Just over one year ago Henrik Syse, senior researcher at Oslo's International Peace Research Institute (PRIO) was approached by Norges Bank Investment Management to devise a strategy for ethical investment. During today's E&ETV Event Coverage of a recent Wilson Center event, Syse discusses bridging the gap between moral philosophy and business investment, particularly by oil-rich countries. PRIO director Stein Tonnesson joins Syse in discussing new research produced by PRIO on the subject of ethical investment. Tonnesson also talks about the Middle East and Asia's role in climate change.
Geoff Debelko: Good morning ladies and gentlemen. Why don't we get started? I would like to welcome you to the Woodrow Wilson International Center for Scholars. My name is Geoff Debelko. I direct the Environmental Change and Security Program here at the center. And it's a thrill for us to really be hosting a day's worth of activities starting with this morning's meeting, but a day's worth of collaborations with the international Peace Research Institute in Oslo. It goes by the acronym PRIO.
PRIO has been very kind to me personally. I have been fortunate enough to have a number of months there in residence studying and researching in a very active, lively, intellectual environment with some terrific, terrific people. Nils Petter Gleditsch, a senior researcher there, or whatever title, he's got multiple titles. But Nils Petter has been terrifically helpful to me and to our program. And so it was a thrill for us to be able to collaborate on bringing some of the current research and some of the current researchers from PRIO to Washington and provide a forum for discussion of some excellent, and as usual, cutting edge research that they are doing. So we have a session right now and then we have another one at noon that I urge you to take advantage of as well.
So let me just very briefly say a word about the Wilson Center, introduce our speakers and turn the floor over to them. For those of you who may be new to the center, you're actually sitting at the formal memorial to Woodrow Wilson. So Congress set up the Wilson Center in 1968 as a place where the worlds of scholarship and policy come together. Wilson was our only President with a PhD and so, for better or for worse, this is an opportunity for those two worlds to learn from one another and we do that in a nonpartisan, non-advocacy basis.
The Environmental Change and Security Program is a 13-year-old program that tries to facilitate this dialogue within the worlds of the environment, development, health, population, and then broader foreign policy and security policy issues. And so as you will see today's topic really fits directly in that arena. We do that with meetings like this and some publications that I hope you will avail yourself of outside. We are web casting this meeting live, so when we go to the discussion period I hope you will tell us your name and also use a microphone that my colleagues will bring to you so the folks on the web and the archive video can share in hearing your question as well.
So let's turn to the substance of the meeting. Ethical investment, energy, climate change and security, new research from Norway's PRIO. As you can see there's quite a lot in that title, but it really reflects that there's quite a lot going on at PRIO and the work of the two gentlemen that we have to kick it off. Henrik Syse is the head of corporate governance at Norges Bank Investment Management, which manages the Norwegian government pension fund, global, and then Norwegian government currency reserves, the so-called petroleum fund. And so it's terrific that he will share his insights on ethical investment in energy and how the Norwegians have handled those abundance of resources. Henrik is also, I should hasten to add, a senior research fellow at PRIO and someone whose office was just a door or two down from mine when I was there 10 years ago. So it's terrific to see him again. As you can see from the bio he's trained as a philosopher, has a wide range of writings and is someone who I very much look forward to hearing.
Stein Tonnesson is the director of International Peace Research Oslo. He's trained as a historian, particularly a focus on East and Southeast Asia. And so is working on, again, issues of energy, climate in the regional context and connecting it to security, so we're very much looking forward to Stein's comments as well. So, Henrik, please, the floor is yours.
Henrik Syse: Geoff, Excellencies, ladies and gentlemen, it's great to see all of you here. I am, for the time being, 80 percent engaged for the Norwegian central bank's work on managing this petroleum fund and 20 percent at PRIO. I'm not a mathematician, but I realize that 80 and 20 at least is not a hundred, according to my wife, but I try to keep these two parts of my life together. Most of my PRIO work is done in the evenings and during the night, so I rarely see my colleagues. So I, therefore, have to go all the way to Washington, DC to be with them. But it's good to be with you Stein, and all my other colleagues here.
It's a special delight to be in this building since my colleague Greg and I and another colleague, Endre Begby, had just published a book on the ethics of war with the most significant writings through the ages on this tangled question of how can we restrain violence in war? And one of my favorite chapters is one that I edited, is one Woodrow Wilson. I realize we're in the Ronald Reagan Building so there should have been a Ronald Reagan chapter as well. There is not. But anyway, the book is now out on Blackwell and it's that part of my life at PRIO.
Then of course you may ask the question, what on earth is a moral philosopher doing helping the management of a large investment fund? And I asked myself the same question when I was asked to take on this job by the leadership at Norges Bank. I asked them, do you really know who you're talking to? I mean I don't know the difference between stocks and bonds. That is not true. I actually do, but I tried to point out to them that you must know what sort of competence you're bringing aboard. And the answer from the CEO of the fund was, well, that's exactly the point. We have the best competence in the world on stocks and bonds. We're growing and becoming the largest pension fund in the Western world and we recruit the best people all the time. But when we are to use our ownership rights in order to secure the long-term sustainability of this fund, maybe we need some one with another language. Maybe we need someone who looks at this from the outside and helps us ask different questions.
