* Central bank should decide on which firms to avoid-report
* Critics says this will weaken ethical stance of fund
* The central bank runs the sovereign wealth fund
* Report calls for research on ethical impact on returns
By Gwladys Fouche and Joachim Dagenborg
OSLO, Nov 11 The ethics panel that decides which
firms Norway's $800-billion wealth fund should avoid should lose
its independence and become part of the central bank, a report
said, a shift critics said would undermine the fund's ethical
The report by a government-appointed commission also called
for more research on the performance of ethical investments,
saying a lack of such studies made it difficult to assess how
the fund's stance compared with other strategies.
The fund, which is run by the central bank, is the world's
richest sovereign wealth fund and holds about 1.25 percent of
all global equities. Its decisions are closely followed by
Its exit from its investment in Walmart, the world's
largest retailer, in 2006 for alleged breach of human rights and
labour rights led to other funds doing the same, including
Sweden's four national pension funds and the Netherlands' PGGM
pension fund. Walmart declined to comment on the decision at the
The fund is not allowed to invest in some industries -
tobacco, nuclear arms, anti-personnel landmines and cluster
bombs. Nor can it invest in companies involved in serious or
systematic human rights violation.
The commission said making the independent panel, the
council on ethics, part of the central bank would speed up
decisions on exclusions and ensure more consistency - the fund
has its own ethical strategy, separate from the panel's, which
covers different areas of concern.
Oeystein Doerum, chief economist at Oslo-based bank DNB
Markets, said such a reform could lead to fewer companies being
excluded on ethical grounds.
"The more independent the council on ethics is, the better,"
Doerum told Reuters. "In other words, it should not be made into
a section of the Norwegian central bank.
"If anything, a less independent ethics council could lead
to more conservatism - i.e. fewer exclusions."
The fund, which invests in about 7,500 companies, has
excluded about 60 firms so far, including Lockheed Martin
, Boeing or Philip Morris.
Currently the five-strong council on ethics decides which
companies should be excluded, subject to approval from the
ministry of finance. The approval process can often take several
The commission said if the panel became part of the central
bank, it would not require the approval of the ministry, thereby
speeding up the exclusion process.
It said it would also bring it into line with the fund's own
separate ethical strategy which it pushes with the companies it
invests in, including issues such as the equal treatment of
shareholders, board accountability, climate change, water
management and children's rights.
Non-governmental organisations roundly criticised the
"There needs to be a strong and independent player who
performs the screening of a company and comes with a
recommendation about the impact it should have on an
investment," Beate Ekeloeve-Syldal of Amnesty International told
"If the independent investigation of serious conditions in a
company is left to the fund ... I think it will undermine the
oil fund's credibility when it comes to ethical guidelines."
Svend Soeyland of environmental group Bellona said: "This
will make it more difficult for NGOs to make complaints about
specific companies. There would be less openness and what we can
do would be less."
The commission said it was difficult to assess whether the
Norwegian fund, whose wealth stems from taxes on Norway's
offshore oil industry, would have made more money if it did not
have an ethical stance.
Many sovereign wealth funds do not disclose their results,
like the Norwegian one does every quarter, nor do they have an
And the pension funds that do have an ethical dimension,
such as those in Canada, New Zealand or the Netherlands, have
different ethical guidelines than the Norwegian fund, or are
much smaller in size.
Some academic research on so-called sin stocks - shares in
industries such as gambling, tobacco and liquor - suggest they
return more money than ethical stocks on a risk-adjusted basis.
But if they constitute only a small part of a fund's
portfolio, then they do not affect overall performance.
"The Norwegian fund is so big and is growing bigger and
bigger. Small investments will not make a big difference on the
return of this fund," said commission member Laura Starks, a
professor of finance at the University of Texas at Austin.
"It is like a giant ship. It is more affected by the
fluctuations of the world economy," she told Reuters.
She and her fellow members called on the fund to finance
independent research on the impact of responsible investment
practices on portfolio value.
The finance ministry will decide whether to accept the
commission's recommendations and will publish a review of the
fund in spring next year.