NORWAY AND SOVEREIGN WEALTH FUNDS

UNCLAS OSLO 001087

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EINV ECON NO
SUBJECT: NORWAY AND SOVEREIGN WEALTH FUNDS

REF: STATE 153075

Sensitive but unclassified--please protect accordingly.


1. (SBU) Summary. In a November 5 briefing to the diplomatic
corps, the Ministry of Finance DG reviewed Norway's approach
to Sovereign Wealth Funds and the status of Norway's
approximately $350 million Global Fund (formerly known as the
Pension Fund). He said that Norway's application of the
Ethical Guidelines, which has heavily impacted US companies,
is not ideal and an upcoming evaluation may help improve
them. The DG also explained that Norway is considering
possible divestments from companies building pipelines in
Burma. Finally, he noted the possibility of positive
investments in companies promoting the public good. End
Summary.

Overview of the Fund
--------------

2. (SBU) Martin Shanke, DG at the Ministry of Finance,
explained that petroleum drives the Norwegian economy. It
accounts for 25% of GDP, 38% of government revenue, 24% of
investment and 51% of exports. With the growing shift from
oil to gas, the Norwegian economy will depend more on a
smaller set of clients.


3. (SBU) The money that the GON has made from petroleum has
been, since 1990s, invested in a fund which is fully
integrated in the state budget. The revenues come into the
government and then are shifted to the Global Fund. The Fund
in turn invests the money abroad and transfers to the state
budget the amount needed to cover the non-oil budget deficit.
A fiscal policy guideline provides that over time, the Fund
should not transfer to the state more than the expected real
return of the Fund, estimated at 4%.


4. (SBU) At present, the Fund invests 60% in equities and 40%
in fixed income assets. Within each category, there is a
fixed allocation of how much goes to each geographic area
based on the capitization values of each area. 35% is
invested in the Americas (and Africa). Overall, the Fund
invests in about 7,000 companies worldwide. The Fund is the
largest single investor in Europe.


5. (SBU) Shanke explained that the Fund is looking at
beginning real estate investments and will present a proposal
to the Parliament on this in the Spring. If the decision is
made to move forward with these investments, money in fixed
asset investments will be drawn down.

Ethical Guidelines
--------------

6. (SBU) Moving to the Ethical Guidelines which have been a
source of controversy, Shanke said that the Fund has a
negative screening process as well as an ad hoc review
process. The negative screening is designed to weed out
companies who handle "weapons that through their normal use
may violate fundamental humanitarian principles" which he
identified as weapons such a cluster munitions or nuclear
weapons. (Note: it is as a result of this screening that
Norway divested from several American arms manufacturing
companies.)


7. (SBU) An Ad-hoc exclusion is made when a company is
considered to have "serious violations of fundamental ethical
norms." (Note: Walmart was excluded under this provision.)
Shanke claimed that exclusions only happen after the Ethical
Council tries and fails to get the company to change its
practices. The Council then recommends exclusion to the
Ministry. The Ministry then asks the Central Bank (the
technical owner of the shares) whether the company is likely
to be amenable to dialogue. If the Central Bank says no, the
Ministry orders divestment. (Comment: In the Walmart case,
we don't recall the Central Bank's effort to mediate with
Walmart. This may indicate that the Central Bank said any
effort would be fruitless. Alternatively, perhaps this
process was not followed. End Comment.) To date, the Fund
has excluded 21 companies, 12 of them are American.


8. (SBU) In response to a question from Emboff which
suggested that companies that operate transparently and in
open economies may be discriminated against, Shanke agreed
that that could happen and that the process is second-best.
In the 1990s, his Ministry had argued against an ethical
screen because of this problem. Today, with more information
available, he thought the system was good enough. He pointed
out that an evaluation of the whole process in 2008 may lead
to fine-tuning. He welcomed engagement with others on this
issue. Finally, he noted that more transparent companies are
often easier to engage and so it is more likely that the
Central Bank would evaluate them as amenable to
negotiations-something which might offset the initial
discrimination.

Investments in Burma
--------------

9. (SBU) Turning to the growing domestic political pressure
for the Fund to divest from companies doing business in
Burma, Shanke explained that the Ethics Council has
determined that if companies build large gas pipelines in
Burma they will likely be involved with the Burmese Armed
Forces and thus probably undermine human rights. Thus, if a
company builds a pipeline in Burma, the stage is set for
possible divestiture from that company. The companies at
risk include Total, Daewoo and PetroChina.

Positive Screens?
--------------

10. (SBU) Finally, Shanke explained that there is growing
interest in positive screens whereby the Fund picks out
special areas in which to invest based on ethical
considerations. One area under discussion is investments in
environmental technology.

Norway Welcomes Sovereign Fund Discussions
--------------

11. (SBU) Shanke said Norway welcomed dialogue on Sovereign
Wealth Funds and looked forward to international discussions
which would help shape rules for the funds in general as well
as perhaps share best practices on ethical guidelines. He
provided a position paper on Sovereign Wealth Funds which is
being emailed to the desk along with his powerpoint
presentation.
JOHNSON