Right or wrong: the ethical side of net zero asset ownership

The Tapanuli orangutan is the world’s rarest ape. There are currently less than 800 in the wild with Indonesia’s North Sumatra province being their only habitat. 

It is one of the main reasons why hydropower projects in that part of the world have been vehemently opposed by conservationists.

Why is this relevant? Recently, this species and the need to protect them featured in a divestment decision issued by Norway’s government pension fund.

Norges Bank, which manages the fund, decided to exclude Power Construction Corporation of China (Power China) from its portfolio. The reason: the company’s hydropower project in North Sumatra, which poses an existential threat to the endangered orangutan species, according to the fund.

Power China, one of China’s largest construction companies, is partly state-owned. While state investment companies retain in the driving seat, the company is listed on the Shanghai stock exchange. Consequently, a handful of western asset owners are involved.

Norges Bank is one of them. At last count, the fund had invested close to NOK 40 million in the Chinese constructor, which amounts to 0.03% of the listed equity.

Interestingly, the reasoning behind the exclusion is more ethical than financial. It resurfaces a contested debate about the ethics of sustainable investment and the ethical obligations of a net zero investor.

Factoring in Ethics

Norges Bank’s decision was prompted by a recommendation from the pension fund’s Council of Ethics, whose main concern was the project’s impact on the Tapanuli.

“The Council concludes that construction of the Batang Toru hydropower scheme will have highly destructive environmental consequences, in that it will further reduce the Tapanuli orangutan’s habitat," it wrote.

The Norwegian government pension fund makes its investment decisions in consultation with a set of ethical guidelines.  According to the latest version of the guidelines their purpose is:

“To avoid that the Government Pension Fund is invested in companies that cause or contribute to serious violations of fundamental ethical norms."

Severe environmental damage and “unacceptable emissions” are among the factors these norms consider.

This is where ethics come into play. The concept of ethics is derived from the Greek word “ethos” and is fundamentally concerned with what is right and what is not. Guidelines such as those followed by Norges Bank seek to subject investment decisions to a moral compass.

The world of climate change is no stranger to debates over morality. 

Advice from scientific voices such as the Intergovernmental Panel on Climate Change often advocate for climate action on the grounds of moral duties such as concern for the well-being of future generations.

However, a moral compass of asset ownership is notoriously non-financial in that it attracts variables beyond risk and return.

Which leaves regulatory scope to incentivise asset owners to consider ethical factors.

The Hippocratic Oath of green investing

Some regulatory attempts have made the leap. The European Union’s green taxonomy, published in 2020, has at its core an obligation by investors to “do no significant harm”(DNSH).

According to the EU, “do no significant harm means not supporting or carrying out economic activities that do significant harm to any environmental objective”.

The DNSH principle establishes an implicit assumption that investors, both public and private, have an ethical obligation to limit the degree of harm their investment poses. It mimics, in some sense, the Hippocratic oath of medical practice.

However, it has brought up new tensions. 

For one, “harm” is challenging to quantify and needs precise definition. A narrow definition would exclude factors such as biodiversity and a broader one could be too ambiguous.

Ethical engagement

The other piece of the puzzle is integrating ethics into engagements with individual companies. This remains the exception rather than the norm.

The Norwegian Council of Ethics itself is an independent and autonomous body consisting of five members appointed by the Ministry of Finance. However, Norges Bank’s guidelines state that:

“Communication with the companies shall be coordinated. The Bank may attend meetings that the Council on Ethics has with companies”.

In the case of Power China too, the Council did engage. 

According to Norges Bank repeated attempts were made to gather further details on any mitigation plans the company had. Power China did not respond to such attempts.