Norway’s $870 billion sovereign wealth fund has always been at the forefront of ethical investing, and its actions have influenced the decision making of other asset managers, big and small. But in the area of shareholder activism the fund has been reticent about how it votes, choosing to reveal its decisions only after it has cast its ballot.
But starting next year the fund will reveal its voting intentions before shareholder meetings, not only to be more transparent but also to influence the debate and the subsequent voting. It will start with a few selected companies, and then cover all the holdings in its portfolio.
“Large institutional investors in Europe have taken the lead in shareholder activism and responsible investing,” says Martin Skancke, head of the advisory council of the United Nations Principles for Responsible Investment and a former chief asset manager for the fund. But US investors have been slow to follow, he and others say. In an age of corporate excess the public stance taken by the fund could spur a new level of shareholder activism not only among Europeans but also in the US.
In recent months the fund has taken unpopular positions, often to be proven right later. It refused to back the auditors at Bank of America, and in early August, BofA agreed to a $16 billion to $17 billion settlement on charges that it knowingly sold toxic mortgage-backed securities. The fund also voted against what it considered excessive pay packages at Goldman Sachs and Morgan Stanley. And it has voted against giant multinationals on a variety of issues, including corporate governance, accountability and labor practices. But while its votes have brought attention to the issues, they haven’t resulted in many changes. Signaling how it will vote on corporate issues and behavior should encourage other activist groups to take a stand. “This is actually quite an exciting development as it will force everyone to raise their game,” Hans-Christoph Hirt, an executive director of UK-based activist group Hermes EOS, told the Financial Times.
The fund has always had an elaborate process for excluding bad actors from its portfolio. An independently appointed ethics council responds to complaints about portfolio companies, conducts investigations in private, invites the company to respond, then decides on its culpability. If it determines that a company is “guilty,” it conveys the decision to Norges Bank Investment Management, which manages the fund. The ethical decision-making process, while comprehensive, is time consuming and costly. It is hoped that the fund’s voting practice, while quite different in goals and strategy from that of the ethics council, will add to its stature as an activist investor.
Yngve Slyngstad, the CEO of Norges Bank Investment Management, has noted that the size of the fund means that it has to invest beyond Norway. But instead of being a passive investor simply seeking the highest returns, it felt it could be socially responsible and still optimize returns.
The fund has generated an annual return of 5.7% since 1998, when Norges Bank Investment Management was established, through the end of 2013. After management costs and inflation, the return was 3.6%. The return in dollars was 6.7%. The fund currently owns stakes in some 8,000 companies in 82 countries.