Norwegian government to assess oil and gas benchmark request from giant pension fund

Norway’s government will assess a request from the world’s largest sovereign wealth fund to kick oil and gas stocks out of its benchmark index, in what could be a major leap forward for the fossil divestment movement globally.

The trillion-dollar Government Pension Fund Global, established in 1990 to invest the country’s plentiful oil revenues and known as the “Oil Fund”, now wants to pull its own investments out of the sector, citing a desire to minimise “the Norwegian economy’s vulnerability to a permanent drop in oil prices”.

Around half of Norway’s exports relate to oil and gas, and the fund owns around NOK300bn (€31bn) in the sector through its benchmark index, which is provided by FTSE. That constitutes some 6% of holdings and includes BP, Shell and Exxon. The government also has a 67% stake in Statoil.

“The bank recommends that oil and gas stocks are removed from the benchmark index,” said the Norwegian central bank, Norges Bank, which runs the fund through Norges Bank Investment Management (NBIM), in a letter to the Ministry of Finance. “This will help reduce oil price risk in government wealth.” The Ministry has the final say on how the benchmark index is composed for the sovereign wealth fund.

In response, the Finance Minister, Siv Jensen – part of the centre-right coalition which came to power in September – described the request as “complex and multifaceted”, adding that a “thorough assessment” was required, which would not be complete until next autumn.

“The government is responsible for the Norwegian economy as a whole and must take a broad and comprehensive approach to this issue,” she concluded.

The Ministry said in a statement that it would now obtain further information and notify parliament of the issue in spring 2018, as part of its Report on the Management of the Government Pension Fund.

Falling oil prices have hit Norway hard in recent years. Jensen described the slump as “a challenge for the Norwegian economy” in a recent speech.

“The Norwegian government has a proactive approach in order to limit the negative impact of the drop in the oil price,” she continued, saying it needed to “facilitate long-term readjustment and improved competitiveness” and “promote the long-term transition of the Norwegian economy through predictability, competition between sectors on an equal footing”.The Ministry of Finance appoints a Council of Ethics to put forward recommendations on exclusions for its sovereign wealth fund. Exclusions have previously been based on products or conduct. For example, tens of companies in the tobacco, nuclear weapons and cluster munitions sectors are excluded because of their products, while a number of others are blacklisted on the basis of issues such as corruption, human rights violations and severe environmental damage.

The only category to fall outside the remit of the Council of Ethics is product-based coal exclusions, which are recommended by Norges Bank Investment Management itself. Coal has only been on the exclusion list since last year, and there are now some 70 companies in the sector that are not eligible for investment. These include those where thermal coal is a more than 30% of the company’s business activities. Green bonds issued by these firms are exempt.

“Emphasis should also be given to the forward looking product/fuel mix transition as well as the degree to which the company utilizes renewable energy in its activities,” Norges Bank states.

The sovereign wealth fund’s exclusion list is much-watched by other investors – especially those in Norway and the rest of Scandinavia – as a basis for their own exclusion lists.

Today’s announcement somewhat overshadowed a similar announcement from fellow Norwegian investment giant Storebrand, which has also this week axed more coal companies in a bid to reduce exposure to the sector.

The $80bn asset manager – second in size to Government Pension Fund Global in the country – has exited 10 firms. It said it was “throwing down the gauntlet to the financial sector” – pointing specifically to the sovereign wealth fund and asking it to blacklist more coal companies, “including giant power companies operating in Germany”. RWE is one of the firms to be cut in Storebrand’s latest slew of exclusions, along with E.ON’s Uniper.
“This is also a warning to all coal plant developers, if you put steel in the ground, we’re out,” said Jan Erik Saugestad, CEO of Storebrand Asset Management. “To the power producers, clean up your energy sources or lose customers and investors.”