19 November 2011

Norway: Saving rainforests with one hand, destroying with the other

“It has long been a fact: Norway is saving rainforest with one hand and destroying the rainforest with the other,” wrote Lars Løvold of Rainforest Foundation Norway recently. The problem is that while Norway has promised billions to save the rainforest, the Government Pension Fund Global (GPFG) is investing in companies that are destroying the rainforests

By Chris Lang | REDD-Monitor | 16th November 2011

Norway: Saving rainforests with one hand, destroying with the otherThe US$525 billion GPFG is often referred to as the Oil Fund, because the money came from Norway’s income from oil. The Fund is managed by Norges Bank Investment Management, an arm of Oslo’s central bank whose chief executive is Yngve Slyngstad. Løvold writes that, “Finance Minister Sigbjørn Johnsen and Oil Fund manager Yngve Slyngstad have greater influence on the rainforest than the Minister for Environment and International Development, Erik Solheim.”

Løvold’s article came shortly after a letter from Rainforest Foundation Norway and the Environmental Investigation Agency to Norway’s prime minister, Jens Stoltenberg. The letter notes that Norway agreed in Cancún to address its role in driving deforestation. Although several companies have been excluded from the GPFG on ethical and environmental grounds, the Fund’s investments remain Norway’s biggest contribution to deforestation.

Rainforest Foundation Norway and EIA make two recommendations. First, to set up an inter-departmental working group to ensure that GPFG investments are be compatible with reducing deforestation, rather than increasing it. And second, to commission a study on how GPFG’s investments drive deforestation and what can be done to change this.

Norway’s Government Pension Fund Global is both the largest and the most transparent sovereign wealth fund in the world. Thanks to Norway’s freedom of information laws, the letter and the briefing from Rainforest Foundation Norway and EIA are publicly available. They are posted in full below.

Prime Minister Jens Stoltenberg


Proposals for improved policy coherence to safeguard Norway’s reputation as a global leader in responsible investment and reducing emissions from deforestation and degradation (REDD+)

Dear Prime Minister Stoltenberg

We are writing to inform you of how Norwegian Government Pension Fund Global (GPFG) investments in deforesting industries threaten to undermine Norway’s reputation as a responsible investor and leading supporter of global efforts to reduce emissions from deforestation and degradation (REDD+). We also propose, below and in the enclosed paper, constructive and pragmatic measures to resolve these issues, while enabling Norway to meet its international climate and biodiversity commitments.

Since you launched Norway’s International Climate and Forest Initiative (NICFI) at the 13th UNFCCC Conference of the Parties in Bali in 2007, your government has, laudably, committed significant budgetary and political capital to REDD+ efforts worldwide, and in key countries such as Indonesia. As you have rightly explained in global fora, the sad reality is that “in today’s global markets, forests are worth more dead than alive”. Environmental Investigation Agency (EIA) and Rainforest Foundation Norway (RFN) commend your leadership in Norway’s support for REDD+ – an initiative seeking to reverse the perverse financial incentives that drive deforestation.

However, we feel compelled to advise you that, in recent years, the GPFG has invested significant and growing capital in the very sectors responsible for the great majority of the world’s deforestation, and, controversially, in many of the very logging, plantations, and mining companies currently devastating forests in the countries the NICFI is supporting with REDD+ funding.

EIA’s research, for example, reveals that in 2010 the GPFG profited five times more from, and invested three times more new capital in logging, plantations, and mining companies currently deforesting large areas of Indonesia than the 30 million USD that NICFI provided to Indonesia under the Letter of Intent (LoI) on REDD+. Many of these firms operate without required permits in the REDD+ Pilot Province established by Indonesia under that country’s bilateral agreement with Norway.

Sadly, such contradictions make any claim that Norway seeks and supports the reversal of financial incentives in favour of forest conservation and forest governance reform ring very hollow indeed.

This year Norway’s Government Pension Fund Global (GPFG) became the largest sovereign wealth fund worldwide, whilst proclaiming leading responsible investment practices. However, the scale of crime, corruption, and impunity in the plantations and mining sectors we have identified the GPFG is invested in – problems explicitly recognised by senior Indonesian officials and built into the LoI with Indonesia – places the fund’s responsible investor status into undeniable and very public doubt.

It is our opinion that a policy coordination deficit is producing policy coherence deficits that undermine your government’s interests. As currently mandated, the GPFG’s managing institutions are neither capable of reflecting nor supporting Norway’s investments in REDD+, or of credibly practicing Norway’s proclaimed responsible investment principles.

