Norway likes to think of itself as an ethical model for others. It spends 1 per cent of its gross national income on international development assistance and $1bn (£723m, €783m) to save the rainforest in Brazil.

But the paradoxes within one of its most visible efforts, the ethical investment strategy of its government pension fund, show how difficult it is to bridge the irreconcilable differences between the two main purposes of the world's second largest sovereign wealth fund: to make money while investing ethically. The most recent contradiction, and probably most ironic, is the finance ministry's current consideration of whether to exclude companies for carbon emission violations.

Norway's NKr2,275bn (£239bn, €258bn, $329bn) Government Pension Fund - Global, originally known as the Petroleum Fund, is funded by revenues from fossil fuels and even invests in oil companies. The government was obliged to take up the matter after Norwegian environmentalist group Bellona last year made a formal recommendation to the ministry as part of a white paper on the fund's management to be submitted to parliament on March 27.

The paper is the culmination of the most exhaustive review of the fund's ethical guidelines since their introduction five years ago. It will provide the eventual basis for any potential changes to the guidelines this summer.

"Climate change was central [to the public consultation process]," says Martin Skancke, finance ministry director general for asset management. "But the advice was broad, including positive screening, active ownership and separate allocations towards green technology companies."

Several companies have also made recommendations in the current consultation for the fund to abstain from tobacco company investments. The fund can presently exclude tobacco companies on an ad hoc basis if their marketing poses a serious violation of ethical norms. So far, none have been excluded and in fact the fund has ownership in some of the major tobacco companies, such as Altria and Philip Morris, according to its year-end report.

The list of contradictions does not end there. The fund has excluded Lockheed Martin from its investment portfolio, yet the country buys its planes. The fund also temporarily blacklisted US oil company Kerr McGee for pollution violations at a Western Sahara project, despite a Norwegian company being involved in the project.

Moreover, Norway has a formal ethics council for the Government Pension Fund - Global, but cannot present conclusive evidence that ethical investing pays off financially.

"It's not difficult to find the paradoxes in this," says Gro Nystuen, chair of the ethics council. "But if you try and do everything 100 per cent, it is paralysing."

Ms Nystuen is one of five council members, part of whose job it is to recommend which companies to exclude. She says the ethical part of the government pension fund's investment strategy dates back to the late 1990s when journalists unearthed an embarrassing revelation about the fund's investment in a Singapore company involved in anti-personnel land mines shortly after Norway hosted the international Land Mine Ban conference in Oslo. The situation prompted the eventual formation of the independent advisory council on ethics in 2004.

The blacklist of excluded companies comprises polluting miners, weapons producers and companies with labour violations. The council gets its leads from the Ethical Investment Research Service, a UK screening company that looks at the 7,000 companies in the fund's portfolio and mines for keywords. Eiris sends the council the names of 40 to 60 possible offenders every month. The council also gets tips from non-government organisations and journalists.

The fund recently excluded investments in Canadian mining company Barrack Gold for environmental damages and US company Textron for cluster weapons production. There are currently 29 companies excluded from the fund's investment portfolio.

The council's work has been conducive to changing the way some companies behave.

Monsanto is a key example. The council initially recommended in 2006 that the finance ministry exclude the US agricultural company because of its use of child labour in its cotton seed production in India. But after working together with the company, and even going so far as to physically go into the fields and count children, the ministry decided last year to keep Monsanto because it had made significant improvements.

The fund's ethical investment strategy has also been influential in changing the way other pension funds invest. The Swedish AP Fund was persuaded to disinvest in Wal-Mart following Norway's lead; Norwegian pension fund KLP has followed the government pension fund's recommendations, and the fund has influenced the New Zealand Superannuation Fund.

Latest government rulings

The finance ministry announced last Friday that it would exclude Dongfeng Motor, the Chinese company, from the funds investments for selling military trucks to Burma. This is the first time the criteria regarding the sale of military materials to Burma has been applied since it was set up late last year.

The ministry also placed Siemens, the German group, under observation for four years.