So I was tempted, as they say in "The Godfather," by an offer I really couldn't refuse and there I am, still asking myself the question every day, why am I really here? But at least after a bit of more than a year having found part of the answer and I'll try to share that with you.
So NBIM is the acronym for Norges Bank Investment Management. Norges Bank is a Norwegian central bank, but our activity really has nothing to do with the rest of what a central bank does. You know, interest rates, money printing, and so on. What we are is an investment management unit, accidentally, so to speak, placed there because they hope to build up really robust competence in investment management.
The fund that we are talking about was established in 1990. Actually my father was prime minister at the time, but I knew nothing then that I would have anything to do with it. It was established by law as a device to save up the revenues from the petroleum sector, plus the state's direct income from the petroleum sector. At the time there was no influx into the fund because everything was pretty much spent at the time, but there was an expectancy that there would be a savings here to actually take care of for the future. And the idea then is, of course, to avoid the resource curse. To avoid in an economy already very much dependent on the oil, already with a very large percentage of the GDP going through government channels, but this heats up the economy even more. So this is an attempt at putting aside all this money for the future instead of spending it now. And I guess in the back of many of your heads there is the phrase Dutch Disease. How to avoid the resource curse. How to avoid an economy being skewed, being destroyed many would say, by this huge influx coming in.
There is, however, another answer which appeals more to me. Another argument for having this fund, and that's a moral one. That's based on the idea that this resource has been built up over 100 to 300 million years according to the geologists. We happen to live within the 70-to-90 year frame where we take this out and move it to somewhere else. But we should not all spend it at this moment. This is basically an idea that this is a common resource that we own together, and if we spend it now we do a disservice to future generations.
So we should think of ourselves not as extracting something that we spend the income from, but we are moving it from one place to another. We are moving it from offshore to a bank. And the beauty, of course, of having it in a bank is that then you can have interest rates from it. You can actually have a steady return. So that's the rule that the Norwegian government has made for itself. It's surprisingly transpolitical. It's a surprising broad agreement about this, because I mean what you essentially have here is a huge bowl of jelly on the table and you're eating breakfast and you're telling yourself not to use it, but that's basically what they've said. They said that we can have an annual estimated return of 4 percent that we can put into the economy every year. Right now that's approximately 12 to 13 billion U.S. dollars and the rest we don't spend. In theory it's there for eternity. In theory it's there so that every generation ahead will have this basis to take the returns from.
Now, just a little bit more about the timeline. In 1996 the first capital transfer actually happened, so the fund started. Equities were added to the investment universe. Nongovernment bonds were added to the investment universe. And we got ethical guidelines for the fund, about which I will be talking. We have assets under management now of approximately U.S. dollars 300 billion, so this is, depending on little bit on how you count, the largest pension fund in the Western world. It's not quite as large as TIAA-CREF, which I would imagine that some people here have their savings in, but that's because it's counted a little bit different because they also have a mutual fund department. But it's larger than CalPERS for instance, larger also than the largest other pension funds in Europe.
As I said, the income comes from the oil. Norway is, today, the seventh largest oil producer in the world. And, of course, we're not many people up there, so we are the third largest oil exporter. And obviously, there is a huge influx into the fund all the time. So this is a figure that will grow. There are different estimates, but we may be well above 400 billion by the end of the decade.
Now, the ethics. Is it hypocritical to earn money off what some would say are destructive products, knowing that oil and gas are among the main contributors to global warming? Should we instead just keep it out there? Well, I heard a fascinating lecture a few weeks ago by the Norwegian Minister of finance, Kristin Halvorsen, an excellent woman, who is also very straightforward. And she said that I mired in hypocrisy, she said. I represent a party, she's from the Socialist party, who talks very elegantly and eloquently about the dangers of climate change. And yet I just cannot stop extracting this oil because here we have this welfare state that gets 13 to 14 billion U.S. dollars every year from this. And we have customers around the world that want this oil and if we stop extracting it, the rest of the world will cry because that will change the whole equation. We are an important oil exporter.
And she said I just don't have the guts to stop that. But what I do have the guts to do it, she said, is to say that, well, when we need to take on an extra responsibility. Then we need to be an extra strong voice in questions of sustainability, in questions of [unintelligible] and climate change, and even using the fund and its ownership voice to do so. And that's what I'll talk about a little bit later.
I realize Geoff is already nervous since I have spent 10 minutes and I'm saying what I'll come back to later. I'm still on my introduction. I have a very long introduction, but I have a very short lecture, so it will be okay. I can really skip the lecture.
I would also like to add that what we do hear are often, and this is not self-praise, but this is basically what most economists and politicians around the world will say about this fund, is that it is a frugal way of managing the funds. And that very few other countries have managed to do so. Some have managed to build up these sorts of funds, but at the same time they have developed huge deficits on their state budgets because they know they have the fund. The rule I talked about, about only using 4 percent of the actual return, also includes a rule that there must be no budget deficits in Norway while we have this fund. So it is an attempt to be frugal. It's an attempt to be responsible. And I'll come back to the responsible investment part of it.
It leads me to the term corporate governance, which is what we call the active ownership of investors. I have a mother who is a very intelligent woman, but I still have a hard time explaining to her what I exactly do. Head of corporate governance is my title and she's constantly head of, head of what? Aren't you doing something with Plato? But Plato, of course, is dead and this is pretty much alive.
