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Asset Allocation

Tobacco, Weapons Exclusions Reduce Norway Fund’s Returns

Fund manager reports that some ‘ethical exclusions’ have lowered the fund’s performance.

By Michael Katz

Norges Bank Investment Management, which manages Norway’s $1.1 trillion Government Pension Fund Global, said that the exclusion of tobacco companies and certain weapons manufacturers have reduced the fund’s returns, in a recent report on the fund’s risk and return.

Norway’s Ministry of Finance first issued guidelines for the observation and exclusion of companies from the fund in 2004, and appointed a council on ethics to research and evaluate companies, and to make recommendations on investment exclusions. The guidelines set two types of criteria: one relates to specific product types and excludes companies that produce tobacco or weapons that “violate fundamental humanitarian principles.”

The other set of criteria excludes companies where it is deemed there is an unacceptable risk of conduct that contribute to “serious or systematic human rights violations, serious violations of the rights of individuals in situations of war or conflict, severe environmental damage, gross corruption, or other serious violations of fundamental ethical norms.”

Norges Bank said the so-called “product-based exclusions” have reduced the fund’s cumulative return on the equity index by around 2.4 percentage points, or 0.10 of a percentage point annually. Meanwhile, the conduct-based exclusions have increased the cumulative return on the equity index by around 0.9 of a percentage point, or 0.04 of a percentage point annually.

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“Over the last 12 years, the equity benchmark index has returned 1.6 percentage points less than an index which is unadjusted at constituent level,” said the report, “or 0.06 percentage point less on an annualized basis.”

The report also said that two new criteria were introduced last month. The corporate conduct criteria were broadened to cover companies that are responsible for acts or omissions that on an aggregated company level lead to unacceptable greenhouse gas emissions. The second criterion states that mining companies and power producers that derive 30% or more of their revenue from thermal coal, or base 30% or more of their operations on thermal coal, may now be excluded.

Under its “responsible investing” initiative, the fund aims to identify long-term investment opportunities, and reduce exposure to unacceptable risk.

“We believe there are opportunities for investing in companies and technologies that enable more environmentally friendly economic activity,” said the fund in its 2017 responsible investing report. “At the same time, there are companies where we choose not to be an owner, based on long-term sustainability or ethical assessments.”

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Home > News > Regulation > Oregon Passes Law to Boost Public Pensions
Regulation

Oregon Passes Law to Boost Public Pensions

Two funds will be created to help reduce the state’s $25 billion in unfunded liabilities.

By Michael Katz

Oregon Gov. Kate Brown has signed into law a bill that establishes two funds to help the state’s schools and other public employers cover growing public pension costs.

One of the funds would receive the majority of the money, as much as several hundred million dollars by some estimates, which would be deposited with Oregon’s Public Employees Retirement System (OPERS) in a pooled side account for school districts. That account would be invested along with existing pension assets, and gradually drawn down to reduce pension contributions required by the school districts.

The second, smaller fund is intended to get Oregon public employers to use their own resources to make extra one-time contributions to the pension fund, which the state would then match at $0.25 on the dollar as an incentive. That money would go into individual employers’ side accounts at OPERS, and would be invested with existing pension sets, and gradually drawn down to reduce the employers’ contributions. Approximately 900 employers participate in OPERS.

The funds will be capitalized with $140 million in new revenues, according to The Oregonian. Approximately $115 million of that money would go to the school side account, while the remaining $25 million would capitalize the employer incentive fund.

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The new law originated from a task force Brown appointed last year to investigate ways the state could reduce OPERS’ unfunded actuarial liability of $25 billion by $5 billion over five years. Some of the proposed actions by the task force can be seen in the new law, which would establish an employer incentive fund for contributing to OPERS side accounts.

The bill will use various sources for capitalizing the school pool, and the employer incentive fund, such as proceeds from marijuana tax, lottery revenue, debt collection, capital gains taxes, estate taxes, lawsuit settlements not dedicated to a specific purpose, and interest from the unclaimed property account within the Common School Fund.

The bill passed through the Senate unanimously, and by a more than 2-1 margin in the state’s House of Representatives.

According to the Oregon School Boards Association (OSBA), the costs to OPERS for public employers, including school districts, are expected to keep climbing for at least the next few budget cycles. It also said that average OPERS rates are nearly 15% of payroll, and the average is expected to climb to more than 25% of payroll by the 2023.

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