Instead, the decision on which companies the fund should refuse to invest in on ethical grounds will be left to Norges Bank, the company responsible for managing the fund.
"I think the changes will give better results and a more efficient and consistent use of available resources," Finance Minister Siv Jensen said as she presented a white paper to parliament on the fund's future. "At the same we will take steps to strengthen the legitimacy of the ethical side to the management."
In its statement, the finance ministry said that the current ethical exclusion criteria would be "integrated" into the management mandate of Norges Bank.
It also argues that the fund should up its mandate for investment in environmental companies from 20 billion to 30 billion kroner a year to 30 billion to 50 billion.
The proposal has been criticized by both the Christian Democratic Party and the Liberal Democratic Party, both of whom have signed an agreement to support the government on key measures.
"The Christian Democratic Party is not convinced that it is a good solution to eliminate the ethics council," the party's finance spokesman Hans Olav Syversen, told Norway's DN business newspaper.
He was supported by Terje Breivik, the Liberals' finance spokesman, who argued that the committee's independence was "a very important thing to safeguard".
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Ola Mestad, the director of the Ethics Council told DN last month that the council would not be able to do its job if it was embedded in Norges Bank.
"When the Council was established, the basic idea that it should be independent," he said. "If we are subject to Norges Bank, we will be just like other funds."