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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

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

Inve

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Divest

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

FIRM OPTIONS NBIM Screens companies based on three principles that guide its ethics Using

shareholder rights and active management to convince companies to change

Negative screening eliminate companies that create weapons, etc.

Ad hoc divestment

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 Wal-Mart 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 Wal-Mart from its portfolio

NBIM uses a systematic method before deciding on investing / divesting

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

responsible investing and principled centered SRI research

Shift focus away from just alpha creation for the portfolio

Norges Bank Investment Management Takes into account ESG as

an integral part of portfolio management

The criteria for exclusion / inclusion are set by the parliament

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

Companies in the portfolio of the fund Have an obligation to

shareholders to be ethical and to be included in NBIMs portfolio for max liquidity

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: Unethical actions impact long

term company performance downwards

Its not complicit with the actions of the company

NBIM is putting pressure no Wal-Mart to change its behavior

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SCHOOLS OF THOUGHT: SRI VS. CHARTY WORK

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

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

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

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

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

Fund Returns NBIM should continue to follow investment / divestment framework issued by Ministry As previously discussed, the Wal-Mart 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 The fund should not sacrifice alpha generation just so as to meet ethical targets

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 NBIM to maintain high standard of ethical behavior It is important to note that no single factor by

itself should be given priority over others

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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

APPENDIX: NBIM Excerpts from report on NBIM Divestment method

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