NORWAY - The Norwegian Ministry of Finance has issued a public consultation on the evaluation of ethical guidelines for the Government Pension Fund - Global, which suggests potential changes such as introducing a 'cut-off' point for active ownership discussions.

The consultation paper provides a background to the existing ethical guidelines used by the Government Pension Fund - Global through both Norges Bank and the Council on ethics, and requests feedback on proposals that could strengthen the fund's profile as a responsible investor.

One of the potential changes highlighted in the document is whether the fund can achieve more 'leverage' from active ownership activities through processes such as introducing methods for verifying information provided by companies, establishing a 'cut-off' system for the active ownership process in situations where the activity is unlikely to be successful or has become too time-consuming.

Other key questions outlined in the document include:

Whether to introduce other or more exclusion criteria for companies; Should the Council on Ethics be given more policy measures to fill the gap between exclusion and no sanctions at all - such as increasing dialogue directly with companies; Should there be increased co-operation between the operations of the Council on Ethics and Norges Bank, for example through the use of an 'observation list'? and
Are there arguments to support the introduction of 'positive' selection to the fund?

In addition, the consultation document notes changes to the investment strategy of the fund - including an intention to allocate 5% to real estate and to expand the benchmark portfolio for equities to include all emerging markets - might also affect the development of the ethical guidelines. (See earlier IPE article: Norway pension fund allocates 5% to real estate)

The Ministry of Finance pointed out the ethical guidelines for the fund would "generally speaking" apply to investments in new asset classes like real estate, but admitted real estate investments will primarily be unlisted real estate funds and companies, so the ownership stake will be high and the investment illiquid for disinvestment purposes.

The document also suggests "as far as real estate is concerned" ethical guidelines should "place more emphasis on using the size of the fund to impose requirements on the investments prior to making the investment decisions".

However the Ministry of Finance added because of the potential for more influence through its larger ownership stakes, the fund's real estate effort "should be subject to special environmental considerations".

It highlighted this will be particularly the case in the areas of energy efficiency, water consumption, and waste handling, and confirmed the Ministry's investment mandate in relation to real estate will include a requirement that Norges Bank shall "actively participate in the international effort to promote special environmental considerations", and how this would integrate into the investment process.

Kristin Halvorsen, Norwegian minister of finance, said: "We believe that we are at the forefront and can help shape the debate on how investors can best assume responsibility for environmental, social and governance issues."

The deadline for submitting a response to the consultation is September 15 2008, and the results of the evaluation process will be presented to the Norwegian Parliament in a white paper on the management of the pension fund in spring 2009.

Publication of this consultation follows the recent recommendation by the Council on Ethics not to exclude the Israel Electric Corporations (IEC) for an alleged breach of the fund's ethical guidelines for an alleged "collective punishment of the civilian population of Gaza" through the reduction of the electricity supply to the area.

In its response to the allegation from the non-governmental organisation Norwegian People's Aid, the Council on Ethics concluded that although electricity had been reduced to the area earlier in the year the reduction is "not ongoing".

It pointed out as the action has ceased it "cannot be considered an ongoing breach of norms" - as set out in the guidelines - and added "although the humanitarian situation in Gaza is very alarming, this cannot be attributed to the previous, temporary, reduction by 0.5% in IEC's deliveries".

However it warned, if future reductions in the electricity supply to Gaza, causing unacceptable humanitarian conditions for the civilian population are introduced by IEC the council may renew its assessment of the fund's investment".

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