These funds apply a negative screening and exclude companies which provide services and products in business sectors such as weapons, gaming and the tobacco industry and companies that do business with corrupt regimes.
An insight into…
The Norwegian Government Pension Fund Global (formerly Petroleum Fund)
As Norway is the sixth biggest oil producer and the third biggest oil exporter in the world, the Norwegian Government Pension Fund (founded in 1990) is financed by the revenues from the country’s oil and gas exploitation. At the end of June 2015, aggregate market value of the Government Pension Fund was 11,214 billion Norwegian kroner. 1 The fund belongs to the government and is managed by Norway’s Central Bank, Norges Bank. The Norwegian government developed ethical guidelines which the fund management has to abide by concerning the observation and exclusion of companies from the portfolio of the Government Pension Fund.
The fund has exclusion criteria:
- produce weapons that violate fundamental humanitarian principles through their normal use;
- produce tobacco;
- sell weapons or military material to states that are subject to investment restrictions on government bonds.
The fund may also exclude companies if there is an “unacceptable risk that the company contributes to or is responsible for:
- serious or systematic human rights violations, such as murder, torture,deprivation of liberty, forced labour andthe worst forms of child labour
- serious violations of the rights of individuals in situations of war or conflict
- severe environmental damage
- gross corruption
- other particularly serious violations of fundamental ethical norms. 2
This ethical management, active since 2004, gave rise to various decisions to disinvest. It is useful to look at the annual reports produced by the Council on ethics for the Fund.
To ensure the application of the ethical guidelines, a Committee comprised of five persons, the Council on ethics for the Government Pension Fund – Global was established. The Council’s task is to study the companies and industries to exclude and to report back to the Finance Ministry once a year.
Currently the fund hold shares in approximately 9000 companies in 82 countries, and divested from 49 companies in 2014 due to environmental, social and government issues 3 .
The Norwegian Government Pension fund in action
Exclusion of various companies producing arms:
Due to the exclusion criteria, almost 20 companies throughout the world have been excluded from the fund. Amongst those are: EADS, Lockheed Martin Corp (USA), Safran SA (France), BAE Systems Plc (United Kindgdom) andHanwha Corporate (South Korea).
The Exclusion of Wal-Mart
In 2006, Wal-Mart, the global retail leader (US), was excluded from the fund following recommendations by the Council on Ethics. The decision was based on allegations of serious and systematic workers’ and human rights violations (child labour, unpaid overtime, gender discrimination concerning salaries and various violations of freedom of association). This exclusion led to the sale of the funds tied up in Wal-Mart and amounted to a total value of 415 million dollars.
Before excluding Wal-Mart, the Council on Ethics had sent Wal-Mart a letter asking the company to explain the various violations mentioned earlier, but Wal-Mart never replied. Hence the fund judged that obtaining a promise of commitment from Wal-Mart would not contribute to reducing the risk for the fund of violating its ethical guidelines.
Mining companies excluded due to their environmental degradation
In January 2009, the company Barrick Gold (Canada) was excluded due to the pollution generated by its mining activities in Papua New Guinea 4 . In October 2014, the Peruvian and Chinese companies Volcan Compañia Minera and Zijin Mining Group were also excluded because of severe environmental risks related to their activities had been assessed 5 .