NBIM takes 1.3% hit for ethical investments, but says exclusions maintain legitimacy of $1trn sovereign fund

Norges Bank discloses exclusion-based underperformance in new report charting 20-year evolution from ‘a reluctant to an active owner’

Norges Bank Investment Management (NBIM), manager of Norway’s $1trn sovereign wealth fund, has revealed that its ethical exclusions have led to an “accumulated underperformance” of 1.3% compared with an unrestricted equity benchmark index over the last 13 years. 

The disclosure is made in a 124-page report charting 20 years of responsible investment at the vast Norwegian Government Pension Fund Global, over which time it has by its own admission “evolved from a reluctant to an active owner”.

‘The cost of restricting ownership has been accepted as necessary to maintain this legitimacy’ – Norges Bank

Its exclusion-based underperformance translates to an average of 0.04% between its first exclusion in 2006 and the end of 2019. For contrast, the Oslo-based manager states that its annual management costs for the sovereign fund came to just under 0.05% in 2019.

The report is frank in outlining how Norges Bank has sought to negotiate its mandate to maximise financial return and the recognition by successive Norwegian governments that “there are limits to what the fund should own”.

“The cost of restricting ownership has been accepted as necessary to maintain this legitimacy”, it states. 

At the end of 2019, 134 companies had been excluded, and this week three more companies were added to the list – Formosa Chemicals & Fibre Corp, Formosa Taffeta Co and Page Industries – over human rights concerns.

Norges Bank’s ethical advisor, The Council on Ethics, had also recommended the exclusion of PetroChina Ltd over corruption concerns, but the giant fund decided to continue with active ownership for now. 

The new report covers three areas: investments, ownership and markets.

On investments, Norges Bank reveals that it has €17.2bn invested in environmental mandates. Those mandates have returned 7.3% since January 2010, compared to 9.6% for the benchmark, but Norges Bank adds that over the past five years the return on the environmental equity-related mandates has been significantly higher – 11.5% compared to 8.7% for the benchmark. 

Investing in environmental companies is “not without challenges”, however, according to Norges Bank, which adds that it is an “area that is particularly suitable for active investment”. 

“Deep analytical resources need to be deployed to avoid disadvantaged companies while uncovering disruptors and winners”, it writes.

Last year, Norges Bank was allowed to add renewable energy infrastructure as a new asset class to its environmental mandates and double the upper limit for the mandates to Kr120bn (€11.5bn) to accommodate the new asset class. 

It says that it has “begun building in-house investment capacity and expertise to analyse and invest in renewable energy infrastructure”.

The focus will initially be on opportunities in European and North American wind and solar assets. 

Norges Bank also confirmed that from 2021 it will publish its shareholder votes ahead of company annual meetings and explain any votes that go against board recommendations.

It states that it has “come a long way since it initially avoided using its voting rights for fear of getting involved in difficult decisions.”

Resolutions on sustainability issues are described in the report as “often the most difficult decisions”, requiring “individual analysis”. 

Norges Bank relies on “a number of intermediaries” to carry out its voting wishes but acknowledges that in “most markets” it does “not receive any confirmation that our votes have been received by the company”.

It adds that it is “working with regulators and service providers to improve the voting process and ensure that our votes are registered.”

Roughly 87% of voting decisions have been automated since Norges Bank introduced voting guidelines. 

On engagement, Norges Bank states that company board interactions have increased year on year, from 70 interactions in 2013 to 167 in 2019, but it also acknowledges that the “results of these dialogues would be difficult to measure”.  

The Government Pension Fund Global – also known as the ‘Oil Fund’ – was established in 1990 to invest the surplus revenues of the Norwegian petroleum sector.

Since then it has grown to be the single largest owner in the world’s stock markets with an average stake of 1.5% in every listed company.

Norges Bank says that being a sovereign investor imposes “certain requirements” on its behaviour when it comes to engagement, and cites this as the reason it rarely joins investor coalitions or collaborative engagements, due to its “need to maintain control of the agenda and approach to interaction”. 

It is not, for example, a member of Climate Action 100+, the multi-trillion investor engagement initiative targeting the world’s dirtiest companies. 

Norges Bank also adds that it does not believe that it is “appropriate” for it to set deadlines for companies when engaging. “Such requirements could in practice end up as a form of positive screening or create pressure to divest, which would not be aligned with our investment mandate”, it states. 

On sustainability reporting, Norges Bank highlights the “lack of standard units of accounting” and a reliance on “subjective narratives”, making it difficult to compare companies’ sustainability performance.

Norges Bank supports calls for the “harmonisation” of the countless sustainability reporting frameworks and urges investors to be more “proactive” in guiding companies “on what and how to report, down to the level of specific frameworks, standards and data points”.

“We have gone from being a small and reluctant owner to becoming a large and active owner in more than 9,000 companies”, reflects Norges Bank’s outgoing CEO Yngve Slyngstad. “I am proud of the work that has been done and what we have achieved over the last two decades.”