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Norges Bank Investment Management should absorb Ethics Council – Dimson panel

Exclusion policy should be integrated, says high-level advisory group

The Ethics Council which advises the Norwegian government on exclusions from the giant NOK4.8trn (€594bn) Government Pension Fund should be integrated into the investment operations of the central bank’s Norges Bank Investment Management (NBIM), a high-level panel has advised.

The “resources and competencies” of the five-member Council on Ethics should be absorbed into NBIM, which runs the fund, and exclusions and ownership strategies should be carried out by the bank, the Strategy Council on responsible investment has recommended.

It would mean that the fund’s responsible investment work would be grouped into one organisation, avoiding a significant overlap of resources, while maintaining the expertise that has been developed by the Ethics Council since it was formed in December 2004.

Instead, a committee should be appointed by the Norges Bank board to provide “advice and recommendations” on exclusions. The panel said: “The knowledge and competence that has been accumulated in the secretariat of the Council on Ethics should be utilised and integrated into NBIM, the asset management organisation.”

The Ethics Council has been chaired by Oslo University Professor Ola Mestad since 2010.

The panel, chaired by London Business School Professor Elroy Dimson, explained that the decisions to divest or exclude companies affect the investable universe and so criteria for these decisions should be explicitly stated in the government’s mandate to Norges Bank to run the influential fund.

Another recommendation is to require Norges Bank to develop Responsible Investment Principles as the basis for ownership strategies, with the criteria for exclusions explicitly formulated.

One implication, though, of integrating the ethics council would be “cost implications that are not value enhancing for the fund”.

The panel added: “It is likely that Norges Bank will need to add expertise and resources that are not currentlyrepresented in the asset management organisation.”

In line with industry practice, the owner – in the case the Norwegian state – “should make adjustments in how the asset manager is measured with respect to this work”.

A variety of mechanisms are proposed to provide incentives to counter the “inherent conflicts” between financial and non-financial objectives. These include adjusting the fund’s reference index to take into account the exclusion of companies on the basis of non-financial criteria. And the costs associated with exclusions should be not be counted in the asset management costs of the fund.

The Dimson group also recommends increased transparency about how Norges Bank works with investment principles and subsequent ownership strategies as well as further research into the impact of responsible investment.

The panel held interviews with a range of peer group investors such as APG and PGGM of the Netherlands, US giant CalPERS, the Ethical Council of the Swedish AP Funds and the New Zealand Superannuation Fund. It also reviewed materials from ATP (Denmark) and CPPIB (Canada), the BT Pension Scheme (UK), TIAACREF (US), and Norway’s own Folketrygdfondet, KLP and Storebrand. It also looked at other evidence from the Principles for Responsible Investment (PRI), the International Corporate Governance Network and the UK’s Kay Review. It also considered buyside firms like Hermes Fund Managers and F&C as well as Goldman Sachs GS Sustain, Société Générale and UBS, on the sell side.

Alongside Dimson, the panel included: Idar Kreutzer (CEO of Finance Norway and former Storebrand CEO); Rob Lake (former Director of Responsible Investment at the PRI); Hege Sjo (Senior Advisor, Hermes Fund Managers); and Professor Laura Starks (University of Texas).

The 34-page report is called Responsible Investment and the Norwegian Government Pension Fund Global.