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In Oslo, where the world’s biggest sovereign wealth fund decides how to allocate $1.4 trillion, a huge contradiction lurks.

The fund is trying to reconcile a sustainable-investing mantra with the billions it owns in companies that source cocoa from regions where children pick beans that feed the world’s craving for chocolate. So far, it has chosen to stay involved rather than sell so it can push for positive change.

"We expect companies to work against child labor, but at the same time we recognize that child labor in supply chains and agriculture has complex underlying causes,” said Line Aaltvedt, a spokeswoman for the fund.

In a global financial world increasingly obsessed with ethical matters, the world’s biggest investors — from BlackRock Inc. to Fidelity Investments — are navigating gray areas and trying to figure out the best way to engage. While the Norwegian fund’s actions are primarily financial, as was the case when it sold $6 billion worth of companies that purely focus on oil exploration and production last year, ethical considerations increasingly play a part.

The stakes aren’t insignificant for Norway’s wealth fund, which according to its most recent filings owns shares valued at more than $16 billion in some of the world’s largest chocolate makers and confectioners, including Nestle SA, Hershey Co. and Barry Callebaut AG. The companies all acknowledge child labor exists in their supply chain, have explicit policies forbidding the practice and programs in place to mitigate the problem.

It’s the International Year for the Elimination of Child Labour, and the United Nations held its World Day Against Child Labor a week ago. Still, the practice remains hard to eradicate in the world’s cocoa farming regions. Just ask Nouffo.

He was rescued as part of a police operation to clamp down on child labor in Soubre, the heart of the Cote d'Ivoire cocoa belt in early May. Nouffo said he was brought to the country from neighboring Burkina Faso by his father when he was 13 years old. He was left to work on his uncle’s plantation, where he was found splitting open cocoa pods with a machete.

"Two Ramadans have passed since I’ve been here,” said Nouffo in his limited French. That makes him 15 now.

Theobroma cacao beans sit in a pile to dry at a facility in Ticul, Yucatan state, Mexico. | BLOOMBERG
Theobroma cacao beans sit in a pile to dry at a facility in Ticul, Yucatan state, Mexico. | BLOOMBERG

Nouffo, who spoke while being held in a center in Soubre, said he worked seven days a week splitting open cocoa pods gathered by adult workers, drying them and then transporting them by motorcycle to buying centers. School was out of the question.

His uncle was among 24 people arrested as part of the two-day police raid in partnership with the National Committee for the Monitoring of Actions to Combat Child Trafficking, Exploitation and Labor, which is led by First Lady Dominique Ouattara.

Five of those arrested were sentenced to 20 years in prison for child trafficking, including Nouffo’s uncle, said Luc Zaka, the police commissioner in charge of the raid. Seventeen others were handed five years behind bars and two were released.

As supply chains in the cocoa market are difficult to track, it could not be established whether any of the world’s large chocolate makers were supplied by the farm Nouffo worked on.

Demanding action

Last year, the Norwegian fund conducted about 3,000 meetings with portfolio companies to discuss how ESG targets were being met. Children’s rights were the topic of 17 such meetings. In 2019, it initiated talks with nine companies in the cocoa business on the subject.

"Typically, the chocolate producers are in the fund, while the cocoa producers are private farms in West Africa,” said Eli-Ane Lund, a spokeswoman for the ethics council that makes recommendations to guide the fund.

The debate usually revolves around how patient investors should be with transition assets — those with a self-improvement plan — and when it’s time to punish companies through exclusion. When it comes to child labor, mostly in the cocoa business but also in the coffee, tea, cotton, seeds and palm oil trade, the Norwegian fund has often decided to stay involved.

Take Barry Callebaut, the Swiss chocolate maker that says it will probably continue to have child labor in its supply chain until 2025. It counted Norway’s wealth fund among its biggest shareholders, with a 1.4% stake, the latest filings show.

The fund, which also meets with nongovernmental organizations as part of its environmental, social and governance investing strategy, is putting pressure on firms like Barry Callebaut to improve, Carine Smith Ihenacho, chief corporate governance officer at the Oslo-based fund, said in an interview.

In another example, Norges Bank’s executive board asked the fund in 2018 to address the risk of child labor at UPL Ltd., an Indian agro-chemicals maker, and its Advanta Seeds unit.

A police raid as part of a child labor probe in Soubre, Cote d'Ivoire | BLOOMBERG
A police raid as part of a child labor probe in Soubre, Cote d’Ivoire | BLOOMBERG

"In our dialogue with the company, we have, among other things, addressed the need to prevent child labor in the supply chain and the company’s approach to monitoring the supply chain,” fund spokeswoman Aaltvedt said.

