The Ethics of Global Investment: Norway's Government Pension Fund
A recurrent theme in commentary about SWFs is the global power associated with their vast financial resources and the fear that SWFs may be the strategic instruments of their sovereign sponsor’s geopolitical interests (Aizenman and Glick 2008; Drezner 2008). When an SWF announces the acquisition or intended acquisition of a country’s infrastructure assets, one response is to suppose that behind the assessment of risk and return is an interest in acquiring a strategic foothold that will pay political dividends for the national sponsor in the future. A second, related, theme is about the effective independence of SWFs from national political interests. There is a fear that SWFs may be subject to the latest fad or fancy of their political masters. Best-practice investment management has it that clarity of mandate and the formal division of authority and responsibility are essential in driving performance over the long term.
The Norwegian GPF-G is not a pension fund in the sense that pension funds normally have designated beneficiaries, are ruled by the principle of fiduciary duty, and have well-defined time horizons over which they must realize their commitments (Clark 2000). In fact, the GPF-G is a deposit account with the Norwegian Central Bank: its assets are managed by Norges Bank Investment Management (NBIM), which is, in the first instance, responsible to the bank’s governor and board and ultimately to the Minister of Finance. It neither has an independent board of trustees nor does it hire its CEO and CIO; those employed in the NBIM are employees of the bank and are subject to the bank’s employment policies and practices. Furthermore, NBIM investment is subject to ministry policies, including quantitative rules regarding the allocation of assets as well as mission-led policies regarding ethical investment that derive from the national parliament. Since the fund is required to invest its assets outside Norway, its ethical investment policies seek to give global effect to national values and commitments.
Given the huge size of the fund (approximately US$572 billion in 2011) and the ethics policy whereby the fund may be required to exclude certain companies from its investment portfolio, the process of “naming and shaming” can make headlines around the world. For some commentators, notably Backer (2010), the GPF-G challenges conventional boundaries between private investment and public responsibility for global social and environmental standards. As such, it is both an instrument of long-term national welfare and an expression of Norway’s commitment to global justice; hence, we categorize the fund as a moralist SWF. In contrast to other similar funds found in the West, the Norwegian GPF-G is also enmeshed in the machinery of government and is subject to the play of democratic debate over investment in companies around the world that are deemed to violate widely held national standards. Unlike other similar funds, the GPF-G is not protected from parliament and public opinion through statutory powers invested in its trustees (as is the case of the Australian FF discussed in the previous chapter).
We accept that governments may have a legitimate interest in affecting the nature and scope of the investment of public assets. We also accept that governments may wish to give effect to the values of their citizens through the investment policies of responsible agencies and instrumentalities. These propositions form the background to this chapter: our focus is on the legitimacy and governance of the GPF-G through the system of agencies and institutions that in sum amount to the pension fund. In doing so, we are most concerned with the process of decision-making, rather than the fund’s financial performance. This is because we believe that the apparent bipartisan political support for the GPF-G and its ethical policies relies upon the representation of public interests in investment decision-making and the accountability of the fund to the responsible minister. In this sense, its legitimacy is reliant upon the political process more than on its functionality, if measured in terms of the risk-adjusted rate of return.
In this chapter, we suggest that the governance of the fund reflects a public commitment to procedural democracy and, in particular, what Estlund (2008, 6-7) refers to as “epistemic proceduralism”: the notion that institutional legitimacy is a product of the procedures whereby decisions are made and the correctness of those decisions.
As Norwegian society came to grips with the discovery of North Sea oil and gas reserves in the late 1960s, the government recognized that this wealth would profoundly distort the Norwegian economy and society. The capitalization of resource earnings in the GPF, which was later renamed GPF-G, sought to impose discipline on budget planning in a manner consistent with intergenerational equity. If a rational solution to the costs of short-termism, it is apparent that the application of ethical criteria to investment management transgresses conventional boundaries between professional management and political interest in deliberately integrating global social and environmental standards into the investment process. We seek to show, however, that there is a tension embedded in this policy. Notwithstanding a recent review sponsored by the Ministry of Finance (2008), there are two separate policies under the banner of ethical or socially responsible global investment. One is focused on corporate governance that seeks to affect the market performance of companies, which are managed in ways inconsistent with long-term value, and the other is focused on foreign-listed companies deemed to act in ways inconsistent with widely shared Norwegian expectations of proper behavior.
The Ministry of Finance oversees these policies through an unusual model of investment management. If there are costs associated with the Norwegian governance model, we suggest that the functionality of the investment management process is more likely to be associated with political legitimacy than with the efficacy of financial decision-making. Presumably, any costs associated with this governance system are costs willingly borne by the public, given the significance associated with accountability and the pursuit of shared values in the global arena. In conclusion, this chapter suggests that the opportunity costs of the Norwegian model may be growing as the structure and performance of global financial markets change in ways unanticipated by those who rely upon a historical approach to the issues.