NBIM ditches final Adani holdings, manages to break even

Fund publishes list of all ESG engagements as it reveals the impact of ethical and risk-based exclusions on returns

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Norges Bank Investment Management (NBIM) has no exposure left to Adani “for all intents and purposes” after a combination of previous exclusions and reductions in exposure since the start of the year.

In its annual responsible investment report, the world’s largest sovereign wealth fund said that ethical exclusions drove a small reduction in annual returns over the course of 2022 and the lowest ever cumulative reduction in returns, the fund has said.

The exclusion of some companies under product restrictions, such as arms firms, tobacco companies and coal companies, reduced the cumulative return on its equity benchmark index by around 2.9 percentage points or 7 basis points annually.

The report said that the reduction in returns was mainly down to the absence of weapons manufacturers, although CEO Nicolai Tangen suggested in a press conference that coal exclusions had also played a role.

While product exclusions led to a reduction in returns, the exclusion of companies over their conduct had a cumulative positive impact of 0.5 percentage points, with companies excluded for severe environmental impact contributing particularly positively.

Since 2006, the equity benchmark index has returned 2.4 percentage points less than without any ethical exclusions.

“It’s not an option to own these companies,” Tangen said when questioned on the impact at the press conference. “We divest them because we think there’s a risk of human rights violations, for bad stuff with climate and water management, mistreatment of employees…

“It’s not a consideration that it’s costing us a bit of money not to own them. It’s just a complete no-go to be in these companies.”

Adani exposure

NBIM has two tracks for divestments, with separate processes for companies dropped either for risk or ethical reasons.

Risk-based divestments, carried out under a separate process, have a had a less dramatic impact. The 440 risk-based divestments, which include 74 in 2022, have resulted in an improved cumulative return of 26bps since 2012. Climate and human rights divestments have accounted for 14 and 5bps of improvement.

In 2022 specifically, strong performance in energy and basic materials led to a 4bp decrease as this is where many risk-based divestments are concentrated.

At the launch of the report, it took the unusual step of naming companies that it had excluded for risk reasons, noting that it had pulled out of six Adani-related companies between 2014 and the end of 2022 for reasons linked to deforestation and GHG emissions.

The fund remained invested in three Adani companies by the end of 2022, with holdings in Adani Green, Adani Total Gas and Adani Ports worth roughly NKr2 billion ($197 million; €183 million). However, since the start of 2023 it has now reduced its holdings to the point where “for all intents and purposes, we have no exposure left”.

The combined divestments have left NBIM “roughly even” on returns, it said.

Publishing meetings

In a step to increase transparency, the fund published for the first time a list of every single interaction it had with companies where environmental, social or governance topics had come up.

Two-thirds of company meetings or correspondence, covering 61 percent of the equity portfolio, involved some kind of interaction on ESG topics. NBIM spoke to BlackRock on social and governance topics and State Street on all three, while Tesla was exclusively targeted on governance issues.

The responsible investment report also details some of the reactive engagements carried out by the fund in response to controversies in the news. In the aftermath of the Grenfell Tower fire in the UK, for instance, it engaged with housing developers and cladding manufacturers over stakeholder engagement and remediation.

Other examples of reactive engagement include interaction with Australian insurer AUB Group over links to the Carmichael coal mine in order to “understand how they assess financial intermediary support to thermal coal projects”, and with French construction company Vinci to get more detail on risk management on exploitative labour practices relating to the 2022 World Cup.

Thematic engagements

Over the course of the year, NBIM wrapped up a series of thematic engagements, including one on climate lobbying in the EU that resulted in all nine heavy industry companies targeted disclosing their climate policy priorities and two disclosing lobbying expenditure.

Also concluded were engagements with consumer firms on the responsible marketing of infant formula and on climate risks at iron and steel producers. Both initiatives achieved success across their engagement targets.

NBIM has started three new thematic engagement streams, covering biodiversity and human rights at 12 mining companies, gender-based violence and harassment at 10 companies across sectors, and tax and transparency at another seven companies.

While the fund said it was too early to determine progress on the latter two engagements, it noted some improvements from BHP on biodiversity and indigenous rights.