The answer: Funneling the revenues into The Norwegian Government Pension Fund. Currently the fund receives attention not only because it is one of the largest retirement funds in the world, but also due to its newly implemented ethical investment guidelines.
Tore Mydske, representing the Norwegian Ministry of Finance, which is responsible for the fund, answers the ethical questions:
WHY DOES THE GOVERNMENT PENSION FUND HAVE A STRONG ETHICAL PROFILE?
The ethical guidelines were adopted by the Norwegian Parliament in 2004, and are based on two premises. First, the fund is an instrument for ensuring that a reasonable portion of the country’s petroleum wealth should benefit future generations.
So it needs to be managed with focus on generating a sound return in the long term. Second, the fund should not through its investments contribute to unethical acts, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption, or severe environmental degradation.
HOW ARE THESE ETHICAL CONSIDERATIONS OBSERVED?
The ethical basis for the fund is promoted through three different measures. First, it is done through exercising ownership rights in order to promote long-term financial returns. This is done by Norges Bank (the Norwegian Central Bank). Corporate governance is a keyword here, and the bank exercises its ownership rights and voting power, for instance by fighting corruption or poor leadership within a company.
Secondly, it is done through negative screening – selling the shares in companies that produce weapons which may violate humanitarian principles. The focus here is on the products the company makes, not on how the company is run.
Thirdly, it can be done through exclusion of companies where there may be a risk of contributing to serious or systematic human rights violations, severe environmental degradation, gross corruption, or other particularly serious violations of fundamental ethical norms. The decision to sell shares in a company based on negative screening or exclusion is made by the Ministry of Finance.
WHO DECIDES WHAT IS ETHICAL OR NOT?
The ethical framework is anchored in the guidelines adopted by the Norwegian Parliament – with broad political support. The Ministry of Finance commissioned a Council of Ethics to screen the companies the fund is invested in. The council evaluates whether investing in certain companies is consistent with the Parliament’s ethical guidelines. The council gives its advice to the Ministry of Finance, which makes the final decision on whether to sell or not. If deciding to sell, the stocks are sold off quietly in order to not influence the value of the company, and the Finance Ministry’s decision is made public only after all stocks are sold.
HOW MANY COMPANIES HAVE BEEN EXCLUDED TO DATE AND WHY?
17 firms from around the world have been excluded from the fund. Most of these are involved in production of nuclear weapons or key components for cluster bombs.
ARE ETHICAL CONSIDERATIONS MORE IMPORTANT THAN PROFIT?
Often there is no conflict between the two. In terms of corruption, for instance, it is neither ethically nor economically sound to invest in a corrupt company.
WHERE IS THE FUND INVESTED?
To put it simply, the net is cast as widely as possible. We are not interested in risky stocks with short-term gains. This fund is for our children, and for our children’s children, and therefore it is important that we have as low risk as possible. We do this by investing comparatively small sums in a broad array of companies.
This way we follow the larger tendencies in the stock market. A little over half of the fund is invested in bonds and equities in Europe. The rest is spread out over America, Asia, Australia and New Zealand, and South Africa. The fund can hold a maximum of 3 percent of the shares in any company.
WHY ISN’T THE OIL MONEY JUST INVESTED IN NORWAY, SOLVING ALL SOCIAL PROBLEMS?
We want to avoid what is called the Dutch Disease: Historically, nations which have suddenly become very wealthy – particularly from natural resources – have only rarely been able to manage the wealth wisely. This has happened time and time again in the history of the world, and it is therefore absolutely vital for us not to become dependent on – or even addicted to – the wealth the oil has given us.
In the short term, pouring oil money into the Norwegian economy would result in overheating the economy, an inflation spiraling out of control and a large portion of Norwegian industry – the very basis of our current and future economy – would be forced to shut down or outsource.
We also need the money to cover our social security costs in the future. As with most other industrialized countries, we are facing an aging population and vastly increasing costs of pensions. Still, the oil fund will only cover a third of these expenses in the future, so we need to keep the Norwegian economy healthy.
Some oil revenue is already being used today, though. According to a self-imposed “fiscal rule,” the government can use the real return of the oil fund to cover the “non-oil” deficit in the national budget. This real return is stipulated to be 4 percent of the total value of the fund. Still, it is vital that we show temperance and not use too much.
Facts about the Government Pension Fund
• The Government Pension Fund is currently worth more than $196 billion.
• At the end of 2006, the fund is expected to be worth $220 billion. That is approximately $43,000 per Norwegian, up from $1500 per Norwegian in 1996.
• At the current growth rate the Government Pension Fund will be the world’s second largest retirement fund by the end of this year.
• Income from the petroleum sector accounts for 21 per cent of the Norwegian GDP
• 47 percent of Norway’s exports are petroleum related.