* May exclude companies that damage the environment-official
* The fund's holdings in palm firms up 57 pct in 2010 vs yr ago
* Fund invested $4 bln in water management, clean energy
By Niluksi Koswanage
KUALA LUMPUR, March 30 Norway's $550 billion sovereign wealth fund will keep investing in Southeast Asian oil palm planters but may exclude firms that severely damage the environment, a Norwegian finance ministry official said, as green groups step up their campaign against the industry.
Environmentalists have broadened their campaign to involve investment funds holding shares in palm oil firms that fell rainforests to expand -- a practice that pumps vast global warming gases into the atmosphere.
Green groups are targeting the Norwegian central bank-run fund, saying its investment strategy in palm oil firms was counter-productive to a $1 billion climate deal that Oslo had signed with Indonesia last year that involves banning forest clearing.
"Apart from production of certain types of weapons and tobacco, the fund will invest in most industries, including agribusiness and palm oil producers," Runar Malkenes, Deputy Director of the Information Division at the Ministry of Finance, told Reuters in an emailed statement on Wednesday.
"It is what companies do, not their industry per se, which may lead to exclusion," he added.
The Finance Ministry sets the investment mandate for the fund, which held 2.4 billion Norwegian crowns ($428.7 million) worth of palm oil-related stocks in its portfolio as of end-2010.
The investment in Malaysian, Indonesian and Singaporean stocks was up about 57 percent from 2009, Reuters calculations on fund data show.
The oil fund owns stakes in around 8,500 companies, so its investment moves are closely watched. The fund invests the Norwegian state's tax revenues from oil and gas activities to save for future generations and is world's second largest after that of the United Arab Emirates.
Last week, policy group Greenomics Indonesia criticised the Norwegian fund for investing in palm oil firm Golden Agri Resources .
The Singapore-listed planter is the parent of Indonesia's biggest palm oil firm SMART TBK that Greenpeace says had cleared high conservation value forests and carbon-rich peatlands. [ID:nL3E7EL1DS]
The Norwegian government has long set up an ethics council to suggest which companies it should exit for ethical reasons. There are ten companies blacklisted for environmental reasons including Malaysian loggers Samling and Lingui . [ID:nLDE71F211]
"The manager of the (fund)...has published documents which present the fund's expectations of how companies should manage, amongst others, climate risk," Malkenes said. "The exercise of ownership is another way the fund can seek to achieve behavioural change in the portfolio."
The official added that the fund had invested over $4 billion in areas of water management and clean energy, without giving details.
Norway has been among the forerunners in combating climate change with its $1 billion each to Brazil and Indonesia, where large tracts of rainforests remain standing but are at risk of getting logged.
In Norway's deal with Indonesia, a top palm oil producer and a big CO2 emitter, the aid comes in exchange for a two-year moratorium on forest clearing.
But laws for the ban have yet to be formalised as the government has to thrash out details with the powerful palm oil and logging lobbies that bring in billions of dollars to the Southeast Asian country. ($1 = 5.598 Norwegian Crowns) (Editing by Himani Sarkar)