The manager of Norway’s sovereign wealth fund today released two new papers on climate change and its financial implications for the NOK12.2trn (€1.2trn) Government Pension Fund Global (GPFG) – bemoaning the poor data available but pledging to step up it own efforts to foster better company climate reporting.
In a new “asset manager perspective” paper entitled “Climate change as a financial risk to the fund”, Norges Bank Investment Management (NBIM) said: “We reviewed the economics of climate change and the results from climate scenario analysis and found that the fund has a vested interest in an orderly transition to a low-carbon economy that prevents severe physical climate risk from materialising.”
In particular, the Norges Bank department said, a scenario in which warming was kept below 2°C raised the probability of avoiding the most severe outcomes with regards to physical climate risk, which it said should benefit the GPFG in the long term.
In the paper, the Oslo-based manager described the characteristics of climate risk and examined two approaches to measuring it in an investment portfolio – carbon footprint analysis and climate scenario analysis.
However, it said methodological limitations related to data quality, model assumptions, and uncertainty meant it could be “challenging” to use a portfolio’s carbon intensity, or a particular climate scenario, as a basis for setting portfolio targets.
The Norwegian government was called upon earlier this month to commit the GPFG to cutting its portfolio greenhouse gas emissions to net zero by 2050, by 34 economists and other other experts who signed an article to that effect.
The Finance Ministry responded saying there was broad parliamentary agreement that the fund should not be used as a climate policy instrument, but that the ministry would be presenting several reports later this month as part of its investigation into how climate-related issues may affect investors such as the GPFG.
In July, NBIM’s leaders came out against replacing the fund’s equity index with a climate-adjusted one, saying in a letter to the ministry that such an investment decision would have to be based on an assumption that financial climate risk was systematically mispriced – something they did not see enough evidence for.
In the other paper it published today, “addressing climate-related risks and opportunities as a financial investor”, NBIM said it had reduced its exposure to climate risk in the last decade through 170 climate-related divestments, and 77 ethical exclusions, and that it estimated the fund’s carbon footprint was now 12% lower than the benchmark’s.
NBIM said it would continue to develop its climate risk strategy “within our financial objective as defined in our mandate”.
“To inform our ownership and investment activities, we will increase our efforts to promote more meaningful, consistent and comparable climate-related reporting from companies,” the manager said.
Other action NBIM said in the paper it would take includes engaging with “priority companies in sensitive sectors that have not yet articulated their climate plans in line with our expectations”.