The Fund’s managers, NBIM, operate within highly restrictive index-linked profitability and risk parameters, with no regard to forests. The Council on Ethics is forbidden to consider or act in support of REDD+, has limited capacity, and no formal guidance on what environmentally responsible investment means. The Environment Ministry has no input into the Fund’s deployment, merely observing as its investments in Norway’s strategic REDD+ goals are dwarfed by the GPFG’s huge and rapidly growing investments in systematic forest destruction and degradation.

While NICFI funds promote the establishment of inter-departmental coordination agencies in REDD+ partner countries such as Indonesia, reciprocal REDD+ policy coordination in Norway itself seems completely absent. To an increasing array of observers, it seems Norway’s left hand is ignorant of what its right hand is doing, highlighting serious financial inefficiencies that would likely alarm Norwegian citizens, whose taxes are funding the NICFI to compete, against the odds, with the GPFG.

At the UNFCCC Conference of Parties in Cancun, Mexico, in December 2010, Norway agreed to address its role in driving deforestation, agreeing to Decision 1/CP.16, paragraph 68, which encourages all Parties to: “find effective ways to reduce the human pressure on forests that results in greenhouse gas emissions, including actions to address drivers of deforestation”.

In Norway’s case, by far the biggest contributor to international deforestation is the GPFG, and the Cancun Agreements, therefore, create a clear obligation, and opportunity, for your government to examine how the Fund plays a role in driving deforestation and, subsequently, how this can be mitigated. We advise the following two strategic interim measures to begin this process:

  1. Establish an Inter-Departmental Working Group tasked with ensuring the GPFG’s investment practices are reformed to help Norway meet its Cancun Agreements commitments on REDD+. We have provided further recommendations on how this might be done for the Working Group to draw on, in the attached paper.
  2. Mandate this Working Group to immediately commission a strategic study on the GPFG’s role in driving deforestation across all sectors, and how this can be mitigated through reform.

Implementing these interim measures before the UNFCCC COP 17 in Durban will send a strong signal that Norway is committed to meet REDD+ commitments made in Cancun, whilst also arming your government with progressive policy reforms to present at the June 2012 Rio+20 conference on sustainable development, again safeguarding Norway’s positive environmental reputation. Simultaneously, these measures are domestically justified in the pursuit of continuous improvement of Norway’s responsible investment practices, and coherent cross-government budgetary efficiency.

We hope this information and our recommendations will be of use to you and your government, and thank you in advance for the keen attention of your office in these important matters.

Yours sincerely,

Sigbjørn Johnsen,
Minister of Finance
Erik Solheim, Minister of Environment and Development
Hilde Singaas, Secretary of State, Ministry of Finance
Pål Haugerud, Director General of the Asset Management Department, Ministry of Finance
Hans Brattskar, Director General for International Climate Policy, Ministry of Environment
Per Fredrik Ilsaas Pharo, Director, Norway’s International Climate and Forest Initiative (NICFI)
Yngve Slyngstad, Chief Executive Officer, Norges Bank Investment Management (NBIM)
Villa Kulild, Director General, NORAD
Ola Mestad, Chair, Council on Ethics for the Government Pension Fund – Global
Eli Lund, Executive Head of Secretariat, Council on Ethics

Policy Recommendations for the Reform of the Government Pension
Fund Global (GPFG) to meet Commitments under the Cancun
Agreements on Addressing Norway’s Role in Driving Deforestation.

Environmental Investigation Agency (EIA) & Rainforest Foundation Norway (RFN)
October 2011

EIA and RFN have recommended two strategic interim measures Norway should immediately take to address the role the GPFG plays in driving deforestation and forest degradation, so as to be able to meet the country’s commitments under the UNFCCC Cancun Agreements and maintain the country’s role as a leader in the fields of responsible investment and climate change. These are:

  1. Establish an Inter-Departmental Working Group tasked with ensuring the GPFG’s investment practices are reformed to help Norway meet its Cancun Agreements commitments on REDD+.
  2. Mandate this Working Group to immediately commission a strategic study on the GPFG’s role in driving deforestation across all sectors, and how this can be mitigated through reform.

Below, EIA and RFN suggest further policy measures which; 1) the Inter-Departmental Working Group might consider under any mandate given to it, and which; 2) may be assessed under the strategic study, and 3) should be considered by the Ministry of Finance.

To the Council on Ethics:

Increase Capacity & Efficiencies:

The huge growth in the number of GPFG company equity holdings means the Council on Ethics has no chance of credibly performing the role placed on it by NBIM, the Finance Ministry, and Norwegian society – that of ensuring investments are responsible and comply with the Ethical Guidelines. Measures to resolve this include:

  • Increase the budget and staffing capacity of the Council on Ethics, so it may handle more cases passed up to it from the Secretariat.

