Norway’s sovereign wealth fund is changing its policy on new stocks that enter the index it follows, saying some will now not make it past its newly-extended ESG screening system.
This is a shift from the current approach where only big firms are analysed before the NOK11.2trn (€1.12trn) fund invests in them, but small stocks are automatically bought when they join the index.
In a speech at yesterday’s parliamentary hearing on the management of the Government Pension Fund Global (GPFG), Norges Bank Investment Management (NBIM) chief executive officer Nicolai Tangen said: “We are currently extending our system for reviewing sustainability risks at all new companies added to the index we follow.”
This would enable NBIM to consider environmental and social issues at the firms at an earlier stage, he said.
“This means that we will choose not to invest in some companies even if they are included in our benchmark index,” Tangen said, adding that the organisation might also decide to invest in companies but engage in active ownership from day one.
In the new 2020/21 strategy Tangen presented last month, NBIM stated that it would “further reduce our exposure to companies with unsustainable business models and re-allocate capital to more sustainable companies”.
Tangen told members of parliament that the issue of whether enough thought was given to companies entering the fund had been discussed for a long time, but that the Mestad Committee had found the idea of automatic ex-ante ethical screening of new companies to be inappropriate because it was too inaccurate.
“But they also noted that we could use our judgement to exercise due diligence in our investments – and this is what we now plan to do to an even greater extent,” Tangen said.
The CEO said the change was the logical next step in NBIM’s work, and was a question of enhanced due diligence.
“This is related to, but different from, the mechanical advance screening that some have advocated,” he said.
Previously, he said, ESG data had often been called non-financial data. “Given that they can impact on companies’ long-term profitability, however, they are most certainly financially relevant,” Tangen said.
Speaking to the Storting’s Standing Committee on Finance and Economic Affairs yesterday, Tangen also revealed NBIM had begun to build an investment simulator, compiling million of historical data points for each portfolio manager, and was analysing why they made the decisions they did, and how they could improve them.
“This is one of our most important IT projects this year,” he said, adding: ”It is about learning from mistakes and about having a systematic approach to decision making.”
Answering questions from politicians, Tangen also said NBIM would continue to allow staff to work from home even when the pandemic had abated, since the technology used during lockdown had shown that portfolio management could be done away from Oslo too – which he said was positive.
“We think that after the pandemic will we allow two days home office every week, but that we will also have two fixed office days when everyone will be in the office for meetings and swapping opinions and so on,” Tangen said.
He suggested Tuesdays and Thursdays as the two days of the week for full physical attendance.