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Norway wealth fund examining Total's ethics in W.Sahara

* Norway's wealth fund is Total's fourth-biggest investor

* Total says it respects international norms on human rights

* Fund could blacklist firms for corruption, environmental damage this year

* Council examining labour conditions in textile industry

OSLO, March 12 (Reuters) - Norway's sovereign wealth fund is examining the operations of oil firm Total in Western Sahara, a disputed region of North Africa with a history of human rights abuses, to ascertain whether its activities there are unethical.

The $850-billion fund, which invests Norway's revenues from oil and gas for future generations, invests only in companies it considers ethical, and has blacklisted 63 firms, including makers of nuclear arms, anti-personnel landmines, cluster bombs and tobacco.

It is one of the world's largest investors, with holdings in 8,200 companies, including a 2.06 percent Total stake worth about $3 billion, which makes it the French company's fourth-biggest investor.

"We are following the work of Total in Western Sahara closely," said Ola Mestad, a law professor who has headed the Norwegian fund's ethics council since 2010.

Total told Reuters its "operations offshore in Western Sahara, as in other places where we operate, are in line with the applicable international laws and standards mentioned in our Code of Conduct, in particular those related to human rights".

Mestad said the main issue with Western Sahara, which Morocco and Algeria-backed separatists both claim, was ensuring that the interests of the local population, such as the Sahrawis - many of whom are either exiled or in refugee camps - are protected.

Total was awarded a licence to explore for oil and gas off Western Sahara in 2011 by Morocco, which annexed the region in 1975 after colonial power Spain withdrew, and fought a war with the separatists. In 1991, a U.N.-brokered ceasefire was reached on the understanding that a referendum would be held on the region's fate. That vote never took place.

Media reports and human rights organisations say the dispute has resulted in frequent abuses, including the displacement of tens of thousands of Sahrawi civilians.

The fund's council on ethics, which published its 2013 annual report on Wednesday, has recommended the fund drop its investments in companies in the past because of their involvement in Western Sahara.

In 2005 the fund sold its stake in oil company Kerr McGee, since the council considered its offshore exploration work there strengthened the claims of Morocco to sovereignty over the territory, a claim not recognised by the United Nations. Kerr McGee did not renew its contract the following year.

In 2011 the fund sold its shares in firms Potash Corporation of Saskatchewan and FMC Corporation for buying phosphate from Western Sahara.

In December Total signed a joint declaration with Morocco's National Bureau of Petroleum and Mines in which the latter emphasises its commitment to complying with the principles of the Charter of the United Nations.

Total also signed a memorandum of understanding setting out corporate social responsibility principles for the reconnaissance period and any subsequent phases.

INVESTMENT RISK

Speaking at his office at the University of Oslo, lined with tomes on property, trade and E.U. law, Mestad said investors should be more aware of human rights issues when investing in a company, both for ethical reasons and because it can pose a risk to their investments.

In 2014 he said the council on ethics would also be looking at oil and gas firms operating in countries presenting a risk of corruption and could sell out of textile companies that violate workers' rights.

He said multinationals would probably not be directly responsible for the worst labour conditions, but their supply chains could harbour abuses.

"That is where there could be a relation between really bad conditions and a company in which we are invested in," he said.

He said the exclusion of firms by the fund could be expected this year due to corruption, the destruction of forests to set up plantations, and environmentally damaging fishing activity.

In 2013 the council looked at the oil and gas sector's involvement in Equatorial Guinea and whether it contributed to human rights violations.

In its report, the council said human rights were being violated since the country's revenues were not being used to improve the living conditions of the population.

"Given that this is thoroughly documented in various public reports, this is something that the companies know about. On the other hand, the companies cannot be said to have a significant degree of control over the situation."

As a result, and given the fund's high threshold for exclusions, the council did not recommend disinvestments.

The fund also looked at labour conditions in the consumer electronics industry in China.

"In this sector, many of the larger companies seemed to be more aware of their responsibilities. Companies that had previously been strongly criticised appeared to have improved their working conditions," the report said.

The ethics council is independent of the management of the fund. It makes recommendations to Norway's finance ministry about the investments, which then instructs management to act on those recommendations.