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Sovereign Wealth Fund Divestment as an Environmental Protection Strategy

In this guest post, one of my doctoral students Asmaa Khadim, who is a Canadian lawyer, presents perspectives on the growing trend for large national funds to divest from particular industries that they consider socially or environmentally problematic. Is this making any positive change? This article explores how in a few cases some signs of influence from such divestment strategies on the performance of companies.

Guest article by Asmaa Khadim

Negotiating Wealth and Accountability - a sculpture in China's affluent city of Hangzhou - Photograph by Saleem H. Ali
Negotiating Wealth and Accountability – a sculpture in China’s affluent city of Hangzhou – Photograph by Saleem H. Ali

Divestment (also known as disinvestment) generally entails the use of economic means to pressure an entity, such as a corporation or government, towards a change in its policies or practices. It usually involves the reduction of an asset to achieve an ethical objective. Organized economic boycotts have been utilized in a variety of situations where the practices of the impugned entity have been deemed to violate the norms of society, such as in the case of the tobacco industry, arms manufacturers and governments that support policies of apartheid. More recently, divestment strategies have made their way into the environmental protection sphere.

The Norwegian government in particular has taken some promising steps toward including environmental concerns as an important consideration when determining in which companies its sovereign wealth fund should invest over the past decade. In 2004, the Norwegian government established the Council on Ethics to ensure that investments are consistent with ethical guidelines. The Council on Ethics obtains risk data from RepRisk Business Intelligence, which monitors companies in the Fund’s portfolio for issues involving severe human rights violations, environmental degradation or corruption. Recommendations made by the Council are then considered by the Ministry of Finance in making decisions about which companies to exclude from the fund.

This protocol was significant given the value of the fund and therefore the potential influence it may wield in the market. For example, the 2010 exclusion of 17 tobacco companies amounted to a $2 billion divestment. The fund, known colloquially as the Oil Fund and formally as the Statens pensjonsfond Utland (or the Government Pension Fund Global), derives its income from wealth produced by Norway’s petroleum sector. The value of the fund is currently estimated at $859 billion US dollars, making it the largest fund in its class in the world.

Section 2(c) of the Ethical Guidelines adopted by the Ministry of Finance provides that the Fund may exclude companies “…if there is an unacceptable risk that the company contributes to or is responsible for…severe environmental damage” (COE website). The application of this provision has resulted in divestment based on environmental considerations totaling nearly $1.2 billion, with companies such as Rio Tinto, Barrick Gold, Freeport McMoran Copper & Gold Inc. and Volcan being removed from the portfolio, and Shell being considered for exclusion.

Naturally, this leads to the question of whether divestment has actually made a difference in terms of inspiring corporations to improve upon their environmental track record. Further research may be required to answer this question. However, the case of DRDGold Limited, a South African mining company, serves as an anecdotal example.

DRD Gold was excluded from the Fund in January 2007 on the basis of serious environmental damage caused by its gold mining operations, albeit through a subsidiary, in Papua New Guinea (Tolukuma mine) and Fiji (Vatukoula mine). The Ethics Council expressed concern regarding the company’s operation in relation to riverine tailings disposal which were believed to have caused “extensive and lasting environmental damage to the riverine ecosystem as well as having far-reaching adverse effects on the local population’s life and health” at Tolukoma (COE, 2006a). The operation at Vatukoula was found to produce significant air and water pollution, thereby potentially inflicting serious and chronic health damage on the population. It is interesting to note that in arriving at its conclusions, the Council also consulted with local NGOs as well international organizations, Oxfam Australia in particular.

The amount divested was approximately $0.6 million, not a considerable sum in the grand scheme of things. However, after Council recommendations were made, the company subsequently announced its decision to close the Vatukoula mine in Fiji. Given the unacceptable risk of severe environmental damage posed by the Papua New Guinea operations, though, this was deemed as insufficient to warrant a change in the Council’s recommendations. The following year, DRDGold sold off its interests in the subsidiary company and sought reinstatement within the Fund portfolio. After the company was deemed to no longer be involved in activities that initially led to its exclusion, it was reinstated to the fund in September 2009.

While engaging in unchecked environmental pollution and then off-loading assets is not an ideal outcome, the fact that DRDGold had to engage in the exercise of reviewing its environmental track record and then meeting the expectations of the Council on Ethics in this regard may serve as a effective tool for raising environmental standards. This may also reflect the underlying power of “naming and shaming” companies, which should not be underestimated. Furthermore, perhaps a desire to remain in the portfolio may serve as sufficient incentive to continue to conduct operations in accordance with accepted international norms.

There is some uncertainty as to what activities will amount to a risk of severe environmental damage sufficient to warrant divestment in the future as, earlier this year, the Norwegian government proposed future structural changes to the sovereign wealth fund that will eliminate the Council on Ethics and bring such decisions under the control of the fund itself. Critics have expressed concern over loss of independence and transparency in determinations involving ethics considerations that may occur as a result of these changes. Nevertheless, the Norwegian experience has revealed some encouraging prospects for the effective use of divestment as a strategy for increasing accountability for severe environmental damage and related human impacts.

Comments

  1. Asmaa Khadim
    Brisbane, Australia
    December 4, 2014, 9:06 pm

    Clyde, the point to be made was that even a “small” divestment was noteworthy in its impact on the decision-making of a mining company with respect to its environmental/human rights record. While 0.14% of the fund as you have calculated it may seem insignificant, this still translates to over $1.2 billion dollars, which is a sufficient sum for a sizeable economic impact on individual companies. Naming and shaming may not work in every instance, yet I have presented an example in the article where it did potentially play a part in DRDGold’s decision-making. Yes, I do agree that it may seem ironic that an oil fund divests from mining companies due to environmental reasons and there has been some related commentary regarding Statoil’s involvement in the Canadian tar sands, but the inclusion of ethical considerations is a positive and responsible step in determining portfolio composition – one that is to be commended. Perhaps the debate might focus on pushing the Norwegian government to be more comprehensive and less selective in its ethical assessments rather than simply writing off the process on the basis of percieved double standards. Finally, you inquire as to the point of the article, and I can only comment that I find such a statement surprising given that the exchange of knowledge and information is never “pointless.”

  2. Clyde Israel
    United States
    November 28, 2014, 3:40 pm

    Divestment to the tune of 0.14% of the fund. Is that noteworthy?
    The fund is known as the Oil Fund, yes there is wisdom in investing in fossil fuels, however, does anyone else see the contradiction – the council divests from a mining company due to environmental concerns.
    Naming and shaming? Many large companies have been named and shamed to no effect.
    What is the point of this article?

  3. colin
    australia
    November 25, 2014, 3:21 am

    mak, I think generalising and saying the words “many large companies” is being a bit harsh etc, because you could say that many large companies also find ways raise human values, engage ethically (regardless of the country they may operate in) and help to bring many millions out of poverty! However you are spot on, it is a very well written and informative article. I am hoping that the author will give more examples as well with more cases of great examples? Colin

  4. mak
    canada
    November 23, 2014, 8:03 pm

    This article is very informative and well written. Many large corporations are very powerful and thry find their ways to damage human values, engage in corruption (violation of human rights, environmental and ethical corruption, bribery, etc), and they must be effectively checked. The steps taken by the Norveign government are praiseworthy. It is hoped that the author of this article will enlighten the readers with more cases and examples in the near future. MAK.