Managed by the country's central bank Norges Bank and fuelled by its vast energy revenues, the fund is the world's biggest, with a value of nearly $2 trillion and investments in more than 8,600 companies across the globe.
"Norges Bank's Executive Board has decided to exclude the company Eramet SA due to an unacceptable risk that the company contributes to or is itself responsible for serious environmental damage and gross violations of human rights," the fund said in a statement.
As of June 30, the fund had a 0.44 percent stake in Eramet, valued at around $6.8 million, according to fund data.
The decision was made following a recommendation from the fund's ethics council, which cited "an unacceptable risk that the company is contributing to, or is itself responsible for, severe environmental damage and serious violation of the human rights of uncontacted indigenous people".
Specifically, the council cited "Eramet's participation in the PT Weda Bay Nickel Joint venture, which is extracting nickel on the island of Halmahera, Indonesia".
The mining would result in the deforestation of rainforest areas and "the loss of critical habitats for endangered and endemic species", the council said, adding that it also threatened the survival of indigenous people "in voluntary isolation".
Eramet said it "deeply regretted" the fund's decision.
"As a minority shareholder (in Weda Bay Nickel), Eramet strives to promote best practices in mining, environmental stewardship, and social responsibility with its partners, in line with the group's values and commitment to responsible mining," it said in a statement.
Indonesian authorities told AFP on Friday they had seized nearly 150 hectares (370 acres) of the nickel mine concession that encroached into forest areas without a licence.
An AFP investigation earlier this year showed its effects on members of the Hongana Manyawa Indigenous tribe, one of the country's last isolated hunter-gatherer communities.
The community, parts of which remain uncontacted, says the forest they have long relied on for food and shelter is being destroyed by deforestation and environmental degradation linked to the mine.
Weda Bay Nickel has denied the allegations and says it is committed to "responsible mining and protecting the environment".
Indigenous rights group Survival International welcomed the fund's move.
"The company is now as toxic as its mining, and we're calling on all its other shareholders to divest too unless and until there is a no-go zone for the uncontacted Hongana Manyawa people," Caroline Pearce, director of Survival International, told AFP.
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