Norway panel says giant Pension Fund should not automatically divest fossil fuel, rejects “stranded assets”

Expert group headed by PRI’s Skancke calls for “active ownership”

A panel of experts set up earlier this year to look into whether Norway’s $870bn (€701bn) Government Pension Fund should divest from fossil fuel companies says the influential fund should not divest outright but instead embrace active ownership and exclude the “worst climate offenders” on a case-by-case basis.

And, like fellow Norwegian investor KLP, it rejects the concept of “stranded assets”.

In its report, the panel, which is headed by Martin Skancke, Chairman of the Principles for Responsible Investment (PRI), said that active ownership of and engagement with fossil fuel companies are “the appropriate primary tools for the GPFG to use to address climate-related issues.”

The panel said: “Fossil fuels – both petroleum and coal – will remain part of the energy mix for decades to come. The question is thus not whether investors will own these companies, but which investors are ‘good’ owners of them from a financial and ethical perspective.”

It continued: “As a large, long-term owner with a clearly articulated active ownership and engagement strategy towards climate change and the clout and perseverance to implement it, the fund has every opportunity to be a ‘good’ owner.” The panel called on Norges Bank, which manages the fund’s assets, to step up its reporting on the climate risks associated with fossil fuels so that the Fund could be a more active owner of the companies.

That said, the six-member panel also suggested that a new criterion called “contribution to climate change” be included in the fund’s exclusion guidelines.“This would allow for exclusion of companies on a case-by-case basis where there is an unacceptable risk that the company contributes to or is responsible for acts or omissions that, on an aggregate company level, are severely harmful to the climate,” it said.

It added: “In our view fossil fuel companies’ energy production, energy use or CO2 emissions cannot per se said to be contrary to ethical norms. We therefore do not recommend automatic exclusion of all coal and petroleum producers.”

On the so-called ‘stranded assets’ theory, the panel is clear. “We do not believe the concept of ‘stranded assets’ to be an appropriate guide to investment strategy for the GPFG,” the report states. There was nothing “inherently new” about the idea. “As a baseline, one should assume that asset prices, by and large, provide a reasonable compensation for investment risk on an ex ante basis. This has so far been the basis for investment decisions made by the Ministry of Finance as the Fund’s formal owner, and there is no reason to make an exception for fossil fuel related investments.

“This is, however, not the same as stating that the issue of stranded assets is immaterial to investors or that one should be indifferent to the issue.”

The panel included Professor Elroy Dimson of the London Business School; Professor Michael Hoel of the Economic Institute at the University of Oslo; Laura Starks, Finance Professor at the University of Texas; Gro Nystuen a former Chairman of the GPFG’s Council of Ethics; and Research Director Magdalena Kettis. Link