This opinion piece is written by Mona Thowsen, Secretary General of PWYP Norway, and published in the newspaper Dagens Næringsliv on 28 January 2014.
We have built up the largest state investment fund in the world through the Government Pension Fund Global (GPFG). The Ministry of Finance has recently concluded a hearing into the strategy for its responsible investment activities.
The Ministry of Finance formally owns the Fund on behalf of the Norwegian people, and has a special responsibility for protecting long-term investments and evaluating future risk and the Fund’s investments.
As those with operational responsibility, the managers of the Fund must ensure that they obtain as much information as possible to facilitate follow-up of their investments, either to increase their investments or to sell them (in practice, excluding companies that do not meet the Fund’s investment criteria).
Three measures can help to secure returns and reduce risk and conflict:
From subjective to objective assessments
The Fund has invested in all companies included in the world’s various stock market indices. The GPFG cannot choose not to invest in companies unless those companies have been excluded. The Fund requires either subjective or objective reasons for excluding a company.
Currently, exclusion of investments is based on more subjective assessments. This means that the Fund may come into conflict with companies and countries. It seems unlikely that the Fund wishes to invest in the worst companies, and so some exclusions will always happen.
PWYP Norway is of the opinion that conflict-rich investments must be dealt with according to established principles. We need to move as far as possible away from subjective assessments and as close as possible to objective assessments.
A concrete transparency requirement for country-by-country reporting would create a situation in which we have access to more objective information. An investor would then have insight into eight key figures for each country in which the company operates: the number of employees, production, investments, revenues, costs and three key figures relating to tax.
When such information is provided in the notes to the financial accounts for all countries, we will have reliable, auditor-approved accounting figures that allow investors to trace their money.
An objective transparency requirement for companies will be the best guarantee that all investors, not least the Fund, can obtain standardised, objective company information.
Openly communicated requirements
A transparency requirement must be communicated openly and clearly to ensure continued confidence in the Fund’s investment strategy over time. This will place companies on an equal footing.
Such a solution will help to avoid the Fund being drawn into corruption scandals and conflicts with other countries or other investors. Any exclusion will be less controversial because companies in which the Fund has invested will be treated the same as the companies in which the GPFG will not invest.
Communicating the requirement openly will also substantially reduce the risk of litigation against the Fund. There are therefore many advantages to openly communicated requirements.
Reduced portfolio risk
By introducing the transparency requirement of expanded country-by-country reporting, the Fund can reduce its portfolio risk. The worst examples of resource theft will be obvious if there is expanded country-by-country reporting. Fewer investors will then invest in companies that engage in unacceptable behaviour.
The pressure exerted by open country-by-country reporting of these key figures will probably cause the worst companies to become more careful in their operations, something which is likely to reduce the risk of having to conduct exclusion cases against companies in the future.
When companies move profits across national borders, this has a destabilising effect on countries and a negative effect on dividend payments to investors. Missing tax receipts also hinder national investment in education and infrastructure, as well as demand and growth. The danger is that this may encourage the emergence of highly divided and unequal societies.
Normally, individual investors will have little influence on such reporting. Individual investors are also dependent on national and international authorities to implement relevant and necessary legislation. However, the Fund is a sufficiently large investor to be able to demand expanded country-by-country reporting on its own.
The Ministry of Finance and the Fund should therefore seek to:
- Facilitate expanded country-by-country reporting through Norwegian legislation;
- Encourage every single company in which the Fund invests to publishing such information voluntarily in notes to its financial accounts; and
- Influence international regulations to ensure that the disclosure duty becomes law in other markets to ensure the equal treatment of companies. In addition, influence international forums to ensure that such reporting becomes standardised through accounting guidelines (IASB), or the harmonisation of other regulations across states (UN).
Photo of Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM), which is responsible for the Government Pension Fund Global/Norges Bank.
Illustration photo: Images of Money/Flickr