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UPDATE 2-Norway orders review of $790 bln wealth fund

Mon, 14th Oct 2013 14:18

* Review comes after criticism fund is too big, unresponsive

* Norway often bars sovereign wealth fund from investments

* Asks for greater scrutiny of Shell and Eni in Niger Delta

* Fund will also raise concerns with AngloGold

By Balazs Koranyi

OSLO, Oct 14 (Reuters) - Norway has ordered a review of its$790 billion wealth fund, one of the world's biggest investorswhose largesse helps underpin Norway's generous social benefits,responding to concerns that the fund is unwieldy and its returnstoo low.

The government also in a regular review of the fund'sinvestment ethics ordered it to sell stakes in several companiesdue to ethical issues and expressed concern over investments inoil companies Royal Dutch Shell and Eni.

But it stopped short of saying the latter stakes should besold.

The fund, whose wealth stems from taxes on Norway's offshoreoil industry, is so big it holds 1 percent of global stocks. Buthaving grown rapidly in recent years, it now faces criticismthat it is too big, unresponsive and mostly tracks its speciallydesigned benchmark - based on measures for different parts ofits portfolio - and generates only modest returns.

The outgoing centre-left government has therefore asked anexpert panel of university professors and financial experts toreview the fund's activities, examine how it could improvereturns and to what extent it can increase risk.

The fund has outperformed its benchmark over the past 10years, but its annual net real return of 3.61 percent is belowthe government's 4 percent target. Critics say given its currentsetup, the 4 percent target is not viable.

Propping up returns is vital as the budget relies on thefund for some of its spending, including on schools and on itsgenerous health and social benefits, and lower returns may forceit to dip into the principal instead of using just the returns.

A new Conservative-led government, set to take power onWednesday after winning elections in September, has alsopromised to examine the fund, arguing that changes, which couldinclude its break up, could improve its efficiency.

Meanwhile the ministry has barred the fund from investing inWTK Holdings Berhad, Ta Ann Holdings Berhad,Zijin Mining Group and Volcan Compania Minera because their activities pose a "risk of severeenvironmental damage."

It also put India's Zuari Agro Chemicals Ltd onthe banned list due to child labour concerns.

WATCH LIST

But contrary to the recommendation of its Ethics Council,the government did not place Royal Dutch Shell and Eni on itswatch list for possible exclusion and instead asked the fund toplace a greater emphasis on scrutinizing their activities in theNiger Delta.

"The Ministry of Finance has decided to ask Norges Bank(which manages the fund) to include oil spills and theenvironmental conditions in the Niger Delta in its ownershipefforts for a period of between five and 10 years," the ministrysaid.

Shell, the fund's second-biggest holding as of June 30 andworth some $4.8 billion, said it would continue to engage withsocially responsible investors to discuss its business. ENI didnot respond to an email seeking comment.

The decision to not exclude Shell and Eni drew immediatecriticism, including from the winner of a top Norwegian humanrights award.

"Continued investment in companies like Shell or Eni simplymeans that the Norwegian pension fund is investing in a dirtybusiness and looking for more dirty money," said Nigeria'sNnimmo Bassey, winner of the 2012 Rafto Prize.

"They are funding environmental devastation and destructionof livelihoods," said Bassey, who is a senior member of theenvironmental group Friends of the Earth International.

The fund usually sells its stakes in companies before thegovernment makes its exclusion decision public.

It often excludes companies and has dozens of tobacco andweapons makers on its veto list. Some of the world's biggestminers, such as Rio Tinto and Barrick Gold, are banned because the government considers they havebadly damaged the environment.

The government also asked the fund to raise issues aboutmining-related environmental damage with AngloGold Ashanti, but has not excluded the firm from its investmentlist, despite such a recommendation from the Ethics Council.

"We do have an ongoing dialogue with these companies andwe've had for a long time, over the past two years ... andthey've showed good results," oil fund spokesman Thomas Sevangsaid. "We think that exercising our ownership rights is creatingpositive change."

Besides Shell, the companies involved could either not bereached for comment or did not comment.

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