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Ethical Deficit – Lending by the Norwegian Sovereign Wealth Fund

In the report by The Norwegian Coalition for Debt Cancellation (SLUG), “Ethical Deficit”, economist Leon Du Toit explains how requiring transparency from borrowers can make the Norwegian Government Pension Fund Global a more responsible lender. Today we have no guarantee that the Oil Fund is not investing in illegitimate debt. Du Toit examines various dimensions of transparency, and applies measures of these dimensions to China and South Africa.

Norway, the debt justice pioneer
The Norwegian government deserves praise for spearheading work on promoting responsible lending and creditor co-responsibility the past years. This summer the Norwegian Minister of International Development announced that the Norwegian Government would carry out the first ever creditor debt audit.

It is important to note, however, that while the debt covered by the Norwegian audit is less than 1 billion NOK owed by 7 countries, Norway has outstanding loans held by the Norwegian Government Pension Fund Global (GPFG, or the Oil Fund) worth 600 billion NOK, spread across 44 different countries.

The debt owed to the Norwegian Oil Fund is in the form of government bonds, which makes up about 17% of the Fund’s portfolio. The rest is invested in companies and businesses, based on comprehensive ethical guidelines that ensure the Oil Fund a first place on the Truman Scoreboard for Sovereign Wealth Funds year after year. The Truman Scoreboard ranks Sovereign Wealth Funds’ management and governance, considering structure, governance, accountability, transparency and behavioral rules. Less well known is it that investments in government bonds, which is practically lending to another country, are not covered by these guidelines, or any form of rules for responsible investment or responsible lending. The only guideline for these investments is that the Fund cannot purchase bonds from countries that are subject to international sanctions that Norway  support. To this date, this only applies to Burma.

The need for regulation
The financial crisis of 2008 and the ongoing debt crisis in Europe have illustrated that irresponsible lending and borrowing does not only affect poor countries. Up until now, the international market for lending and borrowing has largely been excluded from international regulation. This does not, however, legitimize that the Norwegian Oil Fund’s lending is exempt from guidelines for responsible lending.

On the contrary, in order for Norway to live up to its goal of being a responsible creditor, the government should take the lead as a responsible lender and ensure that accountability criteria are applied to all investments in government bonds made by the Oil Fund. This would be a logical extension of the government’s efforts to promote responsible lending and creditor co-responsibility.

If the Norwegian government intends to keep spearheading responsible lending internationally, it needs to pick up the pace. The Danish government has already stated that it will work for increased accountability in Danish investments in government bonds, meanwhile the Swedish consulting firm Ethix already provides investors with so-called “ethical screening” of government bonds. Thus, it is possible to establish guidelines for such investments.

Catharina Bu, the chair of SLUG’s Board says: Implementing guidelines for the Oil Fund’s investments in government bonds is not a question of whether it is possible, it is a question of political will”.

A new approach
In 2009, SLUG launched the report «Borrow my pension. The Norwegian Government Pension Fund – Global: a responsible lender?».  The report triggered great interest both nationally and internationally, because it was the first to publicly criticize the Oil Fund’s role as an investor in government bonds. The report was based on the ethical guidelines for investments in businesses and corporations, and asked why there were no similar guidelines for investment in government debt. The author of the report, Øygunn Brynildsen, argued that applying ethical guidelines to investments in government bonds would not necessarily undermine the government’s intention to manage the Fund apolitically.

Brynildsen argued that it is imperative for guidelines to be put in place in order to ensure that the Norwegian people do not profit from investments in illegitimate debt. This report builds on the principles in Brynildsen’s report from 2009, but it goes further in identifying how the Fund can ensure that it is lending responsibly. The author of this report, economist Leon Du Toit, brings a new approach to the debate. Du Toit explores the possibility of conditioning government bond investments on a certain degree of transparency in the bond-issuing country, and suggests various existing guidelines that could be used to assess relevant aspects of transparency.

The argument is that the criteria should be based on transparency in government finances as well as the possibilities populations have to influence bond sales through parliamentary participation and civil society input. Conditioning bond investments on transparency and political participation will contribute to preventing the Fund from financing human rights violations. In turn, such guidelines will be less political than setting up a “blacklist” of countries that grossly violate human rights.

Government bonds as a financing source
Issuing government bonds can be an important source of financing for developing countries, as such loans are not tied to conditionalities that may undermine governments’ sovereignty. Therefore, it must be emphasized that SLUG does not want to contribute to blacklisting countries that do not qualify for investments, and we encourage increased investments in developing countries. However, in order to invest responsibly, the people, who ultimately repay the debt, have to have an opportunity to provide input to what the government spends its money on. If this is not the case, we cannot be sure that Norwegian oil money will not contribute to the build-up of illegitimate debts.

Brynildsen’s report from 2009 generated an important debate about the lack of guidelines for investments in government bonds, but unfortunately the discussions did not lead to political change. This time around, we are exploring a somewhat different question: Can conditioning investments in government bonds on measures of transparency in  bond-issuing countries ensure more responsible investments by the Government Pension Fund Global?


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February 2017
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