Read MoreAll Norwegians become millionaires as oil fund balloon
The step, confirming a report from a group of experts in November, is the biggest organisational change since the council of ethics was founded in 2004. But it is likely to disappoint many activists who believe that the exclusion process will become less transparent once it is based within the oil fund.
"I think the changes will give better results and a more efficient and consistent use of available resources. At the same time we take steps to strengthen the legitimacy of the ethical side to the management," Ms Jensen said.
The government will set up an expert panel to monitor the oil fund's work on responsible investments and insisted that "openness . . . will still be a key feature in the management of the fund".
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Ms Jensen also disappointed expectations of new investment mandates for the fund in infrastructure, emerging markets or green energy.
She said that the fund should nearly double its current investments in renewable sources of energy from the current 20-30 billion krone ($3.34-$5 billion) to 30-50 billion krone. The fund amounted to 5,206 billion at the end of 2013 and some activists had called for it to invest 5 percent of its portfolio in green infrastructure.
The fund will also have to state how much it invests in emerging markets and environmentally-friendly companies – last year the figures were 500 billion krone and 180 billion krone respectively.
Read MoreNorway's $815 billion oil fund faces key decisions
Norway's finance ministry also named the members of the expert group that will consider whether the oil fund should pull out of all investments in oil, gas and coal companies. The group will be headed by Martin Skancke, a former government bureaucrat who once headed the finance ministry's asset management department, and will include British professor Elroy Dimson.
The government noted, however, that "the most important measure to reduce the state's oil and gas price risk" is to put its petroleum revenues into the oil fund and thus into "diversified financial investments globally".
Ms Jensen's Progress party had recommended setting up three smaller funds as part of its election platform last year. But observers of the oil fund expected Norway's powerful bureaucracy to water down any attempts at radical reform.
The finance ministry also decided to push the fund to become a more active investor after receiving a report about its investment returns from international experts.