NordSIP (Stockholm) – Public exclusion remains one of the most efficient ways for investors to influence companies that do not listen to their sustainability demands. Despite being criticised for reducing the investment opportunity set and thus being detrimental to future returns, exclusion works. The tool helps amplify the criticism and increases the pressure on both the excluded companies and other investors to act.
It is, therefore, worth paying attention when major institutional investors announce changes to their exclusion lists. At the very end of 2023, two such news were released in Norway, courtesy of the Norges Bank Investment Management (NBIM) and KLP.
NBIM adds one exclusion only
On 18 December, the Norges Bank Executive Board revealed a couple of decisions based on previous recommendations from the Norwegian Council on Ethics. Going forward, Delek Group Ltd is off limits for NBIM’s portfolio based on the company’s petroleum prospecting offshore West Sahara. The risk of contributing to or being responsible for serious breaches of ethical norms has been deemed unacceptable.
In addition, KDDI Corp and Sumitomo Corp are placed under observation for a period of three years. The companies’ telecommunications business in Myanmar runs the risk of contributing to serious violations of the rights of individuals in situations of war or conflict, according to the board’s motivation. Prior to making the decision, the board considered the steps that the companies have taken, including conducting human rights due diligence, assessing the human rights situation in the country, and dialogue with human rights experts. The observation period allows the Council on Ethics to observe the companies’ further efforts to manage human rights risks and the development of their business in Myanmar.
Meanwhile, PetroChina Co Ltd, which has been subject to a special exercise of ownership for the past three years, is found now to have sufficiently reduced the risk of future norm violations. Going forward, NBIM will continue to engage with the company as part of its regular ownership activities.
The board has, however, decided to extend the special ownership treatment for Shell PLC and Eni SpA by two years. Based on their activities in the Niger Delta, the companies have been under observation since March 2013 due to the unacceptable risk that they contribute to or are responsible for severe environmental damage. For the past ten years, NBIM has engaged with the companies regularly, yet there is still a forward-looking risk of norm violation. At the same time, the exercise of ownership has been constructive, and the board notes that the companies have publicly expressed an ambition to divest the relevant assets in the Niger Delta.
KLP puts Gulf companies under the loupe
Compared to the incremental changes introduced by NBIM, those announced by KLP at the end of December appear much more comprehensive. KLP and the KLP Mutual Funds have decided to exclude twelve companies from their investment universe, all listed on stock exchanges in the Gulf States – Saudi Arabia, Qatar, the United Arab Emirates and Kuwait. Eleven of these exclusions are of companies which operate in the building and construction, property, and telecommunications sectors and are motivated by the unacceptably high risk of contributing to human rights abuses. The twelfth company, Saudi Aramco, has been excluded because of its close ties to a dominant state owner, combined with an active position in violation of KLP’s expectations concerning climate change mitigation and energy transition plans.
These exclusions are the result of a comprehensive assessment of all companies from the Gulf States included relatively recently in MSCI’s Emerging Markets Index. During the analysis process, KLP has considered various risks associated with investing in this part of the world. In addition to being rich in natural resources, particularly oil and gas, the Gulf States have been heavily criticised by human rights organisations for issues such as migrant workers’ poor employment conditions and restrictions on political freedoms.
“Despite the risk picture discussed above and the exclusion of companies in several sectors, there are opportunities for KLP to have a positive impact in the Gulf States,” note the analysts. “Going forward, KLP will continue to prioritise the exercise of shareholder influence relating to issues that are particularly challenging in the Gulf States, including migrant workers’ rights, equality and diversity at the management level.”
