Despite their clout, most sovereign wealth funds shy away from social activism. Not Norways $415 billion Government Pension FundGlobal, the sovereign fund managed by Norges Bank Investment Management. NBIM has sought to enlighten companies on such issues as child labor and climate change. Now NBIM has discovered water.
In August it released a draft proposal that sets out the funds water-related expectations for companies in its vast portfolio and invites their comments. Principally, NBIM demands transparency on water issues, an assessment of water risk and, ultimately, implementation of sound supply-chain water management.
Fresh water, of course, has become a key global concern as economic growth and population expansion have driven demand while climate change and pollution have diminished supply. NBIM regards water shortages as one of the greatest potential destroyers of global wealth long-term.
NBIM has identified roughly 1,100 companies with a combined value of 265 billion Norwegian kroner ($46.9 billion) in its 9,000-company portfolio that stand to be directly affected by water shortages. The companies are concentrated in seven sectors: agriculture, food, manufacturing and power, mining, pharmaceuticals, pulp and paper, and water supply. The funds corporate governance team cross-referenced the companies it holds with regions around the globe that are vulnerable to water problems to generate a list of target companies.
Anne Kvam, head of corporate governance, casts the current campaign as less starry-eyed social activism than hard-headed financial pragmatism. "We believe that it will affect the bottom line of these companies and, as such, the financial performance of the fund," she explains. "It didnt take us long to realize that this issue affected a large number of companies."
Water-supply issues can damage companies any number of ways, she adds. Along with straightforward operating risk to the point where a company could be prevented from doing business at all there are the dangers of heavy-handed regulatory intervention, localized conflicts if water supplies in general fall to dangerous levels and damage claims stemming from poor water management and resulting pollution. Oil giant BP (an NBIM holding) had to pay a £20 million ($41.6 million) fine in November 2007 after pleading guilty to discharging oil in U.S. waters; the company remains on three years probation. Kvam points out that pollution problems can so harm the reputation of a company that they hamper its ability to conduct business in a particular region.
NBIMs approach has never been to strong-arm companies; it prefers a softer approach. It is tempting to wonder whether gentle tactics can bring about change at powerful multinational corporations. Nevertheless, NBIMs activism has had notable successes. The fund recently extracted a commitment from Bayer, DuPont, Monsanto Co. and Syngenta to work together to combat child labor in seed production.
Might other sovereign wealth funds embrace NBIM-style social activism? State Street Corp.s most recent report on investing trends among sovereign funds suggests that their owners governments are exerting increased influence on them to pursue policy objectives, and that corporate governance is likely to become a far greater consideration for the funds.
State Street attributes the increased activism to pressure on the funds postcredit crunch. Stakeholders have been more vocal in criticizing the funds performance, and this has contributed to a realization among the funds managers that remaining entirely passive may not be an option. Perhaps, the logic goes, in this challenging environment long-term corporate growth requires sounder labor practices, sustainable resource usage and social responsibility.
But for activism to be effective, the funds will need to practice it in a politically acceptable, as well as market-friendly, way. NBIM may just be the perfect model.