In an audition for the role of villain in the world's financial markets, sovereign wealth funds would have pushed sub-prime mortgages close in recent months. Huge, government-controlled investment pools from Abu Dhabi to China have helped to rescue Wall Street banks left short by the credit crisis and still managed to leave Western governments feeling spooked. Their worry: the funds swollen with foreign-currency reserves or billions in profits from oil and gas might be hiding dark political motives behind fuzzy financial aims.
It's an easy fear to hype, given how opaque these funds tend to be. But even the most conspiracy-minded find it hard to work themselves into a panic over Norway's Government Pension Fund-Global. That's not to say it's lacking in clout. With assets of $382 billion at the end of March, it's the world's second-largest sovereign wealth fund, trailing only the Abu Dhabi Investment Authority, which weighs in at about $875 billion. Norway's fund, flush with money from the nation's oil and gas, has stakes in 7,000 firms from Google to Goldman Sachs, Deutsche Post to PetroChina. Astonishingly, the fund now owns about 1% of the entire European stock market, and close to 0.5% globally.
Despite that economic muscle, it's unlikely to offend anyone, not least because it's unusually open about its agenda. The fund's managers publish an annual report making clear their interest in financial not political returns. And with Norway's central bank left alone to run the fund, the role of the country's government in deciding its broad strategy and monitoring its performance is clearly defined. Such measures have made the fund the industry's gold standard. In a recent study by the U.S.-based Peterson Institute for International Economics, Norway's fund scored 100% for governance, as well as accountability and transparency. The Government of Singapore Investment Corp. averaged just 40%; the Abu Dhabi Investment Authority trailed with 2%.
Crucial to achieving that kind of reputation is the Norwegian fund's commitment to ethical investing. Keeping to guidelines it set down in 2004, the fund pledges to press firms it invests in to improve the protection of human rights particularly those of child workers and to be environmentally conscious. That social and ecological responsibility, the fund insists, is key to safeguarding its own financial returns. Take children's rights. If children are denied schooling and forced to earn a living prematurely, they grow up to be less productive workers with fewer skills. While a current employer may benefit from their cheap labor, future employers will lose out. For Norway's fund, it's a concern both ethically and economically that "the action of one company may influence the profitability of another," says Yngve Slyngstad, CEO of Norges Bank Investment Management, the part of Norway's central bank that runs the fund.
Slyngstad's team of 188, which includes 11 people focused solely on corporate governance issues, consciously leverages the fund's rights as a major shareholder. Last year, the fund contacted several companies in its portfolio with operations in India's agricultural sector, urging better controls on child labor. Similarly, talks are ongoing with firms in Brazil's mining and steel industries. The fund has also sent to the boards of about 30 firms a document it published with the help of UNICEF and Save the Children, setting out its expectations regarding children's rights.
In extreme cases, though, urging change isn't enough to satisfy the fund's ethical guidelines. Since 2002, Norway's Ministry of Finance has stepped in and asked the fund to dump 27 holdings in which it had invested a total of over $2 billion. The vast majority got the boot for their role in producing weapons that the fund views as particularly inhumane; in 2005, for instance, it sold off stakes in Britain's BAE and Boeing for their part in the manufacture of nuclear weapons. The remaining firms put the fund at risk of contributing to serious breaches of human rights, or severe environmental damage. Citing "systematic" violations of human and labor rights in its business and its supplier chain, the Ministry excluded Wal-Mart from the fund in May 2006. (The retailer said the claims were based on inaccurate and outdated information.) Such exclusions are "in one sense, an admission of defeat of the corporate governance effort," says Slyngstad. "When you're no longer an owner, you no longer have influence."
Whatever the fund's well-meaning guidelines, policing them across such a sprawling portfolio is ultimately impractical. "Is any one of these 7,000 companies behaving in ways that you would not be comfortable with?" asks Slyngstad. "Yes, of course." But his team, which is spread between Oslo, London, Shanghai and New York City, tries to use its heft strategically for example, to pressure firms in a sector like Brazilian mining, in which exploitation of child labor persists. Nor will the environmentally unfriendly origins of the fund's cash prevent it from pressing for better ecological standards. Last year, for instance, the fund voted in favor of a shareholder push for U.S. oil major ExxonMobil to adopt emission-reduction goals. Hardly the actions of a rapacious villain.