Norway sovereign wealth fund takes an ethical stance

Norway’s soveriegn-weatlh fund surpassed US$11trn in assets on September 19th this year. With its significant revenue from North Sea oil and gas getting invested overseas it is likely to get even bigger to the extent that Norway can start to shape ideas abroad. It is increasingly speaking out on ethical behaviour of companies and is an increasingly activist shareholder. The ethics watchdog for the fund recommends that it excludes several firms in oil, cement and steel industries for emitting too much greenhouse gas. This may seem hypocritical in that Norway produces significant amounts of oil but it operates under its own ethical guideline set by parliament.

Source: The Economist – 23-9-17

Missing out on billions of dollars

Norway’s sovereign wealth fund has share in 9,000 companies, 1.3% of the entire world’s listed equity. It has lost out on billions of dollars of revenue by its government prohibiting any investment in tobacco companies and manufactures of certain weapons. The fund is forbidden by law from investing in firms that produce nuclear weapons or landmines, or are involved in serious and systematic human rights violations, among other criteria. These include Boeing, Airbus, Imperial Tobacco, Philip Morris. Last year the council looked into the construction industry in Qatar – host of the 2022 soccer World Cup – and neighboring countries, after reports of abuse by human rights groups. Since then new regulations have been implemented which protect the rights and living and working conditions of labour in the construction industry. This includes the right of immigrant workers to hold onto their passport. There is a broad consensus in Norway that the fund should not make money from companies that take people’s lives.

Norway and coase theorem

Another way Norway is trying to influence global warming is by using its sovereign wealth fund to change behaviors of other countries. Ronald Coase argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution. An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests.

Stick and Carrot

The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

5 or 6 more China’s

The reality is that the planet can’t stand another 5 or 6 China’s but developing countries still need to grow and, like their developed country counterparts, it will involve greenhouse gas emissions. If we are to curb global emissions developing countries will have to leapfrog to new technologies as the burning of traditional fossil fuels will just exacerbate the problem. However developing countries have neither the resources nor the incentive to reduce dependence on fossil fuels on their own as their main focus is economic growth. Whilst developed countries have a lot to lose from developing-world emissions it is in their interest to pay the latter to curb emissions e.g. Norway paying Liberia not to chop down its trees. Although this looks a simple enough policy politicians will not be so enthused by it as money that is paid overseas to cut climate change is not very popular with the electorate and therefore the government.

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