World’s Largest Sovereign Wealth Fund Flexes Its Muscles

Claiming ownership of approximately 1.4% of all the listed companies on the planet, Norway’s $1.03 trillion sovereign wealth fund has not shied away from using its financial weight to influence corporate activities.

And while the fund says that divestment is a “last resort” after other possibilities have been deemed insufficient, it has divested from 240 companies since 2012, including 30 companies in 2018, according to its most recent annual report.

Despite the divestments over the past six years, the number of listed companies the fund is invested in has risen 23% to 9,158 in 2018 from 7,427 in 2012.

Among the 30 companies the fund divested last year, 15 were in response to climate risks, nine for corruption risks, four for their handling of human rights, and two that were due to “other unacceptable risks.”

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According to the fund, it may decide to divest from companies that impose substantial costs on other companies, “as well as society as a whole,” and therefore are not considered long-term sustainable.

“Responsible investment supports the fund’s objective in two ways,” said the fund. “First, we seek to improve the long-term economic performance of our investments. Second, we aim to reduce the financial risk associated with the environmental and social behavior of the companies we invest in.”

The fund supports the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) set up by the G20’s Financial Stability Board. Its policy is to work with companies to help with the transition to a low-carbon economy, consider climate issues in its investment decisions, and adjust the portfolio through divestments, if necessary.

According to the fund’s annual report, it held 3,256 meetings with 1,420 companies during 2018 to raise governance and sustainability issues relevant to its long-term return. Last year, the focus was on sustainability, board accountability and effectiveness, executive remuneration, and shareholder rights.

“In addition to these strategic topics, we monitored ongoing governance and sustainability developments at companies in the portfolio,” said the fund. “We prioritize our largest investments, which we know best, and engage in regular dialogue with companies representing about two-thirds of the value of the portfolio.”

During 2018 alone, the fund assessed 1,700 companies reporting on climate change, 600 reporting on children’s rights, and 598 reporting on water management. It also said it looked at how certain companies report on deforestation, anti-corruption, human rights, tax, and ocean sustainability. All totaled, the companies the fund assessed accounted for 62% the market value of its equity portfolio.

In its dialogue with companies in 2018, the fund raised issues such as climate disclosure, deforestation, automotive supply chains, tax and transparency, marine pollution from agriculture, the marketing of breast-milk substitutes, and the management of corruption risks.

It also held meetings with the Organization for Economic Co-operation and Development, the UN Global Compact, and the European Commission. In those meetings the fund raised issues it said it considers a priority, such as board composition and independence, shareholders’ voting rights, executive remuneration, and anti-corruption.

“We want companies to be equipped to deal with global challenges that may lead to major changes in the market and eventually affect their profitability,” said the fund. “We expect boards to understand how their companies impact on the environment and society, set their own priorities, and report on the results.”

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Tags: Divestment, ESG, Government Pension Fund Global, Norway

Despite the ruling, the court sidestepped a much larger issue, whether core pension benefits promised at the time of hire for public workers can be changed.

The California Supreme Court has ruled that a provision of former Gov. Jerry Brown’s 2012 pension law reform is legal, and that Brown and the legislature could end the practice of California Public Employees’ Retirement System (CalPERS) members being able to pay to enhance their pension benefits.

Despite the ruling, the court sidestepped the larger issue of whether core pension benefits for public employees that are negotiated by their unions can be altered.

California courts have held repeatedly since at least the mid-1950s that the pension benefits promised public employees at the time of their hire could not be changed. A series of collective court decisions known as the California Rule protects public workers’ pension benefits.

As least 12 other states have similar laws, a point of controversy among some elected officials and advocacy groups, who would like to reduce pension benefits for public workers as pension costs soar. California and other states have changed the rules regarding pension benefits for new employees, but existing employees have held on to their earned pension benefits.

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So, there was much attention on the case brought by California state firefighters over the Brown legislation’s elimination of “airtime,” which was part of a plan by the governor to rein in spiraling pension costs.

The “airtime” referred to the fact that CalPERS members could buy five additional years of work credit without actually working those hours, enhancing their ultimate pension payout at time of retirement.

The court Monday compared the “airtime” as an optional benefit, not a core guaranteed contractual pension benefit, such as the formula for determining what percentage of pay each year will go towards retirement benefits.

“In addition to their salary or hourly pay, it is not unusual for public employees to be offered the opportunity to purchase different types of health insurance benefits from a variety of providers, to purchase life and long-term disability insurance; and to create a flexible spending account, by which certain medical and child care expenses can be paid with pre-tax income,” the court said. “We have never suggested this type of benefit is entitled to protection under the contract clause.”

The court made it clear, however, that the California Rule protecting vested pension benefits was not affected by its ruling.

“We have no occasion in this decision to address, let alone to alter, the continued application of the California Rule,” the court said.

The firefighters had argued that the airtime credit was part of a benefits package that prospective public employees took into consideration when deciding whether to enter public service.

Brown’s attorneys had said the state could take away the benefit because the legislature never considered it to be a vested right that was negotiated through collective bargaining.

Several other cases involving the rights of California pension systems to reduce benefits are also expected to be heard by the Supreme Court in the next several years. One case involves county pension systems altering the formula for calculating pension benefits, such as ending the accumulation of pension benefits for being on call. The court will then have another opportunity to weigh in on the California Rule.

Tags: California, Pension, US Supreme Court