The Compassionate Investor: Norway’s GPF-G

Ashby Monk

I saw that while many of us were away on vacation in late August (or, in my case, packing, moving and complaining), Norway’s SWF – the Government Pension Fund–Global – announced that it was dropping three corporations from its portfolio due to “grossly unethical activity”. This included two Israeli firms (Africa Israel Investments and Danya Cebus), which are implicated in the construction of settlements, and one Malaysian firm (Samling Global), which has been implicated in environmental degradation.

In justifying the Israeli divestments, the MoF cited the Geneva Convention, UN Security Council resolutions and ICJ advisory opinions, which, according to the MoF, together “have concluded that the construction of Israeli settlements in occupied Palestinian territory is prohibited”. As for the Malaysian firm, the MoF says it is linked to illegal logging and severe environmental damage in Sarawak and Guyana. According to the GPF-G, these divestments have already been made (despite the firms’ denials of wrongdoing). Since I’ve written at length on the GPF-G’s ethical investment policies (see here and here), I thought I would chime in with some quick thoughts.

I can’t help but find the timing of these announcements rather intriguing. As you may be aware, the GPF-G has had a rough couple of years financially; this was most recently ‘capped’ off by BP’s huge stock price drop. (…by the way, I’ll leave the ethics of the GPF-G’s investment in BP out of this, though I have some colleagues at the SOGE who would be appalled at this oversight…) Anyway, the Norwegian SWF’s value actually dropped by 5.4% in the latest quarter for which results are available.

So, here is my provocative question: Is the announcement of these divestments (and their timing) intended to shore up public opinion about the SWF’s operations during a rather difficult and troubling period?  An outlandish question? Not really. Read this from the Ministry of Finance:

“There is . . . broad support for the ethical framework for responsible management of the Fund. Broad political support for the investment strategy for the Fund provides a democratic underpinning and represents an important contribution to maintaining the investment strategy over time, including in periods of major market fluctuations.”

In other words, the ethical policy (on display with the high profile “naming and shaming” of these three companies) is crucial for sustaining the institution over the long-term.

Now, it’s beyond me to know if the Norwegian SWF actually links its financial performance with its ethical actions. Still, the government and the fund both clearly recognize the importance of these ethical policies in maintaining the fund’s legitimacy by providing a buffer against public criticism during periods of poor returns. (And if you think legitimacy isn’t a big deal for this fund, consider that after the financial crisis the very notion of active investment management was questioned, and the very existence of the NBIM was implicitly threatened.)

And so this may offer some insight into why the GPF-G has been working so hard at publicizing and implementing its ethical stance over the past few years (for a nice example, see this brochure). The Norwegian public today perceives the GPF-G as both an instrument of long-term national welfare (i.e. a SWF) and an expression of Norway’s commitment to global justice. And this combination of ideals offers the GPF-G and the government a useful trade-off: when the former struggles, the government can always press on the latter’s accelerator to maintain public acceptance.

Does this completely explain the latest divestments? Maybe not. But it does offer some useful perspective.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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