Now, NBIM has guidelines for corporate governance. That is guidelines for how we use our ownership voice in those almost 3 ½ thousand companies in which we own equities. I'm sure there are people here in this room who know this side of the economy well. Others may not know it that well, but you may not have some shares. So you may sometimes get invitations to come to annual meetings. Well, that's basically what my work is about. It's basically about using that ownership voice, but doing it as one of the largest single investors in the world.
Now, when I first heard about the job, I imagined a poor fellow with three-and-a-half thousand plane tickets traveling around to annual meetings to vote. Fortunately, it doesn't work that way because we have proxy voting and electronic voting systems. When it comes to the guidelines, they are specifically based on OECD and U.N. global compact guidelines. That is actually somewhat significant because you sometimes get, as an investor, and I know many investors in this country as well, the accusation that you are out in some sort of missionary political quest. Out to change the world according to some political activist program. And that you're not really being an investor with all the responsibilities that follow from that. And therefore, it's important for us to point out that our work is based on widely shared principles, that a majority of the companies that we interact with have themselves signed and themselves said that they want to live up to. So this is actually an important point.
Now there are also, as I pointed out on the previous slide, separate guidelines from the Norwegian government. They are divided in two. They include the work that we do within the bank, which was started in the Fall of 2005, but it also includes an exclusion mechanism. And if most of you, when you hear the word ethical investment think of that, that is quite natural, because that is what often grabs the most attention. Right? When you think of ethical investment, it's pretty much about avoiding certain things. Making a stand by saying we will not invest in this, that, or the other. In Norway, there is division of labor between our principle, or the representatives of our owner which is the Finance Ministry. They tell us what we can and cannot invest in. They have a separate council on ethics, which uses a negative screen to screen out the companies that they say that we cannot accept being invested in. There's no economic argument behind it. There is no argument behind it about influencing the world. It's basically what we in philosophy call a complicity argument. The idea that through your investments, you become complicit in what that company does. Even if you only own a little bit, like we do.
Our average share in each company is one-half percent, our maximum share, according to government guidelines, is 5 percent. Still, we do become complicit by investing our money as there are certain sorts of activities that we should not take part in.
The guidelines have put the threshold high, so this is not an SRI fund, if you know that term. Kind of socially responsible fund that only invests in a small part of the investment universe. But we do have an exclusion mechanism, and I'm happy since I'm from PRIO to state that, that the screen is a weapons screen. That companies that contribute to the production of illegal or grossly immoral weapons will be excluded from the investment universe. Even that forum can be discussed because what we have excluded then are companies that have contributed to the production of nuclear weapons. But we are, of course, a member of NATO and accept the NATO strategy, so you have a problem right there. And that exclusion led to, or that mechanism led to the exclusion, for instance, of Boeing, which Norwegian government obviously is still a customer of.
Anyway, I'll leave that because that belongs to the Finance Ministry. I think it's a relatively well thought through screen, and as I said, it includes weapons. And it also includes gross violations of human rights and labor rights.
They've so far excluded 20 companies from the investment universe. But they're working their way through the investment universe with a broom. I cannot guess how many companies it'll actually be, but I'm sure in the end will have a list of more than 100 companies,that's a guess, that will be excluded on the basis of these guidelines.
That, however, is not my job. So if anyone here has heard that Wal-Mart was excluded last year, and you want a really fiery discussion about Wal-Mart, I'd be happy to take part in it, but I did not make that decision. Because we're the second hurdle. We actually use the ownership rights that we have.
And the reason why I mentioned Wal-Mart is that there was quite a lot of debate about that one last year. The reason for excluding it was serious violations of labor rights in several third world countries. But we were asked at the bank what we thought. The Finance Minister sent us a letter and asked, what do you think? And we recommended that we wait a little bit with that exclusion, because we can use our ownership rights.
Now the Finance Ministry came down and concluded that we'll follow the recommendation from the Finance Ministry's council on ethics. We of course, accept that. Any investor accepts what the owner,I mean, they have a right to tell us what to invest in and not to invest in. But there is a real dilemma here. If the large investors who want to take serious long-term responsibility for their ownership draw themselves out of many of the problem cases, you won't anymore have that voice there. In Wal-Mart's case that's not the case because you have that voice there in abundance.
Now a cliché at the end. I always like to add a few trite things, so here's,our aim is to be responsible investors, blah, blah, blah. But I mean, that's the term we use, it is. But I think it carries some meaning. Because responsibility, for me, is about two things. It's not just about responsibility in the causal sense. That you actually cause something by directly being a material cause. But it's also about the sort of signals you send. It's about the role you play. And there is no doubt that NBIM today is one of the largest investors in the world, and therefore, is being looked at.
I realize that. I don't think most Norwegians realize that. There is more written about the activity that we do in the Financial Times and the Wall Street Journal than there is the Norwegian press. Because basically we are looked to as a player, and people ask, what do you do? What sort of voice do you use as an owner?
Now I call the next three slides ethics, business and investment. I just want to point out one thing first which is quite commonsensical, but I like the old philosophical motto, I think it comes Voltaire, that says that common sense is not so common. So we sometimes have to repeat that as well.
The thing is that very often the question is being asked, well what do you want? You want the returns or you want the ethics? But the sort of fund that we are have a moral fiduciary responsibility to secure long-term returns. So in our guidelines, it's explicitly formulated as an ethical imperative,to produce returns.