    The Secretariat is able to outsource many of its research and investigative functions, giving it more capacity than its internal staffing would suggest. However, the Council on Ethics itself cannot outsource its functions, and subsequently its ability to absorb the required workload is limited.

  • Create specialist sub-committees within the Council on Ethics focusing on specific areas of the Ethical guidelines, such as environmental damage and human rights violations. This will enable the Council to more efficiently respond to the case load passed up to it from the Secretariat.
  • Identify high risk sectors where the occurrence and scope of forest destruction is particularly high, and mandate the Secretariat to systematically review all investments in these sectors for compliance with expanded ethical guidelines.

    Such high risk sectors may, and should include as a minimum forestry and plantations, mining, pulp and paper, meat production and oil and gas extraction in rainforest areas, and hydro-electric schemes.

  • Establish & communicate clear and efficient time-frames for Council Secretariat company investigations and companies’ “right to reply”.

    Council Secretariat investigations into company compliance with the Ethical Guidelines take too long, and are not capable of reflecting the urgency that Norway says is required to reduce emissions from deforestation and forest degradation. For example, it took nearly three years for the decision to divest from Samling Global to be made. Without reducing the thoroughness of the Secretariat’s work, the Secretariat should be mandated to set clear timeframes for companies to respond to Secretariat requests for information, or exercise their “right to reply”.

    Develop proxies for measuring compliance with the ethical guidelines relating to the environment and legality, and apply these to high risk sectors and countries.

    For example, in Indonesia, many companies clear forest and develop plantations before receiving forest relinquishment permits from the ministry of forestry. This is illegal, but, sadly, common, and the GPFG has a stake in many such companies. The Council on Ethics should use compliance, or non-compliance with laws such as these – on a sectoral level – to make its recommendations on divestment.

Put Flesh on the Bones of the Ethical Guidelines

Measuring company performance against the Ethical Guidelines is the main tool and only official task of the Council on Ethics in performing its role of providing “responsible investor” status to the GPFG portfolio as a whole. However, the Guidelines are skeletal, particularly with regard to environmental provisions.

Measures to address this deficiency may include:

  • The Council on Ethics must be provided with clear guidance on what constitutes “severe environmental damage”.

    Severe environmental damage” is the only environmental provision currently included in the Guidelines. Yet it is not defined or explained at all, rendering the provision open to subjective interpretation.

  • Wider guidance on “severe environmental damage” must clearly and explicitly outline acceptable and unacceptable levels of deforestation and forest degradation and their associated carbon emissions.

    EIA and RFN have been informed by relevant staff that the secretariat do not know what level of deforestation, for example, would constitute “severe environmental damage”, rendering the provision potentially meaningless.

  • Develop ethical guidelines on transparency and information provision.

    The Council Secretariat has complained that companies often refuse to provide basic information during investigations – often undermining the ability of the Council on Ethics to perform its function. Failure to comply with requests for basic information, such as on legal permits, should be deemed grounds for disengagement or divestment.

  • Explicitly build legal reciprocity into the Ethical Guidelines.

    The basis of exclusion of companies detailed in the Ethical Guidelines should explicitly state that company assessments will reciprocate the laws of the countries in which the companies or their subsidiaries operate, and that the Council Secretariat is obliged to seek evidence of the legal base and legal compliance of relevant companies from the governments of the countries in which they operate. Such a mechanism should be deployed on a sectoral basis, in high risk sectors and countries.

To Norges Bank Investment Management:

Responsible Investment, not Responsible Divestment:

  • Pre-screen all potential new investments in the high risk sectors identified by the Council on Ethics.

    For in-vestments to be responsible, screening must take place before equity is vested to the GPFG. Currently, this is not the case, meaning that Norway’s claim to be a responsible investor is misleading. In fact, Norway, occasionally, makes responsible di-vestments. NBIM should be mandated to change its approach, particularly given its mandate as a long term investor.

Rules on the Exercise of Ownership:

  • Establish sustainable management of forests as a priority area for the work on exercise of ownership.

    Create a document of expectations, including provisions on the transparent disclosure of relevant information, for all companies with a potential impact on forests, focusing on environmental and social sustainability, and, importantly, legal and operational compliance with national laws. Actively try to influence relevant sectors, companies, and the countries within which they operate.

  • Be transparent about which companies NBIM is in dialogue on ethics with, and the main issues of the dialogue.

    Such a model is already employed by the Swedish Pension Funds, and is therefore not an exercise in market manipulation.

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