The Norwegian Government has been given a second chance to put its money where its ethical mouth is. Earlier this week, a coalition of scientists, environmentalists, and Nigerian community representatives petitioned Norway’s Government Pension Fund to divest from Royal Dutch Petroleum, claiming that the company is violating the Fund’s Ethical Guidelines by causing severe environmental damage through oil spills in the Niger Delta. Norway should accept the complaint and divest, or risk undermining its public commitment to responsible investment and breaching its own Ethical Guidelines.
The Fund, which is reported to be largest sovereign wealth fund in the world and an influential global investor, subjects its investments to an ethical screen that is meant to prevent Norwegian public money from financing human rights abuses, environmental degradation, war crimes, and the trade in certain destructive products like weapons and tobacco.
Norway’s Council on Ethics investigates companies in the Fund’s portfolio and, based on its research, can recommend divestment if there’s an unacceptable risk that the company’s activities will make the Fund complicit in unethical behavior. However, the recommendation is not binding; the Norwegian Ministry of Finance can decide to ignore the recommendation entirely, or to prescribe other courses of action, like active shareholder engagement.
The system has often worked well. The Fund has divested from a number of mining and timber companies based on human rights and environmental concerns; the list of excluded firms even includes Wal-Mart, which was pegged as a violator of labor rights. It has also divested from arms dealers and tobacco manufacturers. The Fund was even able to take a position on the Israeli occupation of the West Bank, excluding from its portfolio companies that it deemed to contribute to violations of the law of war. In a number of other cases, where the Ministry was unwilling to divest completely, it agreed to put companies under observation or practice active ownership with the aim of inducing them to improve their objectionable practices.
The Norwegian Government’s commitment to ethical investment was questioned last year, however, when the Ministry declined to act on a recommendation to divest from PetroChina based on human rights abuses associated with its affiliate’s actions in Burma. This is the first known time that the Ministry has completely disregarded a Council recommendation. The Council had previously shied away from recommending exclusion for major companies associated with Burmese natural resource development, noting that human rights abuses had occurred in the past but concluding that such abuses were likely to occur in the future only in connection with infrastructure projects and during the construction stages of on-shore pipeline projects.
In the case of PetroChina, the Council decided that these conditions had been met – the company’s Burmese affiliate was building an on-shore gas pipeline through regions wracked by ethnic conflict, leading the military to intervene in an effort to secure the pipeline corridor. Yet the Ministry demurred, declining to comment on the abuses but finding only that PetroChina couldn’t be held responsible for its affiliate’s actions. This rationale ignored the Council’s factual conclusion that PetroChina, its Chinese state-owned parent CNPC, and other affiliates acted as coordinated branches of a single company rather than as independent entities.
As I argued in a previous post, the Ministry’s decision appears to have been driven by political calculation – a desire not to offend China – rather than by a principled application of its own ethical commitments. Which raises the question, what will it do in the face of the Nigerian petition? On one hand, a recent UNEP report described extensive contamination at Shell sites in Ogoni territory and criticized its remediation methods. Moreover, Shell recently conceded liability for two massive Niger Delta oil leaks in 2008 and 2009 in litigation in the U.K. It seems hard to avoid the conclusion that Shell has a hand in the devastating pollution in the Delta, and that the company is not taking reasonable measures to clean up its act. Moreover, just last year, Shell barely averted a potential disaster in Norway when all but one of its outflow barriers failed at a seabed oil well due to management, risk assessment, and reporting failures.
On the other hand, divestment could be a political minefield for the Norwegian government. In 2010, not long after the Deepwater Horizon blowout in the Gulf of Mexico, Norway authorized Shell to drill in a new, similarly deep-water region about 33 kilometers off its coast. The country’s Petroleum Directorate has been desperate to attract oil companies to prospect in controversial areas off the northern coast in order to boost its falling production numbers; one of the interested parties is Shell.
Significantly, despite many similarities between the impacts of oil companies and miners, the Fund has never divested from the former while repeatedly excluding the latter. The money in the Fund itself comes from Norway’s surplus oil revenues, which leads me to wonder, will the Ministry ever approve divestment from Big Oil? Can the Norwegian government uphold its Ethical Guidelines if that means biting the hand that feeds it?