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Norway's SWF falling short on sustainability, says think tank

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Norway’s NOK7.75trn (€829bn) sovereign wealth fund has strong policies on sustainability and climate change but falls short on putting these into action, according to a critical report from think tank Re-Define.

Produced by Sony Kapoor, managing director at Re-Define, with assistance from Linda Zeilina, special adviser at the think tank, the report argued that the oil fund needed “to learn from its peers and significantly enhance its approach to managing climate risk and investing sustainably, based on rigorous risk/return considerations”.

“A cohort of investors, who are savvier than the oil fund, have made far greater strides on sustainability, in almost all cases based on rigorous risk/return calculations rather than on ethical or political gorunds,” the report said.

The authors’ criticism was aimed both at the government mandate for Norges Bank, whose investment management arm manages the Government Pension Fund Global (GPFG), as well as how the mandate is implemented by Norges Bank Investment Management (NBIM) itself. The Council of Ethics could also do more, they argued.

They said that although the mandate assigned to Norges Bank looked strong on environmental policy and sustainability, the finance ministry was undermining this by asking the manager to use the FTSE Global All Cap Index as the benchmark.

The ministry should shift to ethical benchmarks, as insurer Swiss Re has done, or low carbon indices, according to the report.

It described the mandate as restrictive, but said that Norges Bank could still do more within it, such as by taking a stance on carbon pricing or perform carbon stress tests on its portfolio.

NBIM should also apply the same standards it expects of third party asset managers to itself, according to the authors. They referred specifically to NBIM “Expectation Documents” on human rights, children’s rights, climate change, water management and tax and transparency.

Other policy recommendations set out in the report include that the ethical council take a less restrictive stance when applying conduct criteria, and that the GPFG join investor coalitions that have been formed to address different social, environmental and governance challenges, such as excessive use of antibiotics.

The report was published in anticipation of domestic elections this year and subsequent renewed discussions about how the GPFG is run.

It comes after a government commission set up to review Norges Bank presented its conclusions in June, recommending that GPFG be managed separately from the country’s central bank now that it had grown so big and NBIM be set up as a separate statutory entity. 

In their report, Kapoor and Zeilina said that if the Norwegian parliament adopted a recommendation to set up an independent professional board for GPFG, then at least one board member should have expertise in sustainable investing.

Sustainability should be incorporated into the Pension Fund Act as a core criterion for the fund’s investment strategy, as well as “the principle of diversification”, they said.

In explaining why it was a good and important time to carry out a “reality check” on the oil fund’s sustainable investing, the authors also noted that the finance ministry and parliament are due to debate whether GPFG should be allowed to invest in illiquid assets such as infrastructure, reducing exposure to fossil fuel assets, and investing in renewables and developing economies.

The report is not the first time that Re-Define’s Kapoor has sharply criticised the GPFG. In 2013, the think tank produced a stinging report with Norwegian Church Aid after a new government broadened the mandate of the fund.

The new report was commissioned by several non-governmental organisations, including Amnesty International Norway and Norwegian Council for Africa.

In a response to the report, a spokesperson for NBIM told IPE that “the development of principles and standards for market participants is important for the management of the fund”.

“We engage in dialogue, make submissions and launch initiatives to promote good practices and well-functioning markets,” he said.

The spokesperson also said that NBIM assesses environmental, social and governance (ESG) risks across the fund and that these risk assessments and related monitoring were integrated into the fund’s overall risk management.

It has divested from 210 companies on the grounds of ESG risk, he noted, also pointing out that a separate climate risk framework was set for NBIM last year. 

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