Investment and social responsability

Norway is currently the world’s most active advocate of corporate social responsibility on all international arenas. Hence, in this context, Norway has done a great deal to behave as a solid citizen of the global village. On the other hand, for all its success and wisdom, the management of the state pension fund illustrates that even Norway is sometimes guilty of selfishly feathering its own nest at the expense of other nations, the planet, and, therefore, ultimately its own welfare over the long term.

The Norwegian Government Pension Fund Global is by far the world’s largest sovereign wealth fund, currently exceeding 800 billion USD, and rapidly growing. The fund is owned by the state on explicit behalf of current and future generations. It is administrated by the Ministry of Finance, which gives guidelines to the investment branch of the Norwegian State Bank (Norwegian Bank Investment Management, NBIM). A separate Council of Ethics (appointed by the government) serves the role of advising the Ministry on which companies to divest from due to serious ethical misconduct (details in the structure and mandates can be found here).

The fund has two major ethical concerns: It should provide good returns to future generations, and it should not contribute to severe unethical acts. The major emphasis has been on the first goal. A core management issue is the rule of maximum spending (handlingsregelen), i.e., that no more than 4% of the annual income can enter the annual state budget for public spending. This ensures that the fund will be used for the long-term welfare of Norway, not just short-term welfare.

This is admirable management of common goods and can serve as an example of how natural resources can be managed for the benefit of an entire nation.

In the United States, a nonprofit organization called B-lab (B stands for benefit) provides a certification service for corporations. Those that apply for certification receive a score on the basis of a detailed examination. If the score exceeds a certain value, then the company is permitted to advertise itself as a B-Corporation. Xiujian Chen and Thomas F. Kelly at Binghamton University’s School of Management recently analyzed a sample of 130 B-corporations and compared them to a number of matched samples of other corporations. The samples were matched with respect to geographical location, business sector, corporation size, and other variables. In all cases, the B-corporations were either as profitable or more profitable (on average) than the corporations in the matched samples. Engaging in ethical practices did not hurt, and might even have helped, their bottom lines.

More analysis will be required to pinpoint why B-corporations do well by doing good. One possibility is that they have become like villages in their internal organization so there is less selfishness from within. Another possibility, which is not mutually exclusive, is that consumers are increasingly adopting a norm that causes them to prefer to do business with ethical companies and to shun unethical companies, exactly as they would prefer and avoid people in a village setting. Certification as a B-Corporation makes it easier for consumers to evaluate a company’s ethical reputation. Knowing someone’s reputation comes naturally in a village setting, but work is required to provide the same information at a larger scale. Adherence to other codes performs a similar function, such as the UK Stewardship Code (FRC 2012), the International Corporate Governance Network´s Code (ICGN) or the Singapore Code of Corporate Governance Statement on the Role of Shareholders (SCGC) to mention a few.

@edwalves Financial adviser, entrepreneur, economist. #economics #BRICS #technology #nature #development #value #investing

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