Analysis: Norway’s Government Fund – a responsible investor under scrutiny

High-level Strategy Council report on RI to be presented next week

Norway’s Government Pension Fund – Global (NGPFG) is a massively important investment institution in many ways, not least as a leader in responsible investment.
Consider the mind-blowing stats: seventeen thousand separate engagements with companies; an average aggregate ownership stake of 1.3% of the world’s stock markets; the largest stock owner in Europe with an investment portfolio of NOK4.8trn (€594bn, $796bn) that is projected to grow to NOK6trn – or $1trn – by the end of 2019. It’s arguably the most influential ownership institution in the world.

But for possibly the first time in its 23-year existence the giant fund is coming under scrutiny as a sustainable investor like never before.

This week, Norway’s political opposition party called on the fund to exit its large coal industry investments. That’s after fellow Norwegian institutions KLP and Storebrand backed a demand from environmental campaigners for the new government to push NGPFG into making investments in renewable energy and other infrastructure projects. Earlier this year the Re-Define think-tank said the fund lags its peers on ethical investment and sustainability.

Preceding all this, back in January, the then Norwegian government appointed a high-level panel called the Strategy Council, headed by respected academic Professor Elroy Dimson of the London Business School. The other members of the panel are Idar Kreutzer, the former Storebrand CEO who now heads trade body, Finance Norway, Rob Lake, the former Director of Responsible Investment at the Principles for Responsible Investment (PRI), Hermes’ Heje Sjo, and Professor Laura Starks of the University of Texas. Other experts such as Pavan Sukhdev have also been consulted.

The Strategy Council’s remit is to look at the fund’s “overarching strategy for responsible investment” and assess how gaps to international best practices for RI may be closed, so that the fund “actively contributes to the development of good international standards in the area of RI and active ownership”. The report will be presented on Monday, November 11.Apart from the panel that Dimson chairs, there is also a new Corporate Governance Advisory Board. This comprises three well-known UK figures: Professor John Kay; Tony Watson, the former Hermes CEO; and Peter Montagnon, the former journalist who has had stints with the Financial Reporting Council and the Association of British Insurers.

Although the fund is a leader in responsible investment, in many ways it ploughs its own furrow. It is not, for example, a signatory to the UK’s Stewardship Code where it might be expected to be a wholehearted supporter.

It was also notable by its absence last month when 70 major global investors representing $3trn wrote to 40 oil, gas and coal companies asking them to review their exposure to carbon asset risk and to outline their plans for managing them. Its “proxy access” campaign on shareholder nominated directors in the US seems to operate in a vacuum outside other leading investors on this issue.

Yet it does act with others when it feels the need, such as when it allied itself with a group of other global investors in a consultation on Integrated Reporting. The group argued that a key element of the draft framework – the notion of nonfinancial ‘capitals’ – was “unworkable”.

Then there’s the Posco case, which has had observers scratching their heads. This was a test case brought under the OECD’s National Contact Point (NCP) system which seeks to highlight investors’ role in investee companies. Norway’s NCP accused Norges Bank Investment Management (NBIM), which runs NGPFG’s assets, of having no policy on remedying human rights risks in its investments and said it was refusing to co-operate with the OECD’s Multinational Guidelines.

That resulted in a very strongly worded letter from the Norwegian Central Bank to the OECD warning of a potentially “untenable” situation if the OECD guidelines on responsible business were to be applied to minority investors. Hardly in the spirit of responsible investment. Sources close to NGPFG have suggested to RI that

the heavy-handed approach may have been the result of rushed drafting of the letter. Whatever the cause, it has not shown the fund in the best light. Intriguingly, Norway’s OECD NCP is based in the same office as the Ethical Council that advises the Norwegian fund giant, which must make for some interesting water-cooler exchanges!
It’s another example of the degree to which NGPFG’s ‘representation’ of Norway on the international stage can be hugely problematic. This was highlighted a few years ago when Elbit Systems, the Israeli defence firm, was divested, resulting in a diplomatic incident. The same happened with WalMart a few years earlier. On the other hand, it has also faced criticism for being too broad-brush in its exclusions, such as its blacklisting of palm oil producers which inadvertently lumped together both industry leaders and laggards.

Then there’s the perceived complexity in the way the responsible investment activities are handled. Norges Bank Investment Management (NBIM) has its base in Oslo and four international outposts (London, New York, Singapore and Shanghai). There’s considerable RI work conducted out of London, coupled with the work of the independent Ethics Council and the Finance Ministry’s own staff in Oslo. How this dovetails with the governance panel with Kay and Watson is open to question. Any review of the structure will have to assess whether the current accountability structure is optimal.

And the fund is subject to contradictions outside its control, beyond the obvious one that its revenues derive entirely from oil.For example, Norway has had a 30-year, multi-billion-dollar relationship with US defence contractor Lockheed Martin.

But paradoxically the fund can’t invest in Lockheed due to its links to weapons that may violate humanitarian principles. Surely such anomalies will need to be addressed if the fund is to continue to invest credibly.

There are reservations also about the lack of depth, on occasion, in its corporate engagement: there’s a sense that it sometimes fires off letters to companies but doesn’t do the hard work of following up on them, and that little meaningful dialogue occurs.

It’s not the first time the fund has faced criticism. In 2009, Oxford University’s Gordon Clark and Ashby Monk argued that NGPFG’s ethical policy might be hindering its effectiveness as an investor. They reckoned its high profile and corporate exclusion strategy could be “self-defeating”. The Finance Ministry later responded saying there would be better interaction between the fund and the Ethical Council and the introduction of a watch list for companies in the exclusion “grey zone”. So there’s a history of being responsive to criticism.

The remit of the Dimson panel explicitly excludes evaluating Norges Bank’s operational management of the fund and Council on Ethics’ recommendations. It will be interesting to see how its work shapes this most important responsible investor in the years ahead.