Now this means that it's often ethics versus ethics basically that we are struggling with. Let me take a simple example. A large debate in Norway has been about whether the screen should include tobacco investments. Today it does not. We are heavily invested in tobacco. I don't smoke. My four children are something like anti-smoke fascists. I have to calm them down. They see a smoker, it's like no, no! They can't be good persons. You know that. You know the sort of fervor around tobacco.
But we are invested in tobacco because the guidelines say that it's a legal product, and there is not a broad enough agreement in the Norwegian public about this actually being an evil. We cannot exclude that. But they don't [unintelligible] the additional fact that this is one of the investments that do the best. They've been very successful. And while I don't have the most current figures, a colleague of mine pointed out to me that we can well sit a few years from now and say that these investments have added 500 million Norwegian crowner to the fund. That's quite a lot of money on some future occasion when the Norwegian public could use this.
And should we forego that because we say today that we should not be involved in tobacco, if our investment in each company is so small and so liquid that if we left those investments, someone else would buy them. Now as a moral philosopher, I don't like that kind of reasoning. Because that's the kind of reasoning that can make someone go to a concentration camp and say it's OK that I work here because if I don't, someone does it instead. But of course, tobacco is not a concentration camp. Tobacco is still a legal stock, and it's a stock that makes money. And our job, according to the Norwegian government, all parties from the left to the right, is to make sure that the returns are good for the sake of future generations. So it's not an easy ethics-versus-money.
Another point, and this is my favorite point here, so if I don't have time for the rest, at least try to remember just this one, is that we need to negotiate between different motivations. What do I mean by that? Well, one of the things that we are doing, and I'll mention it at the end, is to work on some social issues that we have picked out as especially important for long-term investors. One of them is the fight against child labor. And when I'm out there and I'm talking to the companies or I'm talking to the public about the scorch of child labor, and about why I believe that we should have markets 20 years from now that don't include children in bonded labor, then obviously I see that as an ethical argument.
And the question comes, aren't you an investor? Aren't you supposed to make the investment argument? But obviously that's not the way we human beings are. We have several motivations at the same time. We do things for several reasons. If you were the Board of Directors and I was talking to you, obviously I would both be talking about the finance case of what we're doing, and I would be talking about whether it's right or wrong in itself.
And I think the natural aim for our kind of organization is to find a motivational overlap. Find those issues where we can be an active voice that both makes sense from a long-term financial standpoint and from the point of view of ethics. This is not an easy one, but I think it's an important ambition to have.
Of course, added to this is the fact that our owners increasingly expect us to include social, environmental, and also governance issues into our corporate governance activity. This means that we are suppose to raise, and we do, issues that cannot be read off the next quarterly balance sheet. They're often called extra financials. Someone asks, who put the extra in extra financial? Because why we're doing it is obviously that we believe that these are important to the markets in the long-term.
But this is a challenge, and I'll admit that. Because the kind of structure that this sort of pension fund has, and it's true for most of the pension funds that you're invested in as well, is that we're not really exposed to company risks since we own very little in each company. But we are exposed to market risks. We can survive an Enron, but we cannot survive catastrophic climate change over the next 30 years. And this is, of course, a challenge when you go to communicate with each individual company. Because you're essentially telling them that we need to change not be cause we think you're necessarily in huge danger, but because our broad portfolio is. And trying to combine the company and the portfolio arguments is one of the greatest practical challenges, and rhetorical challenges, that we have.
Now the thing is, of course, we're not alone, and that's an important point. Even though we each own small stakes in each company, altogether, pension funds account for ever larger parts of the stock world. Including private equity. We're not in private equities yet. We may end up there. We will at least enlarge our equity share to 60 percent relatively soon.
But the point is that in the United States more than 60 percent of the listed stock market is owned by these sorts of investors. And these are investors that ask questions about where the companies in the markets will be in 20-30 years from now.
Now there are two main ways of doing this work. There was suppose to be a "B" there at the bottom. I'll read that to you. The "A" is integration into investment decisions. That's not part of our mandate now. We don't have the sort of mandate where we go out and pick specifically green investments. There's a huge debate whether we should do that, but the question is once again the money we may lose from that, would that be better spent by being politically active on these issues? Or can we actually earn more? Which, of course, the holders of so-called green indices say. Will we be able to pick the right investments? Well, this is a huge debate, and we may come back to that, but that's not part of my work. The "B" that should have been there is what we do.
Geoff Debelko: It starts out from the end.
Henrik Syse: Oh, that's right! There it is! Yes! Hooray. Overlaying etches. Isn't that cool? Overlay means pretty much that you take the portfolio as it is, and then you engage with the companies. Whether your holding is large or small, whatever kind of investment it is, you are actually an owner in the importance of that. And this is a key point,is that you are then talking to companies as an owner who will be there in the long-term.
A representative of a large multinational said to me last year,if you are the kind of investor that is most interesting to talk to, because we pretty much know that ten years from now you're still around. This is the sort of dynamic you can build up through long-term engagement.
So let us sum up then, what are the sorts of arguments for including these sorts of extra financials? You saw ESG as the acronym on the previous slide. That stands for environment, social, and governance issues. I would at least say that there are four.
First there is long-term solidity and functioning of the markets themselves. I've already made the argument. The fact that we actually have to think through what the markets look like. We are what is often called in the investment world a universal owner. We don't really primarily own companies, but we own a little slice of the world and, therefore, and it's the whole world.
