Norges Bank develops in-house climate model as environmental mandates return 21.7%

Influential investor releases 2017 responsible investment report

Norges Bank Investment Management says it is developing an in-house climate model and that its environmental equity investments returned 21.7% in 2017.

The giant investor has a mandate from the Norwegian government to investment between NOK30-60bn (€3-6bn) in environment-related mandates.

As at the end of last year it had NOK67.8bn invested in 206 companies under the mandate – with NOK7.1bn invested in green bonds. The investments are actively managed both internally and externally.

Norges said the environment-related equity portfolio and universe have had a higher volatility than the wider equity market. It said: “We have to expect a relatively small group of companies such as this to show greater return volatility over time than the broad equity market.

“The environmental investment universe is still nascent and sensitive to the developments of new technologies, business models and government regulation.”

Norges says it has built up “in-depth, internal expertise” in environmental technologies in recent years, which has involved defining the environmental investment universe.
Norges says: “We believe that we are currently in a transition period of improving technologies and solutions. These technologies are, however, expected to become central in moving towards net zero environmental impact in the future, without excessive costs and stranded assets.”
In its 2017 Responsible Investment report, the influential investor – which manages the assets of the Government Pension Fund Global – said it is developing an in-house model for analysing the potential impacts of mainstream climate scenarios on individual companies and on the portfolio as a whole.
“Specifically, we model future cash flows and greenhouse gas emissions on a company level and incorporate estimates of future carbon price under different scenarios.” The aim is to be able to model the effects of a carbon price on the return of the portfolio under individual forward-looking scenarios.The report also discusses disclosure, saying that it believes that “consolidating and harmonizing” sustainability reporting around “well-founded and recognised frameworks” is in the interest of companies and investors alike.

In the context of the Task Force for Climate-related Financial Disclosure (TCFD), Norges says it wants to understand what the TCFD recommendations will mean for banks and insurance companies and that it has initiated a dialogue with 55 banks on the TCFD recommendations.
The wide-ranging, 92-page report also discloses that as of the start of this year, the Ministry of Finance has introduced a new requirement for NBIM’s senior management to approve issuers of government bonds.

“We model future cash flows and greenhouse gas emissions on a company level”

Approval is to be based on an assessment of investment and operational risk and the fund says it has developed a framework for systematically assessing this.

“Investment risk is assessed along three dimensions: Stability, sustainability and serviceability. Sustainability includes assessments of environmental, social and governance factors, including exposure to conditions such as climate change and preservation of natural resources.”

It has also been reported that Norges could soon set out expectations for how companies should manage saltwater resources. CEO Yngve Slyngstad was quoted as saying by Reuters that it wants to have an “expectation document on water management that includes salt water”. Link