Freeport investor quits

Down to Earth No. 71, November 2006

Freeport McMoRan Copper and Gold, operator of the Freeport-Rio Tinto gold and copper mine in West Papua, has been dropped from the US$240 billion Norwegian government pension fund for ethical reasons. Norway's move has drawn a hostile reaction from the US government but is seen as a bold move by fund managers charged with implementing socially responsible investment for public funds elsewhere in the world.

The divestment in Freeport McMoRan was announced in Oslo by Norwegian Minister of Finance Kristin Halvorsen on June 6, 2006, who said the ministry's decision to dispose of stocks and bonds worth NOK 116 million was based on the results of an investigation by the pension fund's Council on Ethics.

"Freeport employs a natural river system to dispose of close to 230,000 tonnes of tailings each day, thereby releasing large quantities of sediments and heavy metals," explained the minister. She went on to say that the Council on Ethics found that "Riverine tailings disposal has inflicted serious damage on the river system and parts of the nearby riverine rainforest and has considerable negative consequences for the indigenous peoples residing in the area".A

Noting that international norms and players including the World Bank consider riverine disposal to be unacceptable, Minister Halvorsen said that "The Council on Ethics finds that the environmental damage caused by the mining operations is extensive, long-term and irreversible," and that the ethical guidelines adopted by the Norwegian government for the pension fund were being violated because "the Government Pension Fund runs an unacceptable risk of contributing to severe environmental damage by investing in the company."

At the same time, Norway also announced that it was dropping retailer Wal-Mart Stores for serious, systematic violations of human rights and labour rights. The fund's investment in Freeport and Wal-Mart was worth around US$430 million altogether.

The Government Pension Fund, formerly known as the Oil Fund was established to preserve Norway's North Sea oil wealth for future generations. Similar funds exist around the world, mainly as investments made using public funds or private superannuation contributions to provide for pensions payable in the future. These funds are among the biggest concentrations of capital, collectively worth over USD$2.66 trillion worldwide in December 2005B.


Socially responsible investment

Increasingly these public funds, and many specialised 'ethical' private funds are being managed in accordance with the principles of socially responsible investment (SRI). SRI involves examining 'extra-financial considerations' of investments such as the impacts of a company's operations on the environment and workers' rights. The decision of the Norwegian fund's Council on Ethics has set a very visible precedent for SRI decision-making, and has been discussed in the context of pension funds in Canada, France and New Zealand.

J.D. Harden of the Canadian Labour Congress wrote that the Canadian Pension Canadian Pension Plan Investment Board should consider the Norwegian decision to divest from Freeport in the light of its own mining investments, observing that "Canada is also the place where mining firms raise capital for their operations in global jurisdictions, many of which have a terrible record for workers rights and environmental degradation."B


Ambassador attacks decision

Besides SRI fund managers and commentators, the significance of the decision was not lost on market watchers in the media, nor by those in the US government which support Freeport. On behalf of its wounded commercial interests, the US government predictably lashed out against the decision. The official complaint arrived in the form of a speech rhetorically entitled "Pension Fund Divestment: Meeting Norwegian Fairness Standards?" delivered by the US Ambassador to Norway on September 1, 2006. In his speech at the Norwegian Institute of International Relations in Norway, Ambassador Benson K. Whitney noted that "the stain of an official accusation of bad ethics harms reputations and can have serious economic implications, not just to the company and big mutual funds, but to the pocketbooks of workers and small investors."

The ambassador went on to condemn the method of choosing which of the companies held by the pension fund were investigated, saying "there is no set standard on how and why it picks a certain company for review among the 4,000 choices, so the process really is arbitrary. The council primarily reacts to individuals, outside organisations, and government entities who challenge the ethics of a particular company. It's clear how this ad hoc approach could lead to serious bias in the process. Naturally, the louder or more persistent the complaining, the more likely it is that the council will take action."C It seems obvious, however, that companies which generate numerous complaints are exactly the ones which most urgently require investigation by the Ethics Council, and indeed this is exactly why the Freeport mine, notorious world-wide for environment and human rights problems, was chosen. Put simply, where there's smoke there's usually fire.

He also complained of what he described as a lack of procedural fairness, despite the fact that each company investigated was given the opportunity to reply to specific accusations before the final decision was made. Freeport made use of this, sending a 25 page response which the Ethics Council certainly did take into account.

The ambassador was also highly critical of the information used by the Ethics Council, which included websites, anonymous sources and unpublished documents, and only grudgingly conceded "I realise that the ethical screening process probably cannot operate with the strict procedures of an official court." Unfortunately, the Ambassador's criticism either naively or deliberately ignores the fact that the very nature of accusations against Freeport - that it pays and collaborates with the military to stifle criticism and prevent independent environmental testing, for example - means that informants, while fully identifying themselves to the Norwegian investigators, are unable to allow their identities to be revealed publicly.

Perhaps most interestingly, the ambassador observed that US companies, operating in a regulatory environment which requires them to publish certain information about their activities were subject to the 'perverse' result that they are more likely to be criticised about their operations.

While there may be some truth in this, it is vital to take the wider interest into account. Greater transparency may well open up a company to criticism which is better informed and harder to handle. But this is surely better for Freeport and US interests than allowing human rights violations and environmental degradation to be swept under the carpet once more? For the Papuans who have suffered these impacts for more than three decades, more information reaching the international arena means greater pressure for change and a better chance of justice. This, not corporate comfort, should be the priority.

A Ministry of Finance, Norway, Two companies - Wal-Mart and Freeport - are being excluded from the Norwegian Government Pension Fund - Global's investment universe, Press release, June 6 2006
B "P&I/Watson Wyatt World's 300 Largest Retirement Plans", Pensions and Investments (December 26, 2005) in J.D. Harden,The Art Of The Possible: Socially Responsible Investment And State Pension Plans, Department of Social and Economic Policy, Canadian Labour Congress (June 2006).
C Ambassador Benson K. Whitney, Pension Fund Divestment: Meeting Norwegian Fairness Standards? speech delivered at the Norwegian Institute of International Relations, September 1, 2006.