Norway’s Finance Ministry was today presented with recommendations for radical change to the way the Nordic country’s giant sovereign wealth fund is managed, with officially-tasked experts saying huge power shifts in the world meant the SWF needed more flexibility.
A committee chaired by Norwegian professor Ulf Sverdrup, and tasked a year ago by the ministry with considering “long-term perspectives” for the Government Pension Fund Global (GPFG), presented its report this lunchtime, saying: “The management of the fund should be strengthened in preparation for more challenging times.”
Advice includes giving the SWF’s manager Norges Bank a more flexible, more general mandate that stipulates principles, and allowing possible divergence from the benchmark index.
Sverdrup, director of Norwegian Institute of International Affairs and professor at BI Norwegian Business School, said: “The fund has long been reaping gains from globalisation and technological development.
“However, Norway cannot rely on the international political and economic investment framework remaining unchanged, and as favourable as it has been,” he said.
Presenting the report, the panel said the world was changing, power was shifting and great power rivalry was on the rise, adding that finance, trade and investment were increasingly harnessed as tools in the geopolitical rivalry.
“These developments have accelerated in the wake of Russia’s invasion of Ukraine and mounting tension between China and the US,” it said.
Sverdrup said it was very uncertain, but the fund’s returns may well be lower than Norwegians had been used to, adding that at the same time a new and complex risk situation may make the SWF’s investment management more challenging.
Among recommendations made in the 56-page report, the panel said the fund needed a strengthening of its knowledge base, and that geopolitical risk should be included in the overall risk assessment.
International developments towards more authoritarian systems of government and a weakening of democracy in many countries made responsible investment “more important, but also more challenging”, the experts said.
A more volatile risk situation made a certain flexibility in investment management desirable, they said, in order to manage non-financial risk better.
“New flexibility in investment management may for example involve the Ministry of Finance not automatically adhering to the decisions of the index provider, or lead Norges Bank to making financially-motivated investment decisions that diverge from the benchmark index,” the panel said.
The experts also said the Finance Ministry should review the GPFG’s mandate to make sure Norges Bank’s strategy and risk taking conformed with “the overarching interests of the GPFG”.
“While the governance structure needs to provide clear lines of responsibility and facilitate good governance, it should be considered whether it might be appropriate to have a somewhat more general investment mandate that stipulates applicable investment management principles,” the panel said in the report.
The experts said the ministry should set up an independent council tasked with examining and evaluating various aspects of the fund, including geopolitical issues.
The report is now out for public consultation until 5 January 2023, after which, the ministry said, it would would address the report and consultation comments in its annual white paper on the SWF.