The world's largest sovereign wealth fund, Norway's Statens pensjonsfond Utland, has announced that it excluded 73 companies from its portfolio during 2015 — and that it did so because of the harmful environmental and social impact of their activities.

What is a sovereign wealth fund

But let us take a step back: what is a sovereign wealth fund, and why does the Scandinavian state own one (and apply a code of ethics)? In principle, any government has the option of opening a sovereign wealth fund, which is simply an investment fund managed by the public administration. Doing so, however, obviously makes sense only if a country holds substantial liquid assets — which is why it is an attractive opportunity above all for nations that export heavily.

The problem is that these financial bodies are often used solely to maximise profits. Put simply: I sell goods abroad, collect the revenues and reinvest them in financial markets to generate further returns — sometimes without even disclosing (or disclosing only to a minimal degree) what my sovereign wealth fund actually invests in. A case in point is China's China Investment Corp., which operates with very little transparency.

In Norway, an ethics committee has the final say

Norway, by contrast, has chosen to impose rules on its own investments. Its enormous fund — worth no less than 726 billion euros — is governed by the central bank and an Ethics Committee made up of experts in human rights, environmental policy, international law and economics. Over time, the committee has drawn up a blacklist of companies that fail to meet the established social and environmental criteria and in which it has therefore decided not to invest.

The list is substantial. It includes well-known names such as landmine manufacturer Singapore Technologies Engineering, cluster bomb producers such as Textron and General Dynamics, and companies involved in the manufacture of systems linked to nuclear weaponry: from Lockheed Martin to Honeywell International, from Airbus to Boeing.

Among those excluded: Lockheed, Philip Morris, Zte and Wal-Mart

Tobacco giants such as British American Tobacco, Philip Morris and Alliance One International have also been excluded. Other companies have ended up on the blacklist not because of their products, but because of their conduct: retail giant Wal-Mart over matters related to human rights violations, and Daewoo International, Vedanta, Norilsk Nickel and Rio Tinto for the devastating environmental impact of their operations.

Zte, meanwhile, was "banned" over corruption issues, while others were excluded for violations identified in war zones. The names of the new seventy-three companies hit by the Ethics Committee's axe have not yet been made public. However, according to the AFP news agency, they are mainly cement and coal producers, companies that use coal as an energy source, and certain mining groups.

The oil question

It must of course be said that the funds invested by the Norwegians through their sovereign wealth fund come overwhelmingly from oil exports — and oil, as is well known, represents a colossal problem for the environment. Oslo's position could, in this respect, be accused of inconsistency. Yet it is also true that the selection process carried out by the sovereign wealth fund can push some companies to improve their behaviour, so as not to be counted among those deemed too unethical to invest in — thereby triggering a virtuous trend.

Cover photo: Yngve Slyngstad, director of Norway's sovereign wealth fund ©Norges Bank