Balancing conscience and profit with Norway's wealth (Norway)
OSLO: Martin Skancke is director general of the Norwegian Ministry of Finance and head of the asset management department. In this capacity,
Skancke, a 42-year-old former McKinsey management consultant, has responsibility for Norway's sovereign wealth fund. Known as the Government Pension Fund - Global, it began in 1996 investing the proceeds of Norway's excess oil and gas revenue for future generations.
The fund has $400 billion in assets, about equal to Norway's gross domestic product, and will be worth around $1trillion in 2020, according to internal estimates. It is thought to be the world's second-largest such fund, after the Abu Dhabi Investment Authority, which does not publish its assets.
In his office in Oslo, Skancke spoke recently about ethical standards and transparency, two areas where Norway is trying to break new ground for sovereign wealth funds.
The purpose of the fund is to maximize profit. But surely there is a contradiction between, for instance, investing in clean-energy companies and maximizing returns for the Norwegian nation?
As owners, it is legitimate for us to have a broader set of perspectives. In particular, it is legitimate for us to avoid contributing to unethical acts through our investments. This is important to preserve the legitimacy of the fund. We are asking the Norwegian public for their trust in setting aside every year between 15 percent and 20 percent of GDP in this fund. We would not be able to do that if the investment policy diverged too much from the basic, core, ethical belief of the average Norwegian.
The ethical criteria governing the fund include a decision not to invest in companies that produce cluster bombs and land mines. Given that Norway is an active member of NATO, are you opposed to investing in weapons companies in general?
No, we are not. We have just excluded some weapons. The criterion is that their normal use contravenes basic humanitarian principles, like land mines or cluster bombs. Of course, any weapon can be used in a bad or inappropriate way.
Why are you currently conducting a broad review of your ethical principles, including consulting nongovernmental organizations?
We have a Council of Ethics which is independent from the Ministry of Finance but gives advice to us on how to interpret the general guidelines we have set up. We have had the principles for a few years and it is important for us to see if we can improve them and to preserve their legitimacy by inviting people to have their say.
Also, we have an ambition to match ourselves against the best funds internationally and identify international best practice. We do this in all areas where we operate: investment strategy, risk management and so forth. There are big changes internationally in terms of what people think in the area of ethical policies.
Your rules say you can hold up to 10 percent of any company but your actual maximum is 5 percent. This is at odds with the behavior of many other SWFs, which have taken much larger stakes.
That is a decision taken mainly to ensure we are diversified in terms of risk. And also, once you cross the 10 percent threshold, you need to take a different, more active ownership role. We are a financial investor. We do not have strategic interests in the companies we invest in. We will not take over companies. We will not put our people on the board. We will not interfere with management.
You have invested virtually nothing in private equity and very little in hedge funds, while many of the funds you measure yourselves against have done so. Does this mean your performance suffered during the last decade?
The largest asset class outside the portfolio currently is real estate. So for us the focus has been to set out a strategy for real estate investments.
There are segments of private equity that could be interesting to us. However, in other segments of private equity we have concerns about fee structures and transparency issues. It is true that some alternative investments have had good returns over the last few years, but a lot of that is probably just an effect of a lot of leverage and cheap credit. It remains to be seen whether that is a sustainable business model for an investor with a 100-year time horizon, like we have.
You made the decision last year to increase the equities portion of your portfolio to 60 percent from 50 percent. Does that mean you were bullish on global stock markets?
No. The decision was taken last year and it did not reflect any views on market timing. It reflects a long term view on the attractiveness of equities in the portfolio.
Critics argue that more of the fund should be used to lower taxes and/or build more infrastructure in Norway, rather than being mainly safeguarded for future generations.
You could spend that money either on reducing taxes, or increasing investments. It is a political decision how you want to prioritize in these areas, but I am not a politician, so I am not going to get into that.
Von: 14.11.2008, by Karina Robinson , www.iht.com