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Norwegian Oil Fund Investments in China Create Controversy

Norwegian daily Aftenposten focused on the ethical challenges Norway faces in the Pension Fund’s investments on abroad. Last week, the newspaper wrote how the fund has invested in a company that has delivered pharmaceuticals that are used to carry out executions of 300 prisoners in U.S. jails since 2004. The Fund has also bought up several companies accused of serious damage of the rainforest, and investor companies that are heavily involved in cluster munitions, nuclear weapons and landmines.

In December 2011, the fund also placed Norwegian oil money in 1016 Chinese companies. Due to diplomatic crisis between China and Norway, this number has reduced to 308 companies in the end of the year. Meanwhile, the total investment in China continued at the same level – 4.7 billion NOK.

The newspaper reported that some of the investments go to Chinese companies that contribute to serious environmental pollution.

A council tries to make sure that oil money is not invested in companies that violate human rights and international law. But it is a challenge for the supervisory council to do their job in one of the hardest countries to probe- China, as it may simply be illegal to investigate corruption, illegal and unethical behavior.

– The biggest challenge is to keep up with companies in Southeast Asia and China. It can be difficult to figure out something. In China, it may be punishable only if the public access to the information. Then it is not so easy to gather information related to the individual company, especially if it concernsd possible misconduct, says the head of the Council, Ola Mestad.

The Council has tested its own monitoring tools in China and Southeast Asia, but the method works very poor in a country with very extensive censorship.

The Fund has said clearly that Norway has too much money invested in China, according to how important the Chinese are the world economy. The Chinese have strict rules on how much foreigners can buy up the land. Last year, the Pension Fund increased the quota to 5.7 billion. Norway was the first international investor receiving increased quota to the maximum limit. But this fund is almost trivial to work for.

About Pension Fund

The Government Pension Fund is a fund into which the surplus wealth produced by Norwegian petroleum income is deposited. The fund changed name in January 2006 from its previous name, The Petroleum Fund of Norway. The fund is commonly referred to as The Oil Fund (Norwegian: Oljefondet). As of the valuation in June 2011, it was the largest pension fund in the world, although it is not actually a pension fund as it derives its financial backing from oil profits and not pension contributions. As of December 31st 2012 its total value is NOK 3.816 trillion ($683.7;billion), holding one percent of global equity markets. With 1.78 percent of European stocks, it is said to be the largest stock owner in Europe.

The purpose of the petroleum fund is to invest parts of the large surplus generated by the Norwegian petroleum sector, generated mainly from taxes of companies, but also payment for license to explore as well as the State’s Direct Financial Interest and dividends from partly state-owned Statoil. Current revenue from the petroleum sector is estimated to be at its peak period and to decline over the next decades. The Petroleum Fund was established in 1990 after a decision by the country’s legislature to counter the effects of the forthcoming decline in income and to smooth out the disruptive effects of highly fluctuating oil prices.

Management and size

The fund is managed by Norges Bank Investment Management (NBIM), a part of the Norwegian Central Bank on behalf of the Ministry of Finance. It is currently the largest pension fund in Europe and is larger than the California public-employees pension fund (CalPERS), the largest public pension fund in the United States. The Norwegian Ministry of Finance forecasts that the fund will reach NOK 4.3 trillion ($717 billion) by the end of 2014 and NOK 6 trillion ($1 trillion) by the end of 2019. In a parliamentary white paper in April 2011 the Norwegian Ministry of Finance forecast that the 2030 value of the fund would be NOK 7.4 trillion ($1.3 trillion). A worst-case scenario for the fund value in 2030 was forecast at NOK 2.7 trillion ($455 billion) and a best case scenario at NOK 19.6 trillion ($3.3 trillion).

Since 1998 the fund has been allowed to invest up to 40 percent of its portfolio in the international stock market. In June 2009, the ministry decided to raise the stock portion to 60 percent. The Norwegian Government planned that up to 5 percent of the fund should be invested in real estate, beginning in 2010. A specific policy for the real estate investments was suggested in a report the Swiss Partners Group wrote for the Norwegian Ministry of Finance.

Debate

Due to the large size of the fund relative to the low number of people living in Norway (4.9 million people in 2010), the Petroleum Fund has become a hot political issue, dominated by three main issues:

Whether the country should use more of the petroleum revenues for the state budget instead of saving the funds for the future. The main matter of debate is to what degree increased government spending would increase inflation.

Whether the high level of exposure (around 60 percent in 2008) to the highly volatile, and therefore risky, stock market is financially safe. Others claim that the high differentiation and extreme long term of the investments will dilute the risk and that the state is losing considerable amounts of money due to the low investment percentage in the stock market.

Whether the investment policy of the Petroleum Fund is ethical.

The Ethical Council

Part of the investment policy debate is related to the discovery of several cases of investment by The Petroleum Fund in highly controversial companies, involved in businesses such as arms production and tobacco. The Petroleum Fund’s Advisory Council on Ethics was established 19 November 2004 by royal decree. Accordingly, the Ministry of Finance issued a new regulation on the management of the Government Petroleum Fund which also includes ethical guidelines.

According to its ethical guidelines, the Norwegian pension fund cannot invest money in companies that directly or indirectly contribute to killing, torture, deprivation of freedom, or other violations of human rights in conflict situations or wars. Contrary to popular belief, the fund is allowed to invest in a number of arms-producing companies, as only some kind of weapons such as nuclear arms, are banned by the ethical guidelines as investment objects.

An investigation by the Norwegian business newspaper Dagens Næringsliv in February 2012 showed that Norway has invested more than $2 billion in 15 technology companies producing technology that can and has been used for either filtering, wiretapping, or surveillance of communication in various countries, among them Iran, Syria, and Burma. Although surveillance tech is not the primary activity of all these 15 companies, they have all had, or still have some kind of connection to such technology. The Ministry of Finance in Norway stated that it would not withdraw investing in these companies, nor would it discuss an eventual exclusion of surveillance industry companies from its investments.

The Ethical Council is headed by Ola Mestad, a Norwegian lawyer who works for the European Centre of Law, who previously worked for the law firm Bahr, where he was specialized in oil-sector issues. The other members are Gro Nystuen, Bente Rathe, Ylva Lindberg, and Dag Olav Hessen.

On 19 January 2010 the Ministry of Finance announced that 17 tobacco companies had been excluded from the fund. The total divestement from these companies was $2 billion (NOK 14.2 billion), making it the largest divestment caused by ethical recommendations in the history of the fund.

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