15-03-03

CASE DIAGNOSTICS: ROAD MAP OF ACTION ON WAL-MART BY NBIM

NBIM uses a
systematic method
before deciding on
investing /
divesting

Its not the funds job

to correct social
mandate / the funds
job is to make
money for the
investors
Argument based on
firms financial
performance is
negatively impacted
Argument based on
investor / beneficiary
performance
negative impact

STAKEHOLDER ANALYSIS
People of Norway
The fund is owned by the people of Norway. Our mission
is to safeguard and build financial wealth for future
generations
The objective is to generate the highest possible return
with an acceptable level of risk
Ethics Council
Set the tone for
Companies in the portfolio
responsible investing
of the fund
and principled centered
Have an obligation to
SRI research
shareholders to be ethical
Shift focus away from
and to be included in NBIMs
just alpha creation for the
portfolio for max liquidity
portfolio

Society at large
Responsible investing is an
integral part of NBIMs
management task
Society needs NBIM like
funds to conduct research
in ESG space and voice
their concerns and steer
SRI

Unethical behavior
will affect long-term
financial
performance of the
company
In order to signal to
the market that you
are not complicit with
the activity
So as to put
pressure on the
company to change
its behavior

Divest

Using
shareholder
rights and active
management to
convince
companies to
change
Negative
screening
eliminate
companies that
create weapons,
etc.
Ad hoc
divestment

FIRM OPTIONS

Invest

NBIM Screens
companies based
on three
principles that
guide its ethics

In June 2005, the

Norwegian
government
started exploring
Wal-Mart on its
own account
The ethics
council
discovered the
Wal-Mart was
involved in
several cases of
human / labor
rights violation
There was also
a case of
gender
discrimination

The Council
believed that WalMart the criteria
on ad-hoc
exclusion basis

On Sept 2005,
they sent a letter
to Wal-Marts
CEO for a
response on
unethical
behavior

On not receiving
a response to the
letter, NBIM
divested WalMart from its
portfolio

COMMENT ON ACTIONS
ON WAL-MART
Although it could be argued that
the financial damage done to the
company was material, there is
no empirical evidence

The long-term reputational capital

done to the firm was larger than
the economic / financial damage
from the decline in stock price i.e.
the funds steps were
consequentialist from one stand
point, but deontological from
another point.
Thus, via its actions, NBIM
essentially based its thesis on
three things:
Norges Bank Investment
Unethical actions impact long
Management
term company performance
downwards
Takes into account ESG as
an integral part of portfolio Its not complicit with the
management
actions of the company
The criteria for exclusion / NBIM is putting pressure no
inclusion are set by the
Wal-Mart to change its
parliament
behavior

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SCHOOLS OF THOUGHT: SRI VS. CHARTY WORK

Typically, responsible/impact investing has been
viewed as doing charity work i.e. focusing on
foreign aid
However, as micro-finance emerged, it was
accepted that, taking a market based approach
would be much better
NEW VIEW: IMPACT
Help create SMEs
Opportunities to
capitalize on
entrepreneurship
opportunities not
available in other
places
Generate high
returns in a high-risk
environment

Private business capital would create jobs,

improve efficiency, and build social realties
For a long-time, the model of SRI was about
exclusion of players in the sin industry(tobacco,
arms, ammunition etc.), but now the scope is
different
Milton Friedman stated that the purpose of a
business is to make profit for its shareholders, is
hard to disprove on a pure empirical basis
Many people argue that investors must be able
to forgo some part of their returns in order to
achieve these impact objectives

TRADATIONAL VIEW:
CHARITY
SRI is essentially the
same as giving
foreign aid
Just a philanthropic
effort i.e. to build a
public image of doing
good

However, some market failures cause people to

neglect the profitable opportunities in impact
markets
Many impact investment opportunities in the
private capital space generate returns of 7x-8x
of initial seed investments

RECOMMENDATIONS FOR A MULTI-STAKEHOLDER NEEDS

Society
The world needs
responsible investments
in emerging markets
and developed markets
to foster egalitarian
growth
An opportunity to
transfer knowledge and
capital from developed
markets to emerging
markets is one not to be
missed
We recommend that
NBIM invest with
companies that have
extensive reach
across the globe and
programs to develop
emerging market in a
sustainable way

People of Norway
To meet needs of the
people of Norway, the
fund has to effectively
beat the market and
generate enough
returns to finance social
goods and services for
Norwegian citizens
We recommend that
NBIM continue to
prioritize Norwegian
citizens over other
concerns
The fund is for the
citizens and their
long-term future. NBIM
should take into
account a 100 year
horizon i.e. indefinite
horizon

It is important to note that no single factor by

itself should be given priority over others

Fund Returns
NBIM should continue
to follow investment /
divestment framework
issued by Ministry
As previously
discussed, the WalMart divestment was
appropriate, and so
were others
As mentioned on the
previous slide, impact
investing can meet
both goals of
creating sufficient
returns for the fund,
and delivering social
value

Companies in the
Portfolio

The companies need

access to capital
which NBIM has
In order to secure
financing from NBIM,
the companies have
to meet strict SRI
guidelines
We recommend
companies that
want to be
considered by
The fund should not
NBIM to maintain
sacrifice alpha
high standard of
generation just so as
ethical behavior
to meet ethical
targets

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APPENDIX: NBIM Excerpts from

report on NBIM Divestment method

APPENDIX: SRI Scope Map

We have divested from a number of companies in

recent years following broad financial assessments
that include environmental and social factors. In
2014, we divested from 49 companies
Where we have substantial investments in a
company, divestment will normally not be the most
suitable approach, as we generally have better
analytical coverage and dialogue with such
companies
In 2014, we decided to reinvest in a few companies
after they moved their operations and their plans in
a more sustainable direction

Source: NBIM 2014 Responsible Investing report

APPENDIX: INDUSTRY INITIATIVES

Source: NBIM 2014 Responsible Investing report

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APPENDIX: EXAMPLES OF COMPANY DIALOGUE

Source: NBIM 2014 Responsible Investing report