The new TV comedy Oljefondet (‘The Oil Fund’), set in the offices of Norway’s $1trn sovereign wealth fund Government Pension Fund Global (GPFG), plays upon a rivalry between its slick chief investment officer Pep Grepp and its cardigan-clad, ‘do-gooder’ ethics committee.
One scene in the show sees the ethics committee tell a company CEO (who conceals a gun, but makes it visible to the CIO): “I’d rather lose 600 million than to make money on corruptions, weapons and fracking.”
While clearly played for laughs, the show highlights the very real debate about how to responsibly invest wealth amassed from decades of oil and gas production.
The Council on Ethics
In the real world, the real Council on Ethics has played a major role in putting responsible investment on the agenda in Norway and beyond. That’s the view of Annie Bersagel, portfolio manager ESG at Folketrygdfondet, the asset manager of Norway’s €24bn domestically-focused Government Pension Fund Norway.
The Council makes exclusion recommendations, based on set of defined principles, to GPFG’s asset manager Norges Bank Investment Management (NBIM). GPFGowns 1.4% of the world’s listed companies – 9,158 across the world, including Apple, Microsoft and Samsung.
“You may hear a bit of grumbling that asset managers feel a bit boxed in by the recommendations that they put forward,” says Bersagel. “But in terms of the quality of decisions they make and the transparency they have it has really been a gold standard and they have been highly influential not just in Norway, but also globally.”
But its inception in 2004 wasn’t plain sailing .The Council on Ethics faced fierce opposition from the government of the time, according to Camilla Bakken Øvald, an economist who has recently published a book about the oil fund.
“The original idea for the fund was to invest the money according to strict financial guidelines, but the media repeatedly exposed Norwegian money being invested in arms companies – including land mine manufacturers,” says Øvald. “Faced with a civil society campaign, the iron triangle of Labour, the Conservatives, and the Ministry of Finance fought fiercely against imposing ethical guidelines, but eventually had to give in to public pressure.”
Conflict on climate change
The tension picked up by Oljefondet is hinted at in the new annual report from the Council on Ethics, with signs of real-world divergence with NBIM on exclusion recommendations with regards to climate change.
The document illustrates the work it does in making sure that the fund and NBIM adhere to its ethical guidelines, including company engagement and research, and highlights its exclusion recommendations based on this.
In a foreword, Chair Johan H. Andresen, says: “Translating overarching guidelines into consistent practice can be challenging. One example is the climate criterion… the Council has issued a handful of recommendations, which Norges Bank has so far not taken a position on.”
Norges Bank and the Council are currently exchanging letters and having meetings on the ‘climate criteria’ in the ethical guidelines, which the Council describes as “open to different interpretations”.
But, overall, the Council on Ethics, in a letter to the Ministry of Finance, described its relations with Norges Bank as good.
Norges Bank’s influence is such that domestic finance firms tend to just follow NBIM for their ESG activity and don’t go much further than that. Though experts say that emerging EU legislation on sustainable finance will change this. (Norway is not an EU member, but has agreements under the European Economic Area meaning it is subject to most EU laws.)
The ESG financial landscape
This view isn’t shared by Martin Skancke, chair of the Principles of Responsible Investment, who in the mid-2000s built the Asset Management Department of the Norwegian Ministry of Finance, the government department responsible for setting the mandate and investment strategy for the GPFG.
Skancke says many institutions are active in responsible investment in Norway though the NBIM and GPFG, which invest exclusively outside Norway, do play a large role in the country in setting norms for behaviour.
Industry organisation Finance Norway finds assets under management for the Norwegian financial sector are $968.9bn — almost equal to the GPFG’s $1trn.
“GPFG is very dominant in terms of size and activities because that is where a lot of the savings are at the national level, more than in the private sector which is more dominant in other countries,” says Skancke.
Jeanett Bergan, head of responsible investments at mutual insurer KLP, says pension funds in Norway are normally very small with limited resources, so they often use bigger mangers such as KLP, which are leading on ESG.
Folketrygondet’s Bersagel adds that while there may not be many asset managers with dedicated ESG teams, the picture is very different in terms of the volume of assets under management.
“So I am thinking of DNB, KLP, Storebrand or Skagen funds (all funds progressive on ESG), suddenly that is a very large part of the market,” she says.
Focus on engagement
Folketrygfondet publishes an annual ownership report which outlines its engagement on ESG topics such as climate issues and human and workers’ rights.
As part of its mandate it invests 85% in Norway, with a 15% allocation to other Nordic countries, via equities and bonds.
Last year, Folketrygdfondet led a Norwegian Sustainable Investment Forum (Norsif) working group that published a report on ESG integration in the Norwegian fixed income market. It also surveyed equity managers on techniques they used for analysing the Norwegian equity market.
