money, while "pension" implied money that should not be squandered.

But there are no plans to use the pension fund to pay anyone's pension. The fund, according to Skancke, is more like a university endowment, a vehicle to preserve and multiply institutional wealth over the generations.

The fund itself is meant to be a model of transparency and enlightened management. All of its 3,500 holdings are listed on its website, and the fund is precluded from owning more than 3% of any firm to avoid unduly influencing its business.

The holdings are managed by the Norwegian Central Bank. The salaries and bonuses of fund managers are relatively modest and a matter of public record. Knut Kjaer, the director of the fund who recently announced plans to resign, said he earned less than $500,000 last year.

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