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Fund's ethical guidelines to be reassessed

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Could invest billions of dollars in 14 defence companies

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War in Ukraine behind broad political backing for change

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"Freedom is more important than ESG," says fund's first

CEO

By Gwladys Fouche

OSLO, Nov 13 (Reuters) - Unnerved by the Ukraine war and

U.S. President Donald Trump's whiplash statements on defending

Europe, Norway could allow its $2.1 trillion sovereign wealth

fund, the world's largest, to invest in major defence companies

from 2027 after a more than 20-year hiatus.

Such a move would enable the fund to take stakes in 14

defence companies with a combined market capitalisation of about

$1 trillion, and which it cannot currently invest in under

ethical guidelines because they make components of nuclear

weapons.

On November 4, parliament voted in favour of reviewing the

fund's ethical guidelines, in place since 2004.

The companies that could become open to the fund are:

Lockheed Martin ( LMT ), Boeing ( BA ), Airbus, BAE

Systems, Safran, Thales, BWX

Technologies ( BWXT ), Northrop Grumman ( NOC ), Fluor,

General Dynamics ( GD ), Huntington Ingalls Industries ( HII ),

Jacobs Solutions ( J ), L3Harris Technologies ( LHX ) and L&T

.

Once spurned by ESG-minded investors, defence stocks are

becoming more acceptable, as Russia continues to wage war in

Ukraine, and European countries hike defence spending under

pressure from the Trump administration.

The new security environment has also made defence stocks a

potentially lucrative investment.

"Freedom is more important than ESG," Knut Kjaer, the fund's

founding CEO, who served between 1998 and 2007, told Reuters.

"Europe has to defend itself from the aggression from Russia.

Why should we not invest in weapons?"

Norway was buying arms from the very same companies it has

forbidden its fund from investing in, he said.

NORWAY'S FUND HAS SET INVESTING TRENDS

Any changes to the fund's guidelines could see other

ESG-minded investors follow suit, such as when in 2016, it

decided to shun companies that derive 30% of revenues from coal.

Last Friday, Norway's finance ministry named a commission to

review the guidelines and which will make recommendations in

October 2026, to be voted on in parliament in June 2027.

A NEW GLOBAL SECURITY SITUATION PROMPTS A RETHINK

Like Kjaer, the government has highlighted it is already a

direct customer of many of these defence companies.

"On the one hand, we consider it ethically acceptable to

transfer large sums to such (defence) companies as payment,

while we consider it is unethical to receive much smaller

amounts as returns from the same companies," Finance Minister

Jens Stoltenberg, an ex-NATO chief, told parliament on October

24.

In the commission's mandate, the finance ministry highlights

a "dilemma": Norway buys fighter jets from Lockheed and frigates

from BAE Systems, yet 20 years ago agreed its wealth fund would

not invest in them.

"Since then, both companies' involvement in weapons

production and the security policy situation have changed.

Nuclear weapons are fundamental to NATO's deterrence strategy,

of which Norway is a part," it continued.

The minority Labour government would have the backing of

enough parties to support a change to the guidelines.

"We can dislike nuclear weapons but it is a part of NATO's

strategy and we are a NATO member. So it is hard to see the

logic in not being able to invest," Hans Andreas Limi, the

parliamentary leader for the second-largest party, Progress,

told Reuters.

The third largest party, the Conservatives, is also

supportive. Its incoming leader, Ine Eriksen Soereide, proposed

such a change earlier this year.

Asked whether the government already backed a change ahead

of the commission's recommendations, Deputy Finance Minister

Ellen Reitan said the ministry would not comment beyond what had

already been communicated in the mandate.

Not everyone agrees that a fund whose aim is to safeguard

future generations of Norwegians should invest in companies that

help produce weapons of mass destruction threatening the

survival of humanity.

"We have ... heard it is a paradox that Norway cannot invest

in companies we otherwise trade with. Is it really? Is there

really no big difference between buying equipment our country

needs and, for example, investing in nuclear weapons?," asked

Kirsti Bergstoe, the leader of the Socialist Left party, in

parliament on October 23.

DIVESTMENTS ON ETHICAL GROUNDS HAVE BEEN PAUSED

Norway, a NATO country of 5.6 million, is not part of the

European Union and shares a border with Russia in the Arctic.

A former head of the fund's ethics watchdog, the body that

issues recommendations on stocks to divest from the fund, says

the ethical guidelines had to change to reflect events.

"We should be able to rework the ethical guidelines to say

that 'we are in a pre-war period, or an inter-war period, and so

we have to look at these weapons exclusions in another manner',"

Ola Mestad, head of the Council on Ethics from 2010-2014, told

Reuters.

That means, too, that Norway must tread more carefully when

it issues ethical decisions to divest from international

companies because the backlash can be more damaging than before,

analysts said. Last week parliament paused such divestments.

"In the new regime of more politicised markets, we must be

more aware of where we can be diluted, capital controls being

introduced, have our assets confiscated, or being used as part

of a weaponising of financial transactions where we may have to

wait 100 years for getting our return back," said Kjaer.

Some 52.4% of the fund's assets, or $1 trillion, is invested

in the U.S. across stocks, bonds and real estate.

In September, the U.S. State Department said it was "very

troubled" by the decision to divest from Caterpillar ( CAT )

over the use of its products by Israeli authorities in Gaza and

the occupied West Bank.