Respected pension academics knock Norway fund’s ethical strategy

The ethical policy of the NOK2,385bn (€280bn) Norwegian Government Pension Fund-Global may be hindering its effectiveness as an investor, according to research by Oxford University professor Gordon Clark, the noted pensions academic, and Dr. Ashby Monk, an Oxford research fellow. Notably, the research argues that the fund’s high profile and controversial corporate exclusion strategy could be “self-defeating”. The fund is one of the world’s biggest sovereign wealth investors. While emphasising that it is widely recognised as: “a remarkably transparent and well governed institution”, the research argues that the fund is likely ‘sub-optimal’ on a number of the ‘core’ governance criteria identified as best practice for institutional investment by Clark himself and Roger Urwin in a widely-credited, 2008 research paper: “Best-practice investment management: lessons for asset owners.” These below par factors, it says, include a governance system that is “quite inflexible in the face of changing global financial circumstances and the increasing premium on distinguishing the types of decisions according to their timeliness, resource-intensiveness, and reliance upon expertise”. The fund’s controversial “naming and shaming” of companies makes global newspaper headlines. It has been something of a political football in Norway, and the Ministry of Finance recently called for a strengthening of its ‘engagement’ lobbying process with companies ofconcern before opting for the nuclear option of blacklisting from its portfolios. Nonetheless, a recent exclusion of Elbit Systems, the Israeli defence technologies company, over alleged human rights violations linked to the supply of surveillance equipment for the separation fence in the West Bank on occupied territory between Israel and Palestine, caused diplomatic tension between Norway and Israel. However, the academics query the efficacy of the exclusion approach: “It should be obvious that naming and shaming hardly ever moves markets, and the instant Norway disinvests another investor takes its place. There is little evidence that naming and shaming increases the long-term cost-of-capital for the affected companies. Nonetheless, naming and shaming is an essential ingredient in their process-model of institutional legitimacy: the Council and its recommendations are meant to represent public values. Whether or not these recommendations exact a penalty on the targeted companies is less important.” The study also claims there is ‘considerable ambiguity’ over the fund’s mandate: “The decision-making process is so complicated that it is difficult to determine whether the effective decision-makers up and down the chain of accountability have the requisite skills and expertise.” It adds: “There are reasons to doubt the functionality of the process of accountability and transparency for timely and resource-efficient long-term investment.” Nonetheless,

the research notes that the ethical costs are “presumably” willingly borne by the Norwegian public: “given the significance associated with accountability and the pursuit of share values in the global arena.” Runar Malkenes, deputy director general of the Information Division at the Norwegian Ministry of Finance, told Responsible-Investor.com: “In general,we put much emphasis on being open and transparent about the fund’s management. We welcome research and academic studies, as this can give new insights and help us in our efforts to stay abreast of new developments and in keeping with best practice.”
Link to the paper (copy and paste): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1473973