COUNCIL ON ETHICSFor the Norwegian Government Pension Fund Global
Principles for the selection of companies subject to further assessment
The Ministry of Finance has established guidelines for the observation and exclusion of companies from the Government Pension Fund Global. Section 5 details the work of the Council. Second subsection states:
“The Council may investigate matters on its own initiative or at the request of the Bank. The Council shall develop and publish principles for the selection of companies for closer investigation. The Bank may adopt more detailed expectations relating to these principles.”
In accordance with the Guidelines, Norges Bank has conveyed its expectations in its letter to the Council dated March 20, 2015. Norges Bank expexts, i.a., that the Council gives priority to companies in accordance with its Activity Plan or on the Bank’s request.
The Council on Ethics works systematically to identify companies whose operations are in contravention of the Guidelines.
The selection procedure consists of a four-step process:
- Identification of companies accused of violations
- Selection of companies for preliminary assessment
- More thorough assessment of selected companies
- Recommendation regarding exclusion or observation
In this process the various steps build on one another, and the number of companies subject to assessment is gradually reduced from step 1 to step 4.
The procedures for the examination of companies that are being assessed according to the product criteria are somewhat simpler than the procedures for companies being assessed according to the conduct criteria. It is reasonable to assume that the Council’s monitoring will detect all companies which may have products in contravention of the product criteria. All such cases will be subject to further assessment, and there is no need to undertake a selection of companies for further study other than to maintain a continuous monitoring of the portfolio. When it comes to the conduct criteria, it will be more difficult both to obtain information and to assess what qualifies for exclusion. The discussion below therefore refers to companies whose exclusion is being considered according to these criteria.
1. Identification of companies accused of violations
The Government Pension Fund Global invests in companies with operations across most countries in the world. In order to identify companies whose operations may be in breach of the Guidelines, daily internet-based news searches are carried out on all the companies in the Fund. The news searches identify companies that are accused of severe environmental damage, contributing to human rights violations, corruption or other serious violations.
The news searches are conducted by a consultancy firm that reports to the Council once a month. These reports normally include 60-70 cases. Many of the cases are already known to the Council because the press often writes about the same case over a longer period of time. On average, there is a need to look further into two to four of these cases.
Companies in the same sector, country or region are often assessed jointly. Such sector-wide analyses may take either a specific company that already has been flagged in news reports or an issue that the Council would like to examine more closely as their starting point. The examination of these issues or areas contributes to identify companies for further assessment, making it easier for the Council to see similar enterprises in relation to one another. Such thematic analyses are often mentioned in the Council’s Annual Report.
The Council on Ethics also receives enquiries from individuals or organizations that ask the Council to examine issues or individual companies. These requests are treated in the same way as the information that comes to light through the Council’s news searches.
In addition, Norges Bank may request the Council to assess individual companies. Such requests will be given priority.
2. Selection of companies for preliminary assessment
After potential companies have been identified, a preliminary assessment is made of how serious or systematic the reported violations seem to be. In this assessment, which is only based on violations that fall within the scope of each item in section 3(a-e), the following is given emphasis:
– the gravity and scope of the violation;
– the consequences of the violation;
– the company’s responsibility for, or contribution to, the violation;
– the company’s measures to prevent or remedy the damage; and
– the risk of similar incidents occurring in the future.
In many cases, importance is also attached to whether the practices are in breach of national legislation or international agreements or standards.
3. More thorough assessment of selected companies
The objective of further assessment is primarily to shed light on what has taken place. The Council must then assess the risk that any serious violations could also occur in the future. For selected companies, the ensuing procedure mainly consists of:
a more detailed study and documentation of the accusations against the company;
an assessment of the company’s operations compared with other companies in the sector, country or region; and
an overall evaluation of the case.
More detailed study and documentation of the accusations against the company
In general, the accusations against the company must be substantiated by documented facts. During subsequent analysis, the work may be based on research papers, scientific studies, consultancy reports, official documents, court rulings, reviews in the media and information from local communities, authorities and non-governmental organizations. It is important that the information is verifiable. At this stage of the assessment, the Council normally contacts the company requesting relevant information. The Council may also commission consultants with local knowledge and expertise of the issues in question to analyse matters that have a bearing on the case.
Comparison with other companies in the sector, country or region
Several companies within the same sector or country are often accused of similar violations, and such cases are generally assessed en bloc. In this way the Council gains a better basis for evaluating the gravity of the violation, the company’s degree of responsibility, and whether the companies have differing practices to prevent or remedy the violations and future risk.
Overall evaluation of the case
During the assessment, the Council evaluates the case several times. The aspects mentioned in Step 2 are regularly reassessed as information and documentation is obtained. If the prerequisites for exclusion do not seem to be met, cases may be put aside at any stage of the evaluation.
4. Recommendation regarding exclusion or observation
If the Council, after thorough examination, nevertheless finds that there may be grounds to exclude a company, the Council submits a draft recommendation to the company for comments in accordance with the Guidelines. If the company provides new information in the case, this may cause the Council to refrain from recommending the company’s exclusion. If the company’s reply fails to offer any new substantial information, the Council will generally recommend that Norges Bank exclude the company. If there are doubts as to whether the requirements for exclusion have been met, the Council may recommend that the company be placed under observation