Norway's Sovereign Wealth Fund Contemplates Rio Tinto Divestment

Rio Tinto RIO, the world’s second-largest metals and mining corporation, is facing a possible divestment from the Norwegian sovereign wealth fund.

The Council On Ethics, charged with ensuring adherence to strict ethical guidelines, is deliberating whether to recommend exiting the $2.15 billion stake due to alleged deforestation links in the Brazilian Amazon.

According to The Wall Street Journal, in January, the council asked Rio Tinto for comment on its draft recommendation to exclude the company from Norway's $1.6 trillion fund. Since then, Rio Tinto and the council have been in discussions, but a final decision hasn't been made.

The council, which is independent, plays an important role in the world's largest sovereign wealth fund. Its job is to scrutinize investments made by Norges Bank Investment Management, the fund's operator. It can then recommend excluding companies from the fund or placing them on an observation list.

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Norway’s stringent approach to ethical investing has also led to divestments from other major players in the industry, such as Glencore ADR GLNCY, as the fund dropped the stake in the Swiss miner in 2020 due to thermal coal production concerns.

With Norges closely adhering to recommendations related to environmental, social and corporate governance factors since 2015, Rio Tinto’s potential exclusion from the fund carries significant weight, as the fund is its fifth largest shareholder.

Yet, this isn’t the first time Rio Tinto has faced such a predicament. Back in 2008, Norway made headlines by divesting from Rio Tinto over concerns regarding the Grasberg mine’s operations in Indonesia, citing environmental damage. This divestment lasted for 11 years until June 2019, when Rio Tinto sold its stake in the mine for $3.5 billion, paving the way for its re-entry into the fund.

Today, the controversy lies in Rio Tinto’s 22% ownership of a bauxite producer, Mineração Rio do Norte (MRN), in northern Brazil. Another MRN shareholder, Australian miner South32 ADR SOUHY, which has a 33% stake, is also under assessment, as Norges owns 2.18% worth some $223 million. The third major shareholder is the aforementioned Glencore, with 45%.

As the largest sovereign wealth fund with $1.6 trillion under management, Norges holds an average of 1.5% stake in the world's listed companies. Owing to its size, the fund holds significant global sway. Its actions attract interest from other sovereign-wealth funds and large pools of capital, potentially shifting the sentiment around the companies in focus.

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