“The main headline was where they get their information on ESG,” says Bersagel. “If you are looking at the Norwegian market, other than the large corporates, you won’t find much coverage from the main ESG service providers. On the other hand, sell-side analysts were not perceived to be strong enough on ESG, even though they know the companies well. The primary sources for ESG information were meeting with the company and reports in news media.”
DNB, Norway’s largest bank, is another leading light on ESG through its asset management division DNB Asset Management (DNB AM). DNB AM, which has €61bn in assets under management, was an early mover on environmental-related funds such as the DNBRenewable Energy fund. It launched over a decade ago and in November was awarded FNG-Siegel 2018, the German label for sustainable funds, with the best rating of three stars.
Later this year, it will launch a global fossil-free fixed income fund says Janicke Scheele, Head of Responsible Investments. In 2017, it launched a global fossil-free equity fund, DNB Global Lavkarbon, in addition to its existing fossil-free Nordic equity fund.
DNB AM is also active in engaging on climate reporting via the Task Force on Climate-related Financial Disclosures (TCFD), is part of UNEP FI’s TCFD Investor Pilot Project on scenario analysis and has been engaging with Norwegian companies on TCFD reporting.
As mentioned, KLP is another major ESG player in Norway. Owned by local government and municipalities, it provides pensions and also acts as an asset manager with €60bn in AUM.
Bergan says it is focused on driving corporate sustainability performance and good corporate governance, especially in its home market where it feels it has a bigger influence.
Globally, it engages among others on climate risk and major environmental issues such as ship recycling; last year KLP launched the first fund in Norway to carry the Nordic Swan Ecolabel, consisting of at least 50% ESGtop performance rated companies and avoiding fossil fuel, weapons, tobacco and human rights and other norms violators.
Green bonds lag
A big player in the global green bond market is Oslo-based research institute Cicero: it provided the second opinion for the world’s first green bond issued by the World Bank. But, Norway itself lags in green bond issuance.
Kristina Alnes, senior advisor at Cicero, says: “We have been quite disappointed with our local market, to be frank, because the Oslo stock exchange was one of the very first stock exchanges to have a special green bond list. Although the conditions seemed right, the market has been slow to catch on, absolutely.”
Norway issued the first green bond in the Nordic region in 2010 with an issue from government-owned funding agency Kommunalbanken, according to the Climate Bonds Initiative. But it now ranks only 16th in terms of green bond issuance (11 issues), compared to Sweden which ranks 6th (36).
But Alnes feels this could soon change. “We saw a lot more interest last year. All the local banks and underwriters started inviting us to green bond events and workshops. When there is interest we often see issuance lags a little but I really think we’ll see some change this year.” Maybe a recent $64m issue from grocery firm NorgesGruppen, which Cicero ranked as ‘dark green’, will herald more to come.
Roadmap for sustainable finance
Last year, Norway’s financial sector launched paper setting out a vision for a sustainable sector in 2030. The Roadmap for Green Competitiveness in the Norwegian Financial Sector recommended developing a taxonomy for sustainable finance and including climate risk in the Norwegian financial supervisory authority’s mandate.
In an interview with RI last year, Climate and Environmental Minister Ola Elvestuen welcomed the roadmap saying it would be key to follow up on the government’s strategy for green competitiveness.
The government’ strategy includes a new €2bn ‘green fund’ created to speed up a transition away from oil and gas dependency. Dubbed Nysnø, it will co-invest in green projects nationally and internationally.
Nynsø illustrates how the global low-carbon transition is a key concern for Norway’s fossil-dependent economy.
Last year, Skancke chaired Norway’s Climate Risk Commission, which said the government needed to develop an ambitious climate policy and perform a thorough analysis of climate risk, especially in the petroleum sector.
Norges Bank is a member of the Network for Greening the Financial System (NGFS), the new central bank body, and the Norwegian government just recently responded to a request from its asset management arm NBIM to remove oil and gas stocks from its benchmark index to insure against over exposure to oil.
The request had seemed to divide the top brass at Norges Bank. Last year, NBIM chief executive Yngve Slyngstad was slammed for “propaganda” when he said the fund would have made $38bn more over the past decade had it not been invested in oil and gas stocks.
But Norges Bank Governor Øystein Olsen said the cost of exiting the oil age ahead of time would be “substantial” for the nation of 5.4m people, saying “we may benefit from this industry for many years to come”.
Finance Minister Siv Jensen said two weeks ago that GPFG should not divest all fossil fuels, but proposed excluded “upstream” oil and gas producers to avoid oil price risk.
The world will be watching the outcome closely. Though the official line is that the move is to do with financial risk, NBIM’s size and influence means its actions are often framed politically.
Minister Elvestuen, a member of Norway’s minority Liberal Party, reportedly said the government proposal was “the most important climate decision” the four-party coalition agreed on. The next step is for the decision to be looked at by Norway’s parliament. It should be an interesting debate.