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June 16, 2006
Norwegian Government Pension Fund Dumps Wal-Mart and Freeport on Ethical Exclusions
    by Bill Baue

The $230 billion global fund--one of the largest pension funds in the world--cited Wal-Mart for systematic human rights violations and Freeport for serious environmental damage.


Last week, the Norwegian Ministry of Finance announced its divestment of two companies--Wal-Mart (ticker: WMT) and Freeport McMoRan Copper and Gold (FCX)--from the global portfolio of the Government Pension Fund based on recommendations by its Council on Ethics. The fund excluded both companies for contravening Point 4.4 of its Ethical Guidlelines that "constitute an unacceptable risk of the Fund"--Wal-Mart for "complicity in serious or systematic human rights violations" and Freeport for "severe environmental damage."

The Freeport exclusion represents the first time the fund has invoked the environmental damage provision, while the human rights provision was cited in a call to divest from Total (TOT) late last year for complicity in human rights violations in the Yadana gas pipeline in Burma that the Ethics Council denied. The $230 billion fund, which on the first of this year merged the National Insurance Scheme Fund and the Government Petroleum Fund, has divested from 17 companies since the latter adopted broad socially responsible investing (SRI) criteria in 2004. An environmental fund that initiated screening based on Ethical Investment Research Service (EIRIS) recommendations spun off in 2001 from the Petroleum Fund, which invests surplus oil revenues, and reintegrated in 2004 when the overall petroleum portfolio committed to SRI.

"An extensive body of material indicates that Wal-Mart consistently and systematically employs minors in contravention of international rules, that working conditions at many of its suppliers are dangerous or health-hazardous, that workers are pressured into working overtime without compensation, that the company systematically discriminates against women in pay, that all attempts to unionize by the company's employees are stopped, that employees are in a number of cases unreasonably punished and locked in, along with a number of other circumstances," states the Council of Ethics in its November 15, 2005 recommendation. "What makes this case special is the sum total of ethical norm violations, both in the company's own business operations and in the supplier chain."

"It appears to be a systematic and planned practice on the part of the company to hover at, or cross, the bounds of what are accepted norms for the work environment," continues the Council, which was founded in 2004. "Many of the violations are serious, most appear to be systematic, and altogether they form a picture of a company whose overall activity displays a lack of willingness to countervail violations of norms in its business operations."

Norges Bank, the state-owned bank that manages the fund, recommended engaging in shareowner dialogue (or "exercising the fund's ownership rights") with Wal-Mart to try to induce positive change. However, Wal-Mart did not inspire confidence in this method when it failed to answer a letter the bank sent in September 2005 asking the company to respond to the allegations of human and labor rights violations compiled by the Council since it began investigations in June 2005.

The Business and Human Rights Resource Center, an independent nonprofit that seeks to achieve balance by inviting companies to respond to reports posted on its website that criticize their conduct, posted a June 7 Reuters article on the divestment decision. The company has yet to post a response. Wal-Mart spokesperson Gail Lavielle did not respond to SocialFunds.com's request for the company's position on the divestment decision.

While the fund strongly supports the use of shareowner dialogue to encourage companies to move on social and environmental problems, it considered Wal-Mart a hopeless case.

"In light of the Council's recommendation, the Ministry of Finance finds it unlikely that exercising the Fund's ownership rights vis--vis Wal-Mart will sufficiently reduce the risk of the Fund contributing to ethically unacceptable conduct, as this is defined in the Ethical Guidelines," stated Minister of Finance Kristin Halvorsen, a member of the Socialist Party that took office last year. "I would also recall that the Council on Ethics is mandated to monitor companies excluded from the Fund's investment universe to determine whether a basis for exclusion still exists."

The fund recently extended EIRIS's contract to include corporate news monitoring service on ethical issues. If news accounts show Wal-Mart reforming sufficiently, the fund can reinvest.

The Freeport exclusion was based on allegations that the company has caused extensive environmental damage by disposing of tailings including arsenic, cadmium, and mercury from its Papua, Indonesia copper mines into a natural river system. Unlike Wal-Mart, Freeport responded to Norges Bank's letter requesting explanation, stating the allegations are "utterly false" and appear "to be based largely on outdated information or biased reports issued by non-governmental organizations who are anti-mining or have a political agenda."

"Freeport denies the accusations made against the company, but chooses not to present data, test results, or other concrete information or scientific evidence which might substantiate its claims that the mining operation does not cause severe and lasting environmental damage," states the Council in its February 15, 2006 recommendation.

After the fund requested divestment in late March 2006, Norge Bank dumped 2.5 billion Norwegian crowns (about $416 million) in Wal-Mart shares, and about 116 million crowns in Freeport shares by the end of May.

Shortly after the fund publicized its move, the UK Social Investment Forum (UKSIF) announced a new two year program to encourage pension funds to analyze environmental, social, and governance (ESG) issues in their investment decision-making. The program focuses both on pension funds at companies identified as corporate social responsibility (CSR) leaders and on government pension funds. Later this year, UKSIF will survey ESG considerations incorporated by pension funds of around 300 UK listed companies, including those in the FTSE4Good Index and the Carbon Disclosure Project's Climate Leadership Index. The goal of this project is to inspire uptake of SRI by identifying best practice by pension funds.

The activity of the Norwegian Government Pension Fund exemplifies exactly the kind of engagement and action UKSIF wishes to spotlight.

 

 
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