Socially Responsible Investment Strategies for the Norwegian Petroleum Fund

Socially Responsible Investment Strategies for the
Norwegian Petroleum Fund
Highlights from the Expert Panel on Socially Responsible Investment
Seminar arranged by the Centre for Corporate Citizenship
The Norwegian School of Management
Wednesday, March 24, 2004
Résumé by
Atle Midttun and Tore Dirdal
The Socially Responsible Investment Strategies for the Norwegian Petroleum Fund
Seminar is a part of the Norwegian School of Management’s Centre for Corporate
Citizenship seminar series in the areas of corporate social responsibility (CSR),
socially responsible investment (SRI), corporate governance, and partnerships.
European experts in the fields of corporate governance and socially responsible
investing have been invited to share their views on the Graver Report, Ethical
Guidelines for the Norwegian Petroleum Fund and Norwegian Forum for
Environment and Development’s (ForUM) alternative proposal.
The Norwegian discussion on the placement of ethical, social and environmental
criteria on its Petroleum Fund appears to be consistent with an emerging, international
shift in investors’ strategies towards stronger engagement in corporate governance
issues, and a heightened awareness of the importance of long-term sustainability.
The Petroleum Fund appears to a lagging in its adaptation of practices that have
already been developed over the last decade by major pension funds, such as Hermes
(UK), CALPERS (USA) and more recently IDEAM/Credit Agricole (France), and
AP:3 (Sweden).
Those types of investors tend to have broad “democratic” constituencies that
potentially carry a long-term and socially-responsible economic outlook. Since these
institutions control a considerable, and growing amount of financial assets, their
investment policies carry increasing weight. This can, in turn, place added pressure on
corporations to improve their corporate governance and social responsibility policies
and practices.
The Petroleum Fund, emerging as yet another major investor with a mandate to
support responsible and long-term sustainable business practices, will reinforce an
already growing trend. However, the explicit democratic ownership of the Norwegian
Petroleum could also add additional dimensions to this development since it will
anchor new investment practices in a more explicit and broader public debate. The
Norwegian Government’s Graver Committee’s explicit ethical, legal and societal
justification/argumentation serves as a basis for this Spring’s Parliamentary debate.
The Committee’s approach is unique and has attracted broad, international
From an innovation perspective, information systems, investment strategies and
business models used to support corporate governance and socially responsible
investment (SRI) are in their infancy. Therefore, we can anticipate a dynamic
development in our present knowledge base both with respect to investment methods
and with respect to investment strategies. Policy makers should have a learning and
development perspective in mind when they lay down the basic rules of the game.
Indeed, even the non-government organization (NGO) community realise that the
adaptation of corporate governance and SRI strategies is a long-term proposition.
The expert panel unanimously praised the Graver Committee for the ethical
fundament that it presented. However, several members of the panel argued that it
could have taken even bolder steps, including some of ForUM ’s alternative proposal
measures. Furthermore, these panel members added that their more aggressive stance
would also serve to augment the Petroleum Fund’s value.
Peter Butler is the Director of Corporate Focus at Hermes. Hermes is the principal
manager for British Telecom’s NOK 550 billion pension fund, the largest pension
fund in the UK. Hermes is one of the most experienced corporate goverance fund
managers in Europe. Butler has more than 8 years of experience in working with
corporate governance issues and has a staff of nearly 50 people dedicated to working
to promote responsible business practices.
Butler argued that major pension funds and other institutional investors should adopt a
new approach “We are not just investors, we are part owners, and we believe that
companies with concerned involved shareholders are more likely to achieve superior
long-term returns than those without such owners.” He points out that the Norwegian
people by virtue of their Petroleum Fund are part owners of the companies in which
this fund invests. And, it is the owners’ responsibility to deal with problems of
irresponsible business practice by engaging with the invested companies.
He argued that if companies fail to meet expectations, owners should engage with the
boards and make efforts to have them instruct management to change the companies’
business practices. In serious cases, irresponsible directors should even be removed
through engagement with companies and other shareholders.