Secondly, becoming increasingly important in company dialogue is the reputational and subsequent financial damage to the companies we are invested in. Are they actually willing to have their name closely connected to child labor? Is our own reputation the profile of our funds, what our owners expect of us? And then as a moral floss for I always say is based on number four, is right in itself. Ethics doesn't always need an instrumental added argument.
So what issues should we and do we address, and I'm getting closer to the end. About five more minutes. OK? Thanks.
Of course, issues where we can contribute to change, once again may seem extremely commonsensical. But there is a temptation to pick whatever is out there in the public domain and shout about it. Some of you here will know that there has been a lot of debate about CalPERS, the California Public Pension Fund. And I admire a lot what CalPERS has managed to do. They have opened a lot of doors. They were among the few to do this before Enron. They realized that these owners need to use their voice. But there has also been a huge debate about whether CalPERS has ended up as more of a political voice. Pretty much saying what's in the majority of the California legislature. And going out there and talking loudly about it rather than actually picking out the things where investors can contribute to change.
I wouldn't say it's true of CalPERS, but I see it's a real discussion. Especially for us who are politically owned, and have a Finance Minister behind us who wants to be happy. Understandably. If the follower were a politician, I like politicians happy, but that's not the job of an investor. That's not what we're there to do.
That leads us to the second point. We are to pick issues that do not make us spend our reputational resource as an investor. What do I mean by that? Well, last week an NGO suggested to us that NBIM should raise shareholder resolutions at every single company we own that has anything to do with production of greenhouse gases. Meaning essentially that we would send out hundreds of shareholder resolutions.
Sounds like a good idea. Right? You're there. You're being heard. Well, I can promise you while I have a lot of respect for the NGO suggesting that, that you would lose your voice as an investor very quickly because you would be seen as a political actor, not as an investment actor, and as a nuisance. That's just the way the world is. And that's the divisional labor that we have.
We need issues where we can work with other investors. Obviously because our stakes are small in each company. We need issues that are linked to recognize norms. I already made that argument with U.N. global compact. And we need issues that actually have long-term impact. That's back to the change point really. We need those issues where we actually see that what we and the ministries together do today are changing the world.
There are several examples from the last few years of concrete successes of corporate governance work, and I would say that one of the foremost is coming in this country. Where, because of investor activism, the whole structure of how Boards of Directors are nominated and elected in this country is changing. We are actually gaining a voice for investors to actually be able to suggest nominees for Boards. That may sound obvious. Aren't shareholders suppose to do that? Well for 20 years that's not been the case in the United States where pretty much you had a CEO-ruled Board. Where there has been very little scope for investors to make their voice heard. This is an immensely important issue where we are making headway these days.
Mark Anson, the former CEO of CalPERS, has this top ten list of stupid things he's heard from CEOs, and there are many absolutely excellent CEOs in this country, so this is not meant by him nor by me as a general condemnation. But one of his favorites is one,so you actually mean that shareholders are suppose to elect the Boards? Well, that's actually what we mean. Another one he had was, well, this Board member is not a friend of mine. It's my brother-in-law.
So let's finish off with the strategy that we have presented just last week. We have picked out certain points that we will be working on, that will be our strategic issues, and we'll be working on for the next 10-20 years if necessary. The boring ones for memorial philosophy point of view are the corporate governance things, such as the nomination of Board of Directors, immensely important to make the system work, but still more instrumental.
We are working, however, on issues of child labor and children's rights where we see in countries such as India more than three million children who are working as bonded, more or less bonded child labor, where it's fully possible for multinationals to contribute to an end to that. They need a push. They need someone to insist. And the closest voice to doing that is the one of investors. We have picked it because we're the sort of long-term investor we are, and because we believe that most investors haven't been willing to look at just these issues closely enough.
And the other one is the one that brings a bridge to Stein's presentation and that's about long-term environmental changing. Global warming. And I'll just spend the last two minutes on that.
Many investors talk about this. We are as well. We are saying that we need responsibility from the gas and petroleum producers, including those operating in Norway, in order to make sure that we actually create better and more sustainable policies. But the point is, of course, that it's not the company that can change this. It's better government regulation. International government regulations, that's basically the sort of standards, what will come after the Kyoto protocol. What sort of emission limits will there be? When will the United States come on board? These are the crucial issues.
And the question is, what can an investor do about that? Well, we have found an angle that we believe is very important and so far very much underutilized by investors. Namely to insist on more openness about the lobbying. A lot of our portfolio companies spent considerable time and resources lobbying against the interests of many of their main investors, including ourselves. And we need to see a change to that by shedding more light on that issue.
It's important to note that these must not be flavors of the month. These must not be things we do right now but then forget a few months from now, but must be consistent engagement based on a clear message.
The last one is once again just a boring one, so I'll just go quickly through that like this. This is what we do. This is what we spend our time with. And bullet point number five is what I'm doing right now, and then as an honor to all of you philosophers here, I finish up with Emanuel Kampf [unintelligible]. If you say that you ought to do something, it must also mean that you can do it. That there's a possibility. And I think that we see that investors like this can make a real change because they have power, and the power can be used rightly. We try to do our best. Thank you.
Geoff Debelko: Stein, I turn the floor over to you. Thank you very much.
