* Fund criticises working conditions at Hansae Co
* Companies say taking steps to improve conditions
* Fund barred from investing in firms breaking ethics code (Adds comments from companies and the fund, bullets, background)
OSLO, June 29 (Reuters) - Norway’s $965 billion sovereign wealth fund has put under observation South Korea’s Hansae Yes24 Holdings and its garment manufacturing unit Hansae over possible human rights violations, the central bank said on Thursday.
Under the fund’s operating guidelines, it could sell holdings in firms that do not meet its ethnical code.
At the end of 2016, the fund had a 1.29 percent stake worth $11 million in Hansae Co Ltd, which manufactures garments in Vietnam and several other countries. It also owned a 1.52 percent stake worth $5.2 million in its parent Hansae Yes24.
“The companies are placed under observation because of an unacceptable risk that the companies contribute to, or are responsible for, systematic violations of human rights,” the board of the central bank wrote in a statement.
A spokesman for the two firms told Reuters they had conducted an internal investigation of working conditions at the Vietnam plant this year that resulted in efforts to improve working conditions and related issues.
The Norwegian fund is a managed by a unit of the central bank. The fund’s ethics watchdog, the Council on Ethics, makes recommendations to the central bank’s executive board, which decides whether to act.
The council recommended a prompt exclusion of the two firms from the portfolio, but the board of the central bank decided to put the stakes under observation.
“The Council on Ethics highlights that the companies have taken measures to improve the working conditions. The Executive Board believes that these measures provide sufficient grounds to observe the development in the future,” the bank said.
Norway’s sovereign wealth fund holds stakes in almost 9,000 companies in 77 countries.
Ethics guidelines prevent the fund investing in makers of nuclear weapons, cluster bombs and tobacco, among other things. The guidelines also bar investment in firms deemed to be violating human rights or damaging the environment. (Reporting by Terje Solsvik in Oslo, additional reporting by Heekyong Yang in Seoul; Editing by Gwladys Fouche)