In accordance with the International Corporate Governance Network’s (ICGN)
Corporate Governance Principles, Butler also argued that responsible owners should
be concerned with aspects such as the balance and composition of the board, the roles
of chairman and chief executive, the over all strategy of the firm, its capital structure
and its general governance including Corporate Social Responsibility issues. He has
found that such active ownership strategies have added multiple billions of kroner to
the value of Hermes’ clients’ portfolios.
While arguing strongly for engagement, Butler nevertheless agreed with the Graver
Commission on the necessity of screening for issues of national importance (e.g.,
nuclear weapons and land mines). However, such screening is clearly a political issue
and thus should be decided by Parliament rather than fund managers.
In Butler’s opinion, the Graver Commission’s proposals should be more aggressive.
He argues that by proposing both investment and engagement in many more of the
tough cases, instead of the proposed exclusion, the fund could have a greater positive
impact. He asserted that it is difficult to remove companies from exclusion lists.
Butler highly recommended that the Norwegian Petroleum Fund‘s managers adopt
ICGN’s Corporate Governance Principles. These mainstream guidelines have already
been adopted by many major global pension funds, including the British Telecom
pension scheme.
Pernilla Klein is AP:3’s Iinformation Director. AP:3 is a Swedish state- owned
pension funds with SEK 140 billion in assets under management. Assets have been
placed in a globally diversified portfolio
Klein joined Peter Butler in her praise of the Graver Report. However, she is
concerned about the public’s tendency to have unrealistic expectations of investor’s
ability to induce societal change. She felt that these unrealistic expectations can be
attributed to various SRI screening companies and SRI fund managers’ aggressive
marketing strategies. In her opinion, the Graver Report provides the ethical
investment community with crystal clear definitions of basic concepts. She also
warmly supported the Graver Committee’s conclusion that UN conventions can be
conceived as binding for state owned funds, in a legal sense.
Klein referenced a 2001 Swedish law that mandates that state-owned funds take social
and environmental considerations into account without relinquishing their main target
ensuring financial returns. She made a case for a clear division between the
responsibilities of Ministry of Finance and fund manager. “Morality-based” exclusion
policies should be left to policy makers, while fund managers should use their
expertise to concentrate on enhancing the portfolio’s value. In Klein’s opinion,
engagement strategies should address value enhancement; they should not be used to
address non-material societal aims.
She is also is a proponent of withdrawal mechanisms that permit investors to sell its
investments in corporations if receives information about those companies’
complicity in severe human rights violations. She added that this type of mechanism
had not been used at the AP:3.
Klein focused on information strategies as a major dimension of engagement. She
pointed out that AP:3, tries to promote corporate codes of conduct and the Global
Reporting Initiative and she asserts that these instruments are absolutely vital in
producing the information necessary for an investor to assess the potential risks
facing corporations. .
As an AP:3 representative, Klein said, she screens companies’ reporting. One
important aspect of her assessments are whether companies’ reporting was consistent
with the Global Reporting Initiative. If they are inconsistent, she said she would
engage in dialogue with the companies in an attempt to promote the initiative’s
Xavier de Bayser, is CEO at IDEAM/Credit Agricole, France, with 32 years
experience of corporate management and 16 years of experience of active
quantitative portfolio management, the last six with a focus on SRI
De Bayser took a financial and philosophical point of departure in his presentation.
Philosophy, he argued, is important because it teaches you to ask the right questions.
The important question to ask, according to de Bayser is: It is possible to combine
ethical goals, as described in the Graver report, with performance? Is it possible to
add a third dimension to the investment process? In other words, to combine risk,
return, ethics? When you start thinking this way, he claimed, you make some
interesting discoveries. He summed up these discoveries in four points:
1. Firstly: trying to capture the behaviour of listed companies with environmental
and social responsible and governance issues, de Bayser argued, you are
compelled to pay more attention to extra financial criteria. As your analysis leads
you to evaluate non tangible assets of companies, you discover that about ¾ of the
value of the company is dependant on such assets, he claimed. So surprisingly,
looking for ethical goals you find efficiency, as well as better understanding of
risk, reputation and innovation. Drawing a religious analogy, de Bayser quoted a
German poet: “where there is danger there also grows salvation”.
2. De Bayser’s Second point was that to capture the right information is difficult, and
to include this information in the investing process is even more difficult. Rating
the companies correctly on these extra financial criteria is one of the key points.