Stein Tonnesson: Let me start by thanking Woodrow Wilson International Center for Scholars and Geoff Debelko in particular for hosting this event today. We at PRIO are happy and proud to be here. If ought means can, then what I'm talking about is more like must means can with a question mark. I'll take you through and attempt at the very global general political arguments concerning climate change, energy security, and instability in the Middle East, with focus on Asia. Probably less focus on Asia than I had thought I would have when I started.
My main argument is that global warming forms a challenge for the potential for uniting the world behind a common purpose. This at the time where certain events, in particular policies pursued by the President of the American administration, have led to a situation with a weakened role for the United States and with more dissention and tension among the Red powers. Here you see a potential for a resurrection of international corporations, and also of U.S. direct participation in multilateral work and U.S. leadership.
The presidential campaign that you have started will play a major role in preparing the U.S. and the world for necessary action in the field of climate change. But for this to happen, one needs a kind of political coalition, both in this country and in other countries, between the constituency, the environmental constituency, and the energy security constituency. Which are somewhat different in terms of political colors.
When we try to forge that or work on that, there are three problems that we must see how they are linked together. One is enormous, and that is the monstrous climate change. I just was at the International Studies Association convention in Chicago, and went to a paper on climate change where a group at Yale were working on climate change and how to mitigate it, and they considered climate change to be something they called a super wicked problem. Because you have wicked problem. This was super wicked because you had little time, no chance to do mistakes on the way, because you have no central authority on the level needed in order to do it, and because the consequences of failure would be so enormous.
The other problem is big, and that is the question of energy security, both global and national. And then there's one smaller problem which should be relatively easy to resolve in comparison with the others, and that is the political instability in the Middle East.
The energy security links together the Middle East political problems with climate change. So to understand what's happened and to design strategies, we need multidisciplinary teams of researchers and policymakers focusing on all these three areas and combining all the relevant research disciplines.
Then comes my Asia focus, which is that the most effective investments one can make in using the CO2 emissions, they can be made in the least energy efficient growth countries. And that is Russia as the least energy efficient of all the major economies. China notably perhaps the most important. To a lesser extent India which is actually quite a lot more energy efficient for two reasons. That you still have a large primary sector, and that you have a relatively large [unintelligible] sector and not so much industry. And then the USA as the key. So these four countries are key.
So then there is a key political challenge in resolving a dilemma. An ethical dilemma which I think one could reason also ethically around, and that is the question of the conflict between the right to development of the developing countries, and the fact that we absolutely need them to leapfrog the environmentally polluting stage in their development.
This is the main argument that I'll take you through in a little bit more detail now. I'm starting then with climate change which is now finally this year really on top of the global agenda. Al Gore's An Inconvenient Truth did a lot to raise attention not only in this country, but throughout the world. The Stern report to the British government in October, although it has been very much criticized, also have made a major impact. The fact that climate change for the first time mentions seriously in Bush's State of the Union address contributed the new ambitious E.U. commitments to seek for [unintelligible] where you accept only a 2 degree increase in the global temperature, and E.U.'s contribution to this is to reduce its emissions by 20 percent by 2020. And then the first of four reports from the U.N. climate panel in February this year from working group one. We will have the report from the other two working groups in April-May I believe, and then there will be the synthesis report.
And then we have a special situation with Germany both heading the G8s and the council administers in the E.U., and Germany is a very environmentally conscious country. So it will try to drive the agenda this year also with a special conference in May to prepare for the G8 summit in June.
And we are heading up for the new negotiations for what to do after the Kyoto period in Bali from the 3rd to the 14th of December. Then one member of [unintelligible] conservative party and one member of my social party have together nominated Al Gore together with the Canadian Shelia, I don't remember her second name, who is an intellect who has been doing much work on learning the Artic. Them together for the Nobel Peace Prize. I think they stand a good chance and as in the world's chief guesser concerning who gets the Nobel Peace Prize, I'm going to promote this idea this year.
What is then the state of the global warming threat? First no longer any doubts that the atmosphere is heating up. Also, little doubt that global warming is caused largely by the burning of fossil fuels. Also, little doubt about the fact that this involves serious risks. But still a lot of consternation as to how serious the risks are, and as to what kind of remedies there are. Is it at all possible to stop global warming, or would it be better to use the resources on mitigating the negative effects? For instance, by moving people away from low lying areas.
The negotiations are aiming for a new globally inclusive Kyoto Treaty, including the USA, China, and India, with obligatory caps on their emissions will gain momentum, and I think that E.U. now with its new aims will have to also launch very serious negotiation strategy to try to force others to go along. They try to do that by committing themselves to 30 percent emissions if others go along.
And then the big problem is that the size of private and public investments in energy efficiency, renewable resources of energy, clean coal, capture of CO2 where Norway is trying to develop technologies. Natural gas, carbon-free transportation and nuclear power. These investments will continue to depend on the oil price which may well continue to fluctuate.
And that moves us into the question of energy security, which was in a way similarly on top of the agenda in 2006 as climate change seems to be this year. It was the main issue at the G8 meeting in St. Petersburg, and it was discussed at a number of bilateral summits and also at the summit, for instance, of the non-align movement where India was selected as the country to take lead in that organization's work. And that shows how so the attention in Asian countries and developing countries has now very much increased concerning this issue.
