* Review comes after criticism fund is too big, unresponsive
* Norway often bars sovereign wealth fund from investments
* Asks for greater scrutiny of Shell and Eni in Niger Delta
* Fund will also raise concerns with AngloGold
By Balazs Koranyi
OSLO, Oct 14 (Reuters) - Norway has ordered a review of its $790 billion wealth fund, one of the world's biggest investors whose largesse helps underpin Norway's generous social benefits, responding to concerns that the fund is unwieldy and its returns too low.
The government also in a regular review of the fund's investment ethics ordered it to sell stakes in several companies due to ethical issues and expressed concern over investments in oil companies Royal Dutch Shell and Eni.
But it stopped short of saying the latter stakes should be sold.
The fund, whose wealth stems from taxes on Norway's offshore oil industry, is so big it holds 1 percent of global stocks. But having grown rapidly in recent years, it now faces criticism that it is too big, unresponsive and mostly tracks its specially designed benchmark - based on measures for different parts of its portfolio - and generates only modest returns.
The outgoing centre-left government has therefore asked an expert panel of university professors and financial experts to review the fund's activities, examine how it could improve returns and to what extent it can increase risk.
The fund has outperformed its benchmark over the past 10 years, but its annual net real return of 3.61 percent is below the government's 4 percent target. Critics say given its current setup, the 4 percent target is not viable.
Propping up returns is vital as the budget relies on the fund for some of its spending, including on schools and on its generous health and social benefits, and lower returns may force it to dip into the principal instead of using just the returns.
A new Conservative-led government, set to take power on Wednesday after winning elections in September, has also promised to examine the fund, arguing that changes, which could include its break up, could improve its efficiency.
Meanwhile the ministry has barred the fund from investing in WTK Holdings Berhad, Ta Ann Holdings Berhad, Zijin Mining Group and Volcan Compania Minera because their activities pose a "risk of severe environmental damage."
It also put India's Zuari Agro Chemicals Ltd on the banned list due to child labour concerns.
But contrary to the recommendation of its Ethics Council, the government did not place Royal Dutch Shell and Eni on its watch list for possible exclusion and instead asked the fund to place a greater emphasis on scrutinizing their activities in the Niger Delta.
"The Ministry of Finance has decided to ask Norges Bank (which manages the fund) to include oil spills and the environmental conditions in the Niger Delta in its ownership efforts for a period of between five and 10 years," the ministry said.
Shell, the fund's second-biggest holding as of June 30 and worth some $4.8 billion, said it would continue to engage with socially responsible investors to discuss its business. ENI did not respond to an email seeking comment.
The decision to not exclude Shell and Eni drew immediate criticism, including from the winner of a top Norwegian human rights award.
"Continued investment in companies like Shell or Eni simply means that the Norwegian pension fund is investing in a dirty business and looking for more dirty money," said Nigeria's Nnimmo Bassey, winner of the 2012 Rafto Prize.
"They are funding environmental devastation and destruction of livelihoods," said Bassey, who is a senior member of the environmental group Friends of the Earth International.
The fund usually sells its stakes in companies before the government makes its exclusion decision public.
It often excludes companies and has dozens of tobacco and weapons makers on its veto list. Some of the world's biggest miners, such as Rio Tinto and Barrick Gold , are banned because the government considers they have badly damaged the environment.
The government also asked the fund to raise issues about mining-related environmental damage with AngloGold Ashanti , but has not excluded the firm from its investment list, despite such a recommendation from the Ethics Council.
"We do have an ongoing dialogue with these companies and we've had for a long time, over the past two years ... and they've showed good results," oil fund spokesman Thomas Sevang said. "We think that exercising our ownership rights is creating positive change."
Besides Shell, the companies involved could either not be reached for comment or did not comment.