De Bayser pointed out that there is progress made in Sweden and referred to
Pernilla Klein’s argument that it was necessary to go towards the second
generation of rating. De Bayser was convinced that that implies paying more
attention to the quality of data gathering and looking for specific issues sector by
sector with weight factors to different segments. Social governance, he claimed,
will generally have strong economic impacts for companies and their future
3. Thirdly, de Bayser underlined the methodological weakness of much of the SRI
investment debate. He was disappointed by studies trying to demonstrate the
performance of SRI and found these reports to be misleading. The problem was,
he claimed, that most of the SRI funds are traditionally managed, and a portfolio
manager, even if he choose his stocks from the universe of the worlds best
companies on ethical criteria, makes a lot of bets. He makes sector bets, country
bets, capitalisation bets, style bets and many others. This means, according to de
Bayser,that you will never know where the performance comes from. He therefore
argued that it is essential to take a quantitative approach so that you can
concentrate your risk taking only on stock picking on ethical criteria. By doing so,
he argued, you are able to clearly demonstrate the performance coming from extra
financial criteria.
4. De Bayser’s fourth point was that performance will come with time, because these
considerations are not yet reflected in the stock prices. In the future, he claimed,
companies that are new and bad at transparency will have this negatively reflected
in their stock price. Enron and WorldCom should all be familiar examples. Extra
financial rating is not yet reflected in the stock price, but will be so when more
institutional investors choose SRI. At that time, he argued, the performance will
grow. He here, in other words, argued that SRI performance depends on the
institutional investors implementing their good governance and SRI strategies.
In this perspective, de Bayser saw the petroleum fund as one of the major actors who
are able to gear a “virtuous” circle. Drawing on chaos theory, de Bayser pointed out
that even a small event can change the market completely. Formulating a vision for
the Petroleum Fund, he said that: “The petroleum fund is like a mammoth and the
chaos theory talks about butterflies. The Petroleum Fund therefore should be like a
mammoth with the spirit of a butterfly to move the SRI practices forward”. Being
more specific, de Bayser ended making three recommendations, one of them
reiterating a recommendation already made by Peter Butler:
1. Put more pressure on the portfolio managers to make use of the extra financial
criteria, and really make them use these criteria. The performance of the
Petroleum fund will depend on this.
2. Give someone a mandate to specialize on quantitative processes. This mandate
will provide a really useful benchmark tool. I like the idea of live benchmark.
A live benchmark is to see the performance of this company against another
company. And this gives an incentive to the company to go further with its
3. You should try to organize the community of large institutional investors and
recommend engagement in pushing for SRI and corporate governance criteria.
I know that the French view on this is to share information and ideas on the
Paul Hohnen, director of the Global Reporting Initiative (GRI)
Hohnen argued that the 21st century themes of transparency, better governance and
enhanced performance are absolutely essential to economic development. He stressed
that it is vital that we place demand on business, because there is virtually no link
between the commitments that governments are making and what the market is doing
Like Butler and Klein, Hohnen praised the Graver Commission for confronting the
placement of socially-responsible investment criteria in a detailed, rich and
philosophical fashion that took real ethical complexities into account. He also
welcomed references to the OECD Guidelines for multinational enterprises and the
United Nation’s Global Compact Principles. He envisioned these documents as a part
of an emerging CSR framework that Government, business and accounting firms may
use to drive international investments more in the direction of where governments
want it to go. At the same time, he was disappointed that the Commission had
overlooked the United Nations Development Programme’s Millennium Development
Goals which were unanimously adopted by world leaders at the 2000 Millennium
Hohnen emphasized the importance of having tools in place to translate the
Committee’s commitments, aims, and aspirations into actual performance enhancing
measures. He viewed the GRI as an emerging tool kit that could be used by
corporations examine performance and use as a reporting framework. The GRI has
recently incorporated the UN Global Compact Principles and OECD Guidelines. Its
user guide illustrates how the GRI guidelines can be used to benchmark corporate
performance with respect to the OECD Guidelines and Global Compact Principles.
Finally, Hohnen highlighted the importance of software-based tools to support the
GRI. He added that software enhancements made within the coming years, will
reduce reporting burdens.