Does Divestment Work? The Case of the Norwegian Government Pension Fund Driving Development: Business as a Force for Good? Global Compact Network Nordic.

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 Rights

University of Oslo

http://folk.uio.no/andreasf

Overview

1. About the Norwegian Government Pension Fund and its Council on Ethics

2. A case of Exclusion: Rio Tinto3. Does Divestment work? Effects4. Patterns and Future Trends (AF)

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

A three-track strategy, division of labor

A. Exercise of ownership rights (Norges Bank) to safeguard long-term financial interests, and pursue the UN’s Global Compact and OECD Guidelines for

Corporate Governance

Ministry of Finance, on advise from Council on Ethics:

B. Negative screening => Exclude companies from the investment universe that produce weapons whose normal may violate fundamental humanitarian principles

C. Case by case exclusion of companies => where there is an unacceptable risk of complicity in

gross or systematic breaches of certain ethical norms

C) Case by case exclusionTo 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

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 company’s 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 Tinto’s response confirms the company’s investments and role in the Grasberg mine, but disputes the Council’s assessment that the mining operation causes severe environmental damage.

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?

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