That led to Advanta recently updating its agreements with farmers and further developing procedures for monitoring the supply chain to uncover possible child labor. It also has information activities aimed at farmers, suppliers and local authorities to prevent child labor.

"Child labor in the production of hybrid cotton seeds and other seed varieties was among the very first issues considered by the Council on Ethics, and this was an issue that the council worked on for many years,” said Eli-Ane Lund, a spokeswoman for the council.

The ethics panel, an independent body, has made three recommendations for observation or exclusion of companies on child labor grounds: Monsanto Co. in 2006, Zuari Agro Chemicals Ltd. in 2013 and UPL in 2018. Of the three, only Zuari Agro Chemicals was actually excluded.

Global footprint

With so much money to invest, Norges Bank Investment Management’s footprint spans the globe, and it owns close to 1.5% of all listed companies, making it the biggest stock owner in the world.

Other companies exposed to child labor that counted the fund as a shareholder as of the end of 2020 included Nestle, Hershey, Mondelez International Inc., Procter & Gamble Co., Starbucks Corp. and Lindt & Spruengli AG. The fund’s investments in those companies, including Barry Callebaut, amounted to more than $16 billion.

While some progress is being made, the task remains monumental.

A man prepares cocoa beans for sale in Daloa, Cote d'Ivoire. | REUTERS
A man prepares cocoa beans for sale in Daloa, Cote d’Ivoire. | REUTERS

Barry Callebaut says poverty is the root of the problem, and that it works to alleviate it, provide access to education and raise awareness. It has a code of conduct regarding human rights, forced labor and child labor that all employees are obliged to follow.

Working with the International Cocoa Initiative in 2019-20, the company monitored and took remedial action covering 113 farmer groups, including 39,909 farmers in Cote d'Ivoire and Ghana. It uncovered 22,965 cases of child labor.

"ESG has moved from a peripheral investment criteria to a central one,” the company said in an emailed statement. "Barry Callebaut welcomes the dialogue with its shareholders on ESG topics.”

Cocoa-producing nations in West Africa have come under increased pressure to clean up the industry, with a report last year sponsored by the U.S. government showing that despite chocolate companies pledging to cut child labor, the problem actually got worse in the 10 years prior to the publication of the report.

Lagging ESG standards

While the EU prepares to introduce stricter laws later this year, Europe remains the leading destination for Ivorian beans, accounting for 67% of its cocoa exports. As fund managers wait for global ESG standards, they’ve created their own methodologies to fill in the perceived gaps.

Norges Bank Investment Management says divestments tied to ESG standards are set to rise as it screens for wrongdoers.

The fund has set seven criteria for sustainable investing, according to Ihenacho. For the S in ESG, it looks at how well companies protect children’s rights and human rights, whether they’re transparent taxpayers, and whether they avoid corruption.

Over the past two decades, the ethics council has successively introduced socially responsible guidelines for the fund manager to follow, ranging from selling stakes in fossil-fuel companies to blacklisting firms that abuse migrant workers or dabble in corrupt practices.

After Walmart Inc. was beset by criticism for human rights violations in 2005, including the risk of child labor, the fund sold out. The retail giant cleaned up its act and was removed from the fund’s exclusion list more than a decade later, in 2019. Norway now owns a stake in Walmart valued at about $2.1 billion.

In a more recent instance, the fund has for two years voted in favor of a proposal at Facebook Inc. "to assess the risk of possible exploitation of children on the company’s platforms,” Aaltvedt said.

Measuring misconduct

The fund says it’s harder to catch companies guilty of social misconduct than to identify climate sinners.

"It’s quite clear that the S is in many ways harder to quantify and measure” than the E in ESG, Ihenacho said.

Amnesty International in Norway, which follows the wealth fund closely, says the screening can be tightened up.

"It would have been better if the fund could have avoided investing in a company where there’s a high risk of breaching the ethics council’s framework,” said Hanne Sofie Lindahl, political adviser at Amnesty in Oslo. "Preemptive screening in countries where we know that there are widespread abuses of human rights could help strengthen the fund’s ethical framework.”

The fund’s chief executive officer, Nicolai Tangen, says databases with different sustainability targets now used on portfolio companies will be used to improve its screening of companies being considered for addition.

"You have good and bad companies in all countries, really,” Tangen said in a June 2 live-streamed discussion. "The goal is to keep the rotten apples out of the basket.”

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