Norway Raises the Stakes for ESG Investing

Norway’s sovereign wealth fund, officially known as the Government Pension Fund Global, issued last week a new, government approved climate action plan that requires its portfolio companies to achieve net zero carbon emissions by 2050. “We will be a global leader in managing the financial risks and opportunities arising from climate change,” the fund noted in the plan.

The country’s sovereign wealth fund contains assets valued at $1.4 trillion, virtually all of which were generated from Norway’s oil and gas assets in its portion of the North Sea. Norges Bank’s CEO Nicolai Tangen is one of the investment industry’s so-called “12 emperors” and one of three sovereign wealth fund managers on the list. The fund owns the equivalent of about 1.5% of every publicly traded company in the world.

The Norwegian fund has outlined how it will implement its plan by 2025. One step the fund will take at the market level is to “sharpen” its engagement with companies by asking for science-based short-term, medium-term, and 2050 net zero targets and credible transition plans covering scope 1, scope 2, and material scope 3 emissions, and improved disclosures on performance.” Another market-level step will be to “encourage regulators and standard-setting bodies to set mandatory requirements for climate-related reporting for listed and unlisted companies” and to “support the development of sustainable financial markets, including for green bonds.”

At the portfolio level, the fund plans to increase its investments in renewable energy infrastructure and will “systematically” monitor the portfolio’s climate risks. The fund will divest from companies with “unmitigated climate risks, especially where engagement has failed or is unlikely to succeed.”

The GPFG maintains, however, that addressing ESG issues is one of its most important tools for generating better-than-average returns. Citing the backlash against ESG investing in some parts of the United States, Tangen told the Financial Times that the fund believes “it’s more important than ever to retain the focus on these extremely important matters.” And despite a macroeconomic environment of slowing growth and rising inflation, Tangen commented, “We must not forget decarbonisation.”

In 2019, the country’s ministry of finance declined to exclude oil and gas companies from the GPFG, despite the recommendation of Norges Bank. The ministry argues that continuing to hold shares in integrated oil and gas companies could exclude the fund from participating in the projected growth of renewable energy operations of these large integrated firms. The fund divested about $7.5 billion in oil and gas stocks, just 0.075% of the wealth fund’s total holdings at the time of $1 trillion.

The Corporate Citizenship Project, a corporate governance think-tank, expressed skepticism about the ability of Norges Bank to successfully implement its plan.

“On the one hand, we are supportive of science-based quantitative ESG targets because they prevent massive abuse and conflicts of interest when it comes to ESG rating decisions. On the other hand, we are skeptical that Norges Bank will fully implement their stated objectives because most corporations realistically will not be able to comply with these arduous disclosure requirements,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project.

Norway’s population is around 5.4 million, and the country’s sovereign wealth fund is worth more than $200,000 for every person. That wealth was built on North Sea oil, and now the country will be phasing out oil and gas extraction and putting its financial might behind sustainable energy development. Will that help move major oil and gas producers to consider setting a net zero emissions goal of their own? Should the oil and gas producers invest more now in phasing out their own business over the long haul in favor of more climate friendly energy sources or should they continue looking only at short-term profits?