But we must here distinguish between the concern for national energy security, and global energy security, although many argue that the latter is the only way to ensure the first.
When we look at global energy security, we cannot avoid the discussion about peak oil. We hear geologists often say that the oil reserves are limited, and that we are approaching the peak when it is impossible to further increase the global production, and when no cheap substitutes are available. There would be more expensive ways of producing oil, but that would not be possible to really compete. So this would force us then to change our way of life, often the geologists who are active in this area say. A wasted way of life is unsustainable if the big developing countries should have the same level of prosperity or even approach it.
But then the economists often say that the market forces will resolve this. And through the market mechanism, because when the price increases, then other kinds of energy production will become competitive, and that we will simply see the investments in technological change. But the problem with this economic argument are two that are related to the Middle East. And the first is that the provision of oil from the Middle East may be interrupted by war in the Persian Gulf. And only the prospect of this is influencing the oil price.
The other factor is that it's also possible that one could see changes in the other direction. And this leads me to talk of a problem that I will turn to in a moment of also something I call the peace risk in the Middle East. If we look at the national perspective on this, the global perspective is the most important, but the national perspective is used by most governments. Then oil is the main worry, because other kinds of energy are often seen as means to reduce oil import dependency, including coal. And at the same time we know that national self-sufficiency in oil is unattainable for most nations, including the United States. The only major economy that has something near self-sufficiency in oil is the U.K. So if you see this list of the oil-importing nations, main oil-importing countries, you don't see the U.K., but you see the biggest ones there. And China is rising towards the top.
If we divide the world between the main oil-importing countries and oil-exporting countries, we can also create a table of alliances, political alliances, that are either alliances along oil importers, or alliances among oil exporters, or a cut across.
And the most important partnerships among importers are the U.S. Japan. Japan is the country that is most dependent on oil import because it imports everything, and virtually all the oil it imports from the Middle East. China and the United States have both behaved very differently, and they're more diversified in their import structure. So the Japanese dependency on the Middle Eastern oil is a major factor, and it is the United States, through the U.S.-Japan alliance that is defending Japan's access to this oil.
Then NATO is also an organization mainly of oil importers, though there is a small exception. And the new strategic partnership between the United States and India is also in this category. Then you have also the political important partnerships among exporters where, of course, OPEC is the most longstanding and important of them, but there is now much talk about Russia seeking alliances with other mainly gas exporters. And there's been started talks about the gas cartel.
Among the partnerships between importers and exporters the most important one is that between the United States and Saudi Arabia. But you also have China having engaged in similar attempts to establish bilateral direct relations with many oil exporters, both in the Shanghai Corporation Organization and in relation to countries in Africa and the Middle East.
We also see in this situation of much attention to energy security that the geopolitical discussion about pipeline construction has become a major factor. Both with a potential for sewing conflict, and the potential for bridging relations between countries in conflict. One example there is now the project for a pipeline from Iran through Pakistan through India, which is linked to India's desire to try and resolve the Kashmir issue. And we see politically a development in the Middle East, a weakening of the United States' position in the Middle East, and more and more talk about an internal balance of power in the Middle East between Iran and Saudi Arabia with their respective allies.
So this is, in a way, the geopolitical situation within which national energy security is considered. Some 60 percent of the world's oil reserves, as we know, are within this map. There are five countries in the Middle East that have 722 of the worlds 1,293 billion barrels of crude and oil reserves with Saudi Arabia, of course, on top. Their oil is also much cheaper to produce than oil in most other cases. But the oil sector in the Middle East suffers from underinvestment and inefficient management, much due to the fact that the national oil companies are less effective than many other oil companies.
The risk that the Middle East will react to the concern for energy security and all the investments in other kinds of energy by seeking to boost their production is quite considerable. And Saudi Arabia has already done this. To some extent this, of course, is a positive factor in one way, because it provides more oil to the world market, and reduces energy insecurity or oil-importing security. But at the same time it may very well contribute to a drastic reduction in the oil price again, and then remove the momentum for doing something about the climate change.
And this is what I call a peace risk, and I see these risks as a kind of moral dilemma, because you have to be in favor both of peace and stability in the Middle East and of doing something about the climate change, so there is an obvious conflict between these two concerns. The other risk that could be major war is much easier to handle because that is negative in every sense.
So I ask if this peace risk represents an ethical dilemma, and have not worked much on it yet, I don't know if it has so much consequence either, but I'm rather offering it as a question whether we should let this have,go through some ethical reflections on that.
Then for my political argument, it's extremely important to ask concerning the question of this coalition between the two constituencies that I talked about in the morning, in the beginning. Then we must ask if the means, the measures we must take to enhance energy security and to stop global warming, if they are the same. And here I have four that are the same. That's energy conservation, energy efficiency, including a reduction in transportation needs. For instance through more video conferences. Perhaps next time we have a PRIO event like this, we should be,remain in Oslo and speak to you over, on the screen. Investments in renewable energy, and take logical innovation in power generation, carbon-free transportation, and notably carbon capture. More gas to replace use of coal and oil.
All of these measures need enormous investments, and there are good energy security arguments for doing it. There are good climate change arguments for doing it. But when we get to coal, it's quite obvious that coal works in the direction of enhancing energy security on a national level, particularly for those countries that have much coal, like the United States and China, but it's the worst thing you can do concerning climate change. As long as you have not developed cost effective clean coal technologies.
