Norway

2.The State duty to protect human rights

2.3 State ownership and practice for supporting the business sector [pages 21-24]

Direct state ownership in multinational enterprises is relatively extensive in Norway. We also have the world’s largest sovereign wealth fund, the Government Pension Fund Global, which is invested in around 9000 enterprises worldwide.

State ownership

In 2014, the Government presented a white paper on the importance of ownership for diversity and value creation (Meld. St. 27 (2013–2014)), which discusses the state’s expectations of enterprises in which it has a direct ownership interest, including expectations based on the UN Guiding Principles. The expectation that state-owned enterprises will exercise CSR is based on the belief that this is desirable in itself and that it helps to maintain the state’s shareholder value. Enterprises are exposed to different levels of risk and face different challenges. This means that they can adapt the “comply or explain” principle and the materiality principle to their own operations. The “comply or explain” principle applies to cases where a company’s practice deviates from the state’s expectations. There may be good reasons for this, and the board of directors must provide a public explanation of the reasons for the lack of compliance. The materiality principle implies that companies work with and report on factors that are of major importance to the way its operations affect people, communities, climate and the environment.

The Government has noted that there is a need to focus more strongly on the responsibility of the boards also of enterprises in which the state has an ownership interest and their approach to CSR, including human rights. We believe that greater involvement by company boards will improve risk management and thereby help to maintain shareholder value. The follow-up of CSR and human rights performance is conducted through the owner dialogue in quarterly and/or annual meetings on CSR. In special cases it may be necessary to follow the company’s activities more closely. The work of companies and boards on CSR, including human rights, is taken into account in the election of board members.

Responsible management 

Through the Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (GPFN), Norway has financial investments both in Norway and the world at large. The role of the Fund is that of a financial investor, and the overriding objective is to achieve the highest possible return at moderate risk.

Under the GPFG investment strategy, 60 % of the capital is invested in equities, 35 % in bonds and up to 5 % in real estate. The GPFG may not own more than 10 % of any single company in its portfolio. The investment strategy for the GPFG has been expressed, inter alia, through benchmark indices. Its benchmark indices for equities and bonds are based on broad and easily available indices from leading index providers. Norges Bank may only deviate to a small extent from the benchmarks (1% expected tracking error). The management of the GPFG thus follows closely the broad market indicies as set by the Ministry. This also means that the fund is invested widely and with small holdings in the global markets. At the end of 2014, the fund’s average holding in the global equity market was 1.3 %. This means that the fund is a minority shareholder in a large number of companies.

The Government attaches importance to transparency and ethics in the management of the Government Pension Fund. In the management of the fund, emphasis is also given to respecting values shared by the beneficial owners of the Fund. Guidelines have been drawn up for observation and exclusion from the GPFG portfolio of companies that contribute to or are responsible for certain gross violations of norms, including human rights violations. Expectations from different perspectives are being expressed on the best way to fulfil the funds` ownership role. However, it is important that the fund keeps to its role as financial investor: there is broad political consensus that the fund is not a foreign or environmental policy tool. The state has other and more effective instruments in these fields.

The Ministry of Finance is responsible for the management of the Government Pension Fund, including the framework of responsible management. The operational responsibility for management of the GPFG and the GPFN lies with Norges Bank and Folketrygdfondet respectively, which operate in accordance with mandates decided by the Ministry of Finance. The Ministry reports to the Storting on the management and on planned changes in the framework in an annual white paper (see e.g. The Management of the Government Pension Fund in 2014 (Meld. St. 21 (2014–2015)).

In the management mandate set by the Ministry it is stated that a good long-term return is considered dependent on sustainable development in economic, environmental and social terms, as well as well-functioning, legitimate and efficient markets. The mandates laid down by the Ministry of Finance to Norges Bank and Folketrygdfondet require that these considerations are integrated into the operational management strategies. Within the framework decided by the Ministry, Norges Bank and Folketrygdfondet make investment decisions and exercise their ownership rights independently of the Ministry.

The work on responsible management is an integrated part of the investment process and Norges Bank uses a variety of tools in its responsible management. They can be divided into three main groups: standard setting, ownership and risk management. Norges Bank’s responsible investment management is, as a starting point, based on international principles and standards, such as those set by the UN in the Guiding Principles on Business and Human Rights and the OECD in the Guidelines for Multinational Enterprises. When the UN Guiding Principles were adopted, Norges Bank endorsed a campaign by investors in support of the principles.

When Norges Bank assesses markets and country risks, it includes violent conflicts, human rights violations and political terror in its analyses. Human rights may also be a part of the risk monitoring at sector and company level.

In its capacity as owner and minority shareholder in over 9000 companies worldwide (by the end of 2014), Norges Bank has chosen to focus on certain areas in order to achieve the best and most effective risk management and exercise of ownership rights. At present the bank has three focus areas that are directly linked with environmental and social conditions: children’s rights, climate change and water management. It has set out expectations in each of these areas for how companies can manage risks and report on their activities. The expectation documents are publicly available.

