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Ethical Investment, Energy, Climate Change, and Security: New Research from Norway's PRIO

March 05, 2007 // 9:00am10:30am
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The world's third largest oil exporter, Norway is endowed with a valuable resource that is not only in global demand, but is also a leading source of human-influenced climate change. With a strong tradition of ethical thinking about its role in international affairs, Norway's oil-fueled prosperity stimulated great internal debate about the use of its energy revenues. "[Oil] is a common resource that we all share. If we spend it now, we are doing a disservice to future generations," said Henrik Syse, head of corporate governance at Norges Bank Investment Management (NBIM) and senior researcher at the International Peace Research Institute, Oslo (PRIO), at a meeting sponsored by the Environmental Change and Security Program on March 5, 2007. His PRIO colleague, Director Stein Tønnesson, discussed the security problems arising from our global oil dependence, and the ethical dilemmas facing efforts to confront climate change.

The Petroleum Fund: Ethical Investment

Currently valued at US$300 billion, the petroleum fund was established in 1990 by the government's Norges Bank to reinvest a portion of the country's oil revenues as a safeguard for future generations, as well as ensure that Norway would not suffer from the "resource curse"—slower economic growth or a decline in growth linked to the abundance of a natural resource. The fund also protects Norway from the financial consequences of another potential problem: running out of oil. If demand for oil continues to rise, as expected, Norway may quickly deplete its stores of the resource that took between 100 and 300 million years to create. In the event that Norway can no longer capitalize on oil—which currently accounts for a large percentage of Norway's financial well-being—the fund will provide future generations with enough money to transition to new markets and industries.

Norwegian law allows only 4 percent of the fund's annual return to be spent. Only this small amount—roughly US$12-13 billion—is infused back into the economy. "In theory, the rest remains unspent," said Syse, noting that the fund will only be drawn on in a period of financial uncertainty. Additionally, he said, the government is not allowed to run a budget deficit while the fund exists: "This is an attempt to be frugal and responsible with our resources."

As the petroleum fund has increased its assets, many ethical and moral concerns have arisen, Syse said. These concerns include whether it is hypocritical to earn money from what some believe to be destructive products, such as oil and gas, both major contributors to global warming. To address the nation's concerns over the fund's investment practices, the government in 2004 established a set of ethical guidelines and an Advisory Council on Ethics. The council is run by the Norwegian finance ministry, said Syse: "They screen companies that they say we cannot tolerate being invested in. There is no economic argument behind it. There is no argument behind it about changing the world." Rather, the determination is rooted in the philosophical concept of complicity, he said: "We are complicit in what the companies we invest in do—even if the investment is small."

To date, the fund has screened out 20 companies, including those involved in the production and distribution of weapons, as well as gross violators of human and labor rights. Wal-Mart, he noted, was recently excluded for its violation of labor rights, as was Boeing for its connection to weapons. Yet, the fund has also raised eyebrows for its continued and heavy investment in tobacco. This sort of investment presents a second moral dilemma for Syse: "We have a fiduciary responsibility to produce returns. This means that it is often ethics versus ethics." Part of Syse's job is to manage the fund's different motivations, primarily the balance between making money and investing in ethically responsible stocks. Investing in tobacco, he said, may make some people uncomfortable, but the stock remains legal—and profitable.

Over the next decade, the ethics council will continue to weed out companies. And as the fund grows, Norwegian companies, as well as companies around the world, will look at how, and in what, NBIM invests, Syse added. As leaders in ethical investment, NBIM has already pledged to support companies in countries with good governance, child labor laws, and efforts to address long-term environmental and climate change. But Syse was quick to note that the private sector alone cannot shoulder the burden of ethical and social change, particularly in the case of climate change: "We need responsibility from the gas and oil producers. [We need] better and more sustainable policies. It is not the companies that can change this, it is better government regulation."

Climate Change Response: Who Should Act and How?

Determining how the world should handle climate change presents several different dilemmas, including whether action should first occur in countries with the highest emissions or in those where energy standards will be more economically efficient to implement, said Tønnesson. "The most effective investment one can make in CO2 emissions reductions is in the least energy-efficient countries," he said, pointing to Russia, China, and India's high emission levels and low energy efficiency.

Yet he also pointed out that while it may make financial sense to target these rapidly developing countries, the question of equity must be addressed: "[There is a] conflict between the right to development of the developing countries and the fact that we need them to leapfrog the environmentally polluting stage in their development." He also urged policymakers to weigh another difficult set of questions on mitigation versus adaptation: "What is wise spending? Preventing or reversing? Or mitigating negative impacts? Do we move people away from low-lying areas, for example?"

Energy Investment and Security

The global dependency on oil and other fossil fuels presents security problems on both the national and global levels, Tønnesson said. If global demand for oil continues to rise, many oil-importing nations will become increasingly dependent on certain exporting regions. For example, Japan is almost entirely dependent on the Middle East for its oil supply; and with the exception of Norway and the United Kingdom, NATO is an organization of oil importers. China, meanwhile, has made inroads in Africa as part of a long-range effort to satisfy its growing need for oil.

Advances in alternative energy may help address climate change, and spur a movement away from oil, said Tønnesson, but progress on this front is beholden to another factor: "Alternative energy investment will continue to depend on the price of oil." Additionally, he pointed to the "peace risk" problem: as global demand for oil increases, the Middle East will increase extraction, sending more oil to the world market. While this will reduce oil insecurity, it will also reduce global oil prices, which, in turn, will reduce the incentive to tackle climate change via alternative energy projects.

Huge sums are already being invested globally in alternative energy projects—estimated at $20 trillion by 2030—but Tønnesson said more needs to be done, and the effort must be shared: "The costs must be carried by Europe, North America, Japan, and preferably the oil-producing countries, as well as the countries that can afford it, and countries that have benefited from the carbon economy." He also called for global agreements, including a globally applied minimum carbon tax, and urged the countries that can change to do so. For example, he proposed that China and India capitalize on their relatively cheap labor and production costs to develop technology, but the developed countries that demand the most energy shoulder the financial cost. Finally, he stressed that efforts to address climate change and energy security are not at odds: "They are largely the same. It should be possible to forge the political alliances needed for drastic action."

Drafted by Alison Williams.

 
Event Speakers List: 
  • Head of Corporate Governance, Norges Bank Investment Management; Senior Researcher, International Peace Research Institute, Oslo
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