Norway’s Sovereign Wealth Fund to Invest in India

By Kavaljit Singh | Commentary | February 3, 2008

The recent decision by Norway’s Government Pension Fund–Global (GPF) to invest $2 billion in Indian markets has come at a time when most foreign institutional investors are fleeing the markets. This is a very significant development as there are very few institutional investors in the global markets who can provide liquidity when it is most needed. However, the true significance of GPF lies in its role as an ethical and socially responsible investor. The GPF was in the news last year when it sold stake in the UK-listed Vedanta Resources for alleged environmental damage and labour rights violations in its four Indian subsidiaries. The GPF is the second largest SWF in the world with assets over $390 billion. It invests surplus wealth produced by Norway’s petroleum sector, mostly revenue from taxes and licensing agreements. The return on the GPF is added to the Fund’s capital and therefore there are no transfers to the government budget.

Thanks to rapid rise in international oil prices, the Fund has now become bigger than Norway’s GDP at $360 billion in 2007.

The Norwegian economy is a model of welfare capitalism and mixed economy, combining both free market activity and government intervention. In particular, the government controls key areas, such as the vital petroleum sector, through large-scale state enterprises. The country is rich in natural resources such as oil, hydropower, fish, forests, and minerals. Oil and gas account for one-third of country’s exports. Only Saudi Arabia and Russiaexport more oil than Norway.

Created as a savings fund for future generations, the GPF was established to manage Norway’s petroleum wealth in a sustainable manner, helping to meet the challenge of rising pensions and social expenditures in the future.

The ultimate responsibility of the management of the GPF lies with the Ministry of Finance which issues guidelines for its investments.  The Ministry of Finance has defined a benchmark portfolio for the Fund’s asset allocation. The GPF’s current exposure to equities is 40 per cent and the rest 60 per cent is devoted to fixed income instruments such as bonds and government securities.

Till date, the Norwegian fund has remained a low-profile non-strategic financial investor. Though the Fund has invested in more than 7000 companies globally but its stakes are small. The average ownership stake is less than 1 per cent. The Fund deliberately does not invest more than 10 per cent in each company to underscore its role as a financial investor.

Unlike other sovereign wealth funds from the Middle East and Asia, the GPF follows some of the strictest disclosure and ethical standards. The GPF regularly publishes its assets, investment portfolio and earnings.

In 2004, the fund adopted ethical guidelines that bar investment in companies if there are serious violations of human rights, labor exploitation, corruption or environmental damages. Of late, the GPF has made child labor as an important priority of concern.

The ethical guidelines of GPF are in conformity with other international frameworks such as UN Global Compact, the OECD Guidelines for Corporate Governance and for Multinational Enterprises, and ILO Conventions.

In 2007, the GPF also published its voting records for 2007 which provides the basis for its voting decisions. The voting records reveal that the Fund engaged with several important issues such as global warming, labor standards and freedom of access to the internet, as part of its active ownership approach. For instance, the Fund voted its shares in favor of shareholder resolutions at ExxonMobil and Ford Motor Co, calling for the companies to adopt carbon emission reduction goals.

The evaluation of the investment portfolio from ethical perspectives is frequently carried out by the Norwegian fund’s Council of Ethics.

On the recommendations of the council, the fund had sold its equity stake in several major corporations in the recent past. In June 2006, for instance, the Fund sold its holdings in US-based Wal-Mart, the world’s largest retailer, for “serious and systematic violations of human rights and labor rights.”

The divestment process of the GPF is intentionally designed to avoid any downward price pressure in order to minimize the losses from divestment. Therefore, such penal actions had no adverse impact on the fund’s financial performance.

Undoubtedly, the GPF has opened up new avenues for human rights and civil society groups to influence corporate behavior. The negative publicity generated by the Fund’s disinvestment could helps in creating awareness about the issues involved. For instance, the Supreme Court, while deciding up on the case against Vedanta, took note of the decision of the GPF to exclude Vedanta for violation of human rights and labour laws.

The ethical guidelines and governance standards practiced by the GPF could act as a valuable reference point for other institutional investors to follow. Despite so much talk on ethical standards and investments, very few international institutional investors have actually implemented them.