With nuclear energy, we can have more of a discussion because the dangers of nuclear energy are of a certain, are of another kind. Nuclear energy contributes most to national energy security and to reducing global warming, so I should perhaps have put it in the category above. But I find that very difficult.
Then we have the other ethical problem that I mentioned before. This conflict between the rights to development, and the absolute need to reduce, put a brake on emissions and eventually reduce emissions in the big growth countries in Asia. We know that by 2009 already China is expected to surf past the United States in terms of CO2 emissions. And this is a global problem, and China must do something about it. But of course, the counterargument is that the CO2 emissions per inhabitant is so low still in China in relation to the United States, and that we hear both from Chinese spokespersons and often from people who say this to the Chinese in ways that may make them reduce their willingness to do something about it.
I feel this as a problem, I think we must stop saying these things, we must impress on the Chinese the absolute need to do something about it. Only both for themselves and for the world at large.
But then we must find good strategies of doing this in ways that may be acceptable to the Chinese, and the Chinese preferably should themselves become active in adopting such proactive strategies. And when we look at the strategies for doing something about climate change, there is a very clear difference between the E.U. strategy and the U.S. strategy with the E.U. strategy based on legally imposed cheaply based caps on the allowed emissions in each nation, and where you should then have negotiations to lower these caps and have quota trade to make the system work. And the United States putting more emphasis on voluntary measures, non-legally binding measures, but measures that enhance and stimulate the technological change and investments.
These two strategies are often seen as incompatible and one criticizes the other. In actual fact, I think they are supplementary because the U.S. strategy emphasizes the enhancement of the means needed to fulfill the obligations that the E.U.'s strategy tries to set. And it's this that must be the basis for the negotiations in Bali, where it's essential to get the whole world into the system that the queue to protocol has established, while at the same time building on the experiences that have been built so far, but unfortunately very late with the U.S. strategy and the establishment of the AP 6th group, or the Asia Pacific, cooperation in this area between the United States, Australia, China, Japan, South Korea, and India where the emphasis is on these voluntary measures.
The very fact that an organization of these countries that present well over half of the world's emissions has been established in addition to the Kyoto protocol I see as a very positive factor. So I would not share the general criticism in Europe of this American initiative for being insufficient. It should rather be welcomed as an addition to what is being done from the European point of view.
But my question is left then if perhaps China and India could enter these negotiations with a more proactive strategy, and seek assistance from Japan, the E.U., and the USA in a massive effort to clean up their growth. Japan is a member of both the Kyoto protocol and also of the APP. So Japan, if it could have a more active diplomatic stance internationally, would have a chance to be a key actor actually. It also has a very substantial cooperation with China technologically in energy conservation, which developed without being much damage at all from the political difficulties between those two countries.
So let me end by taking you through six conclusions. The first is that to stop global warming and ensure global energy security, enormous investments are needed in energy conservation, and alternative energy. The figures set on it by the International Energy Agency in 2006 was $20 trillion before 2030.
The second is that while most of this cost must be carried by Europe, North America, Japan, and preferably also the oil-producing countries, the countries that can afford it and the countries that have benefited from the carbon economy for so many years, the most cost effective investments can be made in Russia, China, and India. This is the enormous political challenge on the global level that calls for leadership.
The third is that since the means to stop global warming and ensure global and national energy security are largely the same, it should be possible to forge the political alliances needed to carry out drastic action provided that those concerned about national security do not seek coal as their main remedy.
You would also need to get this alliance at some stage to accept the need for carbon taxes. And preferably there should be an international treaty that would also set a minimum carbon tax that every country must apply.
This is actually part of the next point, number four. This is a globally applied minimum carbon tax. That's one of the three measures needed. The second is a global Kyoto system with national caps on CO2 emissions and Kyoto trade, and the third is massive investments.
So then again comes my Asia focus where the Russians, Chinese and Indians need to overcome their tendency to argue defensively, and instead adopt a proactive strategy. And the proposal I'm making to them,and I've also made that in a lecture in New Delhi, is that China and India should head for establishing global environmental investment parks in some part of their countries, where they would demand of the rich countries to carry much of the financial burden, and make technology available. And also buy out patents and stimulate the most advanced companies to invest in those parks.
This would lead to more direct implementation of new technologies in the areas where they can be applied most cost efficiently, and at the same time, it would create a lobby of engineers and other experts in those two countries links to these parks and give their universities and the research institutes such as also Tata for instance in India, some major opportunities.
Then my sixth conclusion is that world leaders when they gather for instance at G8 summit in June, must now get beyond just providing a list of all things that governments need to do. They need to create institutions that can coordinate and lead the effort. Preferably from the perspective of a small country, these institutions should be on the U.N., but I think there is movement now in the E.U. towards seeing that it will be difficult to get the United States commitment to the kind of institutional solution within the U.N., and perhaps that creating something around the G8 is what is needed. A kind of concert of major powers around the fight against global warming.
This is not perfect from the point of view of a small country that is also outside the EU, but if that is what is needed in order to get some things done, it is so much more preferable.
Geoff Debelko: Thank you both very much. We have a lot to work with in the discussion period. I will remind you because particularly we are web casting the event, we ask that you use the microphone when you're posing a question. If you could let us know who you are, that would be terrific.
So who would like to kick us off in terms of a question discussion here?
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