In its 2014–2016 strategy document, Norges Bank stated that it may add additional focus areas towards the end of the period. The Ministry of Finance will follow up the Storting’s recommendation to verify with Norges Bank whether an expectation document on human rights can be drawn up, including which areas of human rights can be expected to be included. The Ministry of Finance has asked Norges Bank to respond by 1 February 2016, and will report on the subject in its spring white paper to the Storting on the management of the Government Pension Fund.

However, it should be emphasized that Norges Bank’s work on responsible management is not confined to these areas. In its annual report on responsible management for 2014 the bank has elaborated on how it deals with a number of other issues and areas as well, including social conditions such as human rights and workers’ rights. In recent years the bank has also made risk-based divestments based on an overall financial assessment of companies that includes environmental and social issues. Such divestments are made within the limits set out in the mandate from the Ministry of Finance.

To further strengthen its work on responsible management, in February 2015 Norges Bank presented for the first time a separate report on its activities in this area. The aim of the report is to provide a broad and coherent overview of the bank’s work on assuring responsible management and in this way increasing the transparency of the management of the GPFG. The report is published on http://www.nbim.no/en/.

A system has also been established for observation and exclusion of companies. The system is intended to ensure that the GPFG is not invested in companies that produce certain products or contribute to or are responsible for grossly unethical conduct. The Ministry of Finance has appointed a Council on Ethics to advise Norges Bank on exclusion or observation of companies in the fund’s portfolio on the basis of the criteria in the guidelines for observation and exclusion. The criteria are laid down by the political authorities.

The Council on Ethics can recommend exclusions or observations in cases where there is an unacceptable risk that a company contributes to or is responsible for serious or systematic violations of human rights. The companies are identified by means of, among other things, systematic reviews of sectors or issues, approaches from interest groups and reports in the media. Another criterion concerns serious violations of individual rights in war or other conflict situations. In 2014, the council reviewed a number of cases of human rights violations in connection with extraction of natural resources, agriculture, food production and textile manufacturing.

It follows from the mandate from the Ministry of Finance to Norges Bank that in certain cases the GPFG is prevented from investing in government bonds. The GPFG is not a foreign policy instrument, and only in special cases of comprehensive international sanctions or measures that Norway has endorsed, has such restrictions been imposed on investing in government bonds.

 Measure: 

The Ministry of Finance has asked Norges Bank to consider whether it can draw up an expectations document for human rights, and which areas of human rights it would consider including, by 1 February 2016. The Ministry will report on this subject in its spring white paper to the Storting on the management of the Government Pension Fund.”

 Conditions for government support for business promotion and private sector development 

The state is responsible for exercising due diligence when it provides significant economic support or other types of benefits to the business sector. This particularly affects the Norwegian Export Credit Guarantee Agency (GIEK), Export Credit Norway, Innovation Norway, Norad and the Foreign Service. The expectation that companies will observe a high standard of CSR reduces the risk that those that receive credit, loans or other financial support fail to respond correctly in difficult situations, which would affect Norway’s credibility and reputation as well as that of the company concerned. Responsible business conduct also constitutes a competitive advantage.

The Government wishes to expand its cooperation with the business sector in private sector development policy. The cooperation would include financial support for projects with a development effect in particular developing countries, and strategic cooperation between the Norwegian authorities, Norwegian companies and third parties such as the recipient country, multinational institutions or NGOs. In such cases expectations and in some cases requirements will be set for business conduct compatible with the practices of other public institutions.

Measures:

• give companies with international operations that apply for public funding or services18 adequate and coherent information and guidance on the Government’s expectations concerning respect for human rights;
• expect companies that are to receive financial support or servicesto respect human rights;
• continue to classify all export transactions19 for which public funding is sought according to the risk of human rights violations.

BOX: Due Diligence by GIEK, Export Credit Norway and Innovation Norway [page 24]

“GIEK and Export Credit Norway often provide financing for the same projects, and have established formal cooperation on CSR. The cooperation includes human rights due diligence based on the expectations of export credit institutions set by the UN Guiding Principles, and is an integrated part of GIEK’s and Export Credit Norway’s loan and guarantee activities. All projects for which financing is being considered are submitted to an internal risk classification, even projects where this is not required16 by the OECD Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence.17 On the basis of the risk classification and considerations relating to opportunities for exerting influence, appropriate measures are taken to avoid, reduce and/or remedy potentially negative outcomes. In markets where there is a high risk that human rights will not be safeguarded in connection with business operations, it may be logical for example to require business enterprises to have adequate systems and strategies for risk assessment and follow-up.

Innovation Norway practises environmental and social due diligence when dealing with all financing applications from business enterprises. The information on the company and the project for which support has been requested is assessed on the basis of a red flag checklist and a checklist based on the 10 principles of the UN Global Compact and adapted to Innovation Norway’s mandate and target groups. The red flags are: risk of corruption, the nature of the company’s activities in low-cost countries, ethical dilemmas and environmental pressure from commercial activities. CSR scores reflect the level of CSR-related risk connected with the project or whether CSR may be a reason for giving the case priority. One of the conditions laid down in the contract with the client is that the enterprise must have high ethical standards and avoid contributing to corruption, human rights violations, poor working conditions or adverse impacts on local communities or the environment.