ResearchMarch 9, 2020

Norway’s Pension Giant Calls for Improved ESG Metrics

$1.07 trillion fund is focusing on climate and money laundering issues.

Reported by Michael Katz

Norway’s $1.07 trillion Government Pension Fund Global, which owns stakes in more than 9,200 companies and owns 1.5% of all listed stocks, is pressing the companies it invests in to provide more tangible data regarding environmental, social, and governance (ESG) issues.

The fund said it’s no longer enough to hear promises of responsible investing, and that it’s time for companies to start providing hard data to show they’re being true to their word.

“In recent years, we have requested companies to go from words to numbers in their sustainability reporting,” Norges Bank Investment Management CEO Yngve Slyngstad said in a statement. “We wish to see more relevant and comparable reporting from companies, so that we, as an investor, can analyze the companies’ exposure to sustainability risks.”

In its annual report on responsible investment, the fund said company boards must ensure that they regularly report relevant, quantitative, and comparable information on ESG issues. In 2019, the fund assessed more than 3,900 companies’ reporting and contacted 134 companies with poor reporting.

“We encourage companies to improve disclosure, and we have seen progress over time,” the report said. “We stressed the need for better and more consistent information on companies’ exposures, activities, and performance metrics in areas such as climate risk, human rights, and tax.”

The report said economic activity can impose substantial indirect costs on other companies and on society as a whole, and that, because of this, the inability of companies to internalize such costs is a market failure, not just a company failure.

The fund said that as part of its continued focus on deforestation, it brought a group of banks, investment managers, and food producers together in Singapore to discuss business risks. It also entered into dialogue with nine companies that sell cocoa or produce chocolate to discuss deforestation risks and children’s rights in their supply chains, while encouraging them to improve their reporting.

It also contacted five large plastics and packaging producers to learn what steps they are taking to reduce negative effects on the environment. And the fund followed up on additional business aspects of climate change, such as talking to cement producers about the transition to a low-carbon economy and sustainable water use.

While much attention is focused on climate change and environmental issues, the fund said money laundering is one of the issues it focused on in 2019. The fund said companies exposed to this issue—particularly financial sector firms—should have internal policies and procedures to prevent money laundering.

“Money laundering may involve money derived from corruption and thus facilitate it,” said the fund, which has initiated dialogue with 14 banks that could be exposed to the risk of abuse for money laundering purposes because of their products and services.

In the report, the fund said it has clear expectations for how companies should address climate change, water management, children’s rights, human rights, tax transparency, anti-corruption, and ocean sustainability. It assesses how companies report on their work in these areas and monitors selected companies to better understand how they are dealing with relevant risks and encourages them to improve their reporting.

The fund said voting is the “most important tool” it has to make sure the companies it invests in are keeping up with its standards. It said it expects the boards of these companies to set company strategy, supervise management, and be accountable to shareholders. And while the fund’s default is to support the companies it invests in, it said that if it believes a board is not acting in its long-term interests as an investor, it may vote out the board’s members.

“We take our responsibility as a shareholder in over 9,000 companies seriously,” the report said. “As we head into a new decade, we are working more systematically, we are prioritizing more effectively, and we are asking better questions.”