Norway’s sovereign wealth fund should not swap the index it currently tracks for a climate-adjusted benchmark, and neither does it need to increase its scope to hold unlisted green infrastructure assets, the country’s central bank has told government.

In a long reply to a letter from the Finance Ministry about climate risk, Norges Bank – which runs the Government Pension Fund Global (GPFG) via its Norges Bank Investment Management (NBIM) subsidiary – said this risk was hard to gauge, but that there was not enough evidence to claim markets were getting it wrong.

Norges Bank Governor Øystein Olsen and NBIM deputy chief executive officer Trond Grande wrote: “Climate change is something that needs to be addressed by all investors. It is difficult to gauge how climate change will impact the fund’s investments.

“Based on studies of the relationship between climate risk and prices for financial assets, we do not believe there is sufficient evidence to claim that climate risk is systematically mispriced,” they said.

Against this background, the pair wrote, Norway should be careful about making major changes to the principles underlying the fund’s investment strategy.

The Finance Ministry wrote to Norges Bank on 5 March this year, asking it to assess the GFPG’s climate risk, and comment on alternative ways of dealing with climate-related risk and investment opportunities.

Among other things, the ministry asked the bank to describe the consequences for the fund’s return and risk profile of climate-adjusted benchmark indices.

“Norges Bank is of the view that the Ministry should not replace the fund’s broad, global equity index with a climate-adjusted index.

“Such an investment decision would have to be based on an assumption that financial climate risk is systematically mispriced and that this is easily reflected in a climate-adjusted index,” Olsen and Grande said.

Alternatively, they said, it could be based on an assumption that the ministry or the index provider had better information about financial climate risk than did the market.

“The executive board does not believe these assumptions to hold,” the pair wrote.

The bank also commented on the freedom it was given by the government in 2019 to invest in unlisted renewable energy infrastructure of between NOK30bn and NOK120bn, as part of the environment-related mandates it has been running since 2009.

That was the first time the GPFG was permitted to invest in unlisted infrastructure assets.

“Norges Bank does not see a need to increase the limit for the environment-related mandates at this time, but this is something to which we may return, depending on market developments and the projects to which the fund has access,” Olsen and Grande said.

“Norges Bank does not see a need to increase the limit for the environment-related mandates at this time”

In April this year, NBIM announced its first direct infrastructure deal, investing €1.37bn in the Dutch off-shore wind farm Borssele 1 & 2.

Separately, NBIM also released a discussion note today on the asset pricing effects of ESG investing, using two ESG modelling frameworks to look at how the increased focus on ESG issues could affect asset prices.

In one conclusion, the SWF manager said that when investors incorporated ESG in portfolios as a non-financial consideration, this led to lower expected returns on higher ESG-scoring green assets, but on the other hand, higher expected returns on brown assets.

In a third announcement from the GPFG’s manager this morning, Norges Bank said it had decided to place one company – Hyundai Engineering & Construction – under observation, “due to unacceptable risk that the company contributes to or is responsible for gross corruption” based on the SWF’s guidelines.

Thailand-headquartered company Precious Shipping, meanwhile, is having its exclusion status revoked after not having disposed of decommissioned vessels by having them scrapped on the beaches of Bangladesh and Pakistan since 2016, the bank said.

Empire District Electric Company and Anglo American are having their exclusions revoked as part of the bank’s work on coal criterion, it said, adding that it was ending its observation of EDP – Energias de Portugal; Endesa; Portland General Electric and Enel.

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