A conversation with Carine Smith Ihenacho, Chief Corporate Governance Officer of Norges Bank Investment Management on tax, climate change, securities lending and the ocean economy.
Carine Smith Ihenacho was asked on stage during a keynote interview at RI Europe 2018 what long-termism means for Norway’s 1 trillion-dollar Government Pension Fund Global (GPFG), that is run by NBIM. She put it this way:
“We are a fund for eternity. We have a clear purpose: safeguard and create wealth for the future generations of Norwegians.”
The giant fund has, on average, a stake of 1.4% in companies around the world – rising to 2.4% in European companies. Having such a large stake in the globe’s capital market requires it “to think about the sustainable development of the companies we have invested in.”
As Ihenacho told the audience of RI Europe, with ownership comes responsibility. As such NBIM votes all shares the GFPG owns (that’s about 113,000 resolutions) and it aspires to be a “predictable investor” by setting clear voting guidelines, as well as publishing expectations on key issues.
After her keynote interview, Ihenacho sits down with RI and elaborates on one of those key issues: tax responsibility.
In April 2017 NBIM made it clear what it expects from boards, particularly regarding tax avoidance, which is a legal though abusive practice.
NBIM’s Expectation Document on Tax and Transparency stated clearly that companies should “comply with both the letter of the tax laws and the intention of the legislature at the time those laws were passed.”
Ihenacho summarises the main three themes of the Expectation Document as follows: first, NBIM wants this to be a board issue. “We want the board to be involved in setting the tax strategy for the company,” she says.
The second and third themes are reminiscent of the demands of campaigners such as the Tax Justice Network:
“We believe that companies should pay tax where their value creation takes place,” Ihenacho says, adding that this should be disclosed by publishing country-by-country reports (link).
Ihenacho says NBIM sent a letter with the Expectation Document to the 500 largest companies of its portfolio. The response was encouraging, as many believed that having a sustainable tax policy is an important board issue.
“Where we got some more pushback, let’s say, was on the country-by-country reporting. Some companies feel this is something they will adhere to when and if it becomes mandatory, although we see already several companies doing it despite it not being a legal requirement.“NBIM had the opportunity to act on its words this year by backing a prominent, albeit rare, shareholder proposal on tax responsibility.
It voted FOR a proposal asking Facebook’s board to adopt a set of responsible tax principles and to limit offshore tax avoidance strategies.
Despite achieving a meagre 1.5% of votes, it could signal that tax responsibility might become a growing trend.
The proposal, filed by American trade union group AFL–CIO, was also supported by Legal & General Investment Management, Royal London Asset Management, Sweden’s AP4 and the Illinois State funds.
Another key shareholder proposal of the 2018 AGM season came from campaign group Follow This at Shell for the third year in a row.
Co-filled with UK advocacy group ShareAction, it aimed at encouraging fellow shareholders to support Shell in its alignment with the Paris Agreement by setting and publishing emission reduction targets and measurable metrics.
NBIM didn’t support it. Ihenacho says: “We were together with the clear majority that didn’t vote for it. We believe that in many ways the company has already reported scenarios in alignment with the expectations we have set out in our climate risk document.”
She continues: “Part of that is having a 2-degree scenario planning and reporting. But you don’t want to be too detail-oriented and prescriptive [regarding] what should be decided by the board.”
Earlier, Ihenacho had taken a question from the floor at RI Europe from Nick Robins, Professor in Practice for Sustainable Finance at the London School of Economics’ Grantham Research Institute and Special Adviser with UN Environment.
When he asked whether NBIM plans to align the fund with the Paris Agreement goals, Ihenacho answered that there is no alignment planed in that regard although it “doesn’t mean we don’t work on climate change issues”.
The question prompted many in the audience to sit up and jot down what seemed a striking statement. So I ask her to elaborate.
“Depends on what this question was about: If it’s clearly stated in the mandate or not. Maybe I misunderstood this question and thought it was more related to the parameters of the mandate, which comes from the Ministry of Finance.”
She adds: “The way we work on climate change risk issues is in alignment with the 2-degree scenario. We ask companies for a 2-degree scenario reporting.”
On stage, Ihenacho said that NBIM’s first Expectation Document on climate change dates back 10 years and has recently been reviewed to align it with the Task Force on Climate-related Financial Disclosures.
She also said on stage: “The TCFD is a requirement on us, investors, we are now working on how we are going to report under the TCFD.”
On the back of Carillion, the UK construction firm that collapsed in January this year, I ask Ihenacho about NBIM’s policy on securities lending. Carillion was one of the most heavily shorted stocks on the FTSE 250 just two months before its final AGM in May 2017.
“Securities lending is an activity that we have chosen to do as a fund, but one we have to do within the boundaries of responsible investment management. We have found the way to balance it. There are safeguards that you can put in place,” she says. She points to looking at the amount lent out and whether it is possible to recall the securities at will.
“It’s about how much you lend out compared to what you own so that you still remain an owner and can engage with the companies. For important issues, we want to vote with all our ownership holdings,” she says.When it comes to new or recurrent governance topics that are on NBIM’s radar, Ihenacho highlights two.
One is the data management of tech companies, an issue that NBIM is following closely. The other is the ocean economy, in which NBIM is working on an Expectation Document, and the issue of plastics would be an important theme of it.
So far NBIM has joined the Action Platform for Oceans, an initiative of the UN Global Compact launched last month, World Ocean Day, which aims at mobilising the private sector to take tangible action, make investments and form partnerships to leverage the ocean economy.