By year end, huge fund could add first companies to its blacklist for emitting too much climate-changing gas

* Will probe corruption in arms, energy, telecoms sectors

* Will look at firms with unacceptable greenhouse gas levels

* Focus on human rights abuses in textile, construction

* Sees more recommendations for exclusions ahead

By Joachim Dagenborg and Gwladys Fouche

OSLO, March 11 (Reuters) - The ethics watchdog for Norway's $830-billion wealth fund will focus this year on identifying corruption in telecoms, arms and energy companies and expects to recommend that an increasing number of firms across all sectors be barred from investment.

By the end of this year, the fund which invests income from Norway's oil and gas production could add the first companies to its blacklist for emitting too much climate changing gas, said the chairman of its independent ethics panel, Johan H. Andresen.

The ethics panel will also look into allegations of human rights abuses in Qatar's building sector, Malaysia's electronics goods industry, and textile factories in some Asian countries, Andresen told Reuters.

The fund is the world's biggest sovereign wealth fund, owning 1.3 percent of all listed company equity on earth. As of the end of last year it owned shares in 9,050 firms worldwide.

It is forbidden by law from investing in firms that produce nuclear weapons or anti-personnel landmines, or are involved in serious and systematic human rights violations, among other ethical criteria.

Norway's parliament has set a new mandate from this year to restrict investment in companies that emit excessive climate changing gases. Andresen said his panel was still looking into the criteria for such judgements but its first recommendations on climate criteria could come by the end of the year.

Some 66 companies have so far been excluded from the wealth fund on ethics grounds, and two are under observation, including, since January, Brazil's state oil company Petrobras , under scrutiny for alleged corruption.

"Most of the corruption cases come from the industry studies within defence, telecoms and energy. Those three (sectors) seem to keep us very busy," Andresen, the council's chairman, said in an interview. "We will of course look into other companies, should we be made aware of them."

The Council on Ethics makes recommendations to the central bank on firms which may be in breach of the fund's ethics guidelines. It is now examining 14 corruption cases, including Petrobras.

Based on the council's recommendations, the central bank board instructs the fund's management whether to exclude companies from the fund. The board can also put firms under observation to allow them to fix the problem. A key factor is the risk that an ethics breach will be repeated in future.

The risk of corruption increases in the energy, defence and telecoms sectors as they more often involve large contracts between parties that can withhold information based on internal national security directives, Andresen said.

"We were especially surprised with what we found in the arms industry. It seems that the absence of corruption was the exception and not the norm," said the 54-year-old Norwegian investor, owner of private investment vehicle Ferd.

Andresen declined to comment specifically on Petrobras, but speaking generally, he said: "Companies should aspire to be far better ... They should not try to guess what is the least amount of good behaviour that is expected."

Across all sectors, he expected the number and frequency of recommendations to the central bank's board to increase as the council concludes the different sector studies it has begun.

"We did recommend one company for exclusion last week, and there are others that we are working on right now. Some of these companies are quite large, so the (central) bank may decide to undertake some type of ownership interaction," he said.

TEXTILE, CONSTRUCTION AND CLIMATE CHANGE

Asked about the apparent irony in looking at climate change for a fund that earns nearly all its wealth from Norway's oil and gas industry, Andresen said: "We don't get involved in politics and therefore we don't question the criteria. Whichever criteria the politicians give us, we will use."

Andresen said the council would look at "a broad set of industries" including the oil and gas sector over climate change, and had not yet concluded which factors to analyse to determine what is acceptable.

"I don't think there is a reason to avoid looking at oil and gas companies. But they are not going to be the only ones by far," he said, speaking at the council's office in central Oslo.

"We think that there might be some exclusions towards the end of the year within the climate criterion."

Next month the council will receive a first report on the construction industry in Qatar. Construction companies working in neighbouring countries will be under review too, he said.

Also under scrutiny will be electronics goods manufacturers in Malaysia.

The council will look at workers rights in the Indian and Bangladeshi textile industries, after looking at Cambodia and Vietnam last year.

"In earlier studies of textile production facilities, we have been confronted with forced overtime, loss of bonus when legally sick, possible child labour, safety issues and the integrity of the construction of the (plant) building," he said.

Another target will be the environmental damage made by the chemical industry. The council is looking at "less than ten" companies in this field, he said.

The council, although independent, is collaborating closely with the fund, which has its own ethical targets, such as children's rights, human rights and water management. They are working together on the textile industry.

"They are focusing on the buyers' side, the big companies within the fund, while we engage with the smaller companies where the potential breach is happening on the ground," he said. (Editing by Peter Graff)

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