Norway SWF to Reject Dumping Fossil Fuels

The Norway Pension Fund Global should reject calls to dump fossil fuel investments and concentrate instead on working with the worst offenders, according to its advisory board.

The country’s finance ministry asked the board to evaluate whether divesting from coal and petroleum companies was a “more effective strategy for addressing climate issues and promoting future change than the exercise of ownership and exertion of influence.”

The panel of international investment experts concluded that the fund—despite being one of the world’s largest investors—has minimal power over climate change. Becoming a force for environmental causes would mean changing its mandate and fiduciary duty to Norwegian citizens, the board stated in an extensive report published today.

“We do not think that it would be better for the climate—or the fund—if these shares were to be sold to other investors who, in all probability, will have a less ambitious climate-related ownership strategy than the fund,” the advisors said.

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Although funded by the nation’s oil wealth, the organization has been a leader in ethical investment since inception, pushing on governance as well as environmental and sustainability targets.

However, the portfolio is an “inappropriate and ineffective climate change tool,” the report said. “Neither exclusion nor the exercise of ownership can be expected to address or affect climate change in a significant way.”

Furthermore, the board warned that attempting to halt or slow climate change via the $800 billion fund could threaten future returns.

Instead, the board proposed changing its investment guidelines to permit excluding companies that “operate in a way that is severely harmful to the climate.”

It also said the fund should not discount climate change as a risk overall. The factor should play a part in investment decisions, but with the understanding that its impact on big-picture outcomes will likely be limited.

Finally, the board encouraged staff to create a better information exchange between the Council of Ethics and fund managers to monitor climate change risk in portfolios and highlight companies at high risk of violating the new climate criterion.

“We are mindful of the importance of the broader climate issue, as well as of the importance of a well-managed fund for the present and future citizens of Norway, and look forward to a broad and open discussion of our recommendations,” the board concluded.

How investors classify their investments might be holding them back from achieving the outcomes they want, according to analysis by consulting firm Redington.

Categorisation of assets has become meaningless for pension investors, according to Redington Associate Alice Cheung, as the sector has spread beyond simple boundaries of existing terms such as “equities” and “bonds”.

Even the trend for calling assets “growth” or “matching” has become futile, she argued.

“Even without the last few crises, it is clear that risk, return, and relative value are subjective and will fluctuate.”—Alice Cheung, Redington“What is the level of return that earns an asset class the title ‘growth’?” said Cheung. “Is it ‘matching’ if it has duration? Even now with corporate bonds, you would be unable to get a consensus for ‘growth’ or ‘matching’ with a group of 10 pension people. How are we to make good investment decisions using a system that is inconsistent within its own industry?”

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Cheung maintained that catch-all terms, such as “alternatives” were not helpful either, as they covered too much and left investors often lost and not getting what they expected.

Instead, she encouraged investors to think about what they wanted from their portfolios.

“Before we dive into conjuring every shade of classes between matching and growth, perhaps it’s time to rethink what pension funds need from their assets,” she said. “Even without the last few crises, it is clear that risk, return, and relative value are subjective and will fluctuate.”

The attributes that pension investors value are two-fold, according to Cheung: Cash flow certainty and liquidity.

The certainty of cash flow from an asset can be plotted on an axis alongside another showing its liquidity. This would allow investors to choose from a spectrum of assets depending on their own particular needs rather than use arbitrary valuations and measurements, she said.

However, she warned that to implement such changes within a pension or other institutional investor a strong governance model would be essential.

Cheung’s analysis can be found on the Redington website.