The Norwegian Central Bank has rejected a government proposal to earmark assets for a specialist environmental investment programme at the giant NOK2.9trn (€360bn) Government Global Pension Fund.
Instead it says green investments – originally projected to grow to NOK20bn (€2.5bn) over five years – should be made on a “broader basis” within the fund’s existing unlisted investment strategy.
The Norwegian government had initially recommended that the fund set up discrete programmes to focus on environmental investments and sustainable emerging markets, and had sought the advice of Norges Bank Investment Management, the central bank division which runs the fund’s assets. In its response, Norges Bank has recommended that unlisted investments focusing on the environment and sustainable growth “should be made within the context of a broad management mandate,” central bank governor Svein Gjedrem and NBIM CEO Yngve Slyngstad say in a letter to the Finance Ministry that has just been released.
The letter continues: “Such investments should be subject to the same requirements for return and risk management as other investments.”
The bank stresses that the approach to these new investment opportunities should not be to invest in a “narrow and risky” segment of the asset class but to permit unlisted investments on a broad basis. This would be in keeping with fund rules that investments should not be “earmarked” for special purposes.
Gjedrem and Slyngstad go so far as to refer to the legislation governing the fund that it “should not be an alternative source of funding for areas unable to compete with other expenditure through thegovernment budget”. In a separate 25-page report attached to the letter, the bank sais that the expansion of the fund’s investment universe to include only risky segments of new asset classes “cannot be recommended”.
It goes on: “In some segments of environmental investments, it will be a challenge to find investment opportunities that justify the financial and regulatory risk that they entail.”
For its part, the government said it would continue its efforts to assess new unlisted investments under the environmental programme. Further details will be disclosed in the Fund’s annual report in spring 2011.
The Finance Ministry had originally outlined its plans for a new NOK20bn investment programme aimed at environmental investments in a white paper to the Storting (parliament) in April 2009.
A public consultation had found respondents were “generally positive” to earmarking a part of the fund to environmental technology or developing countries.
As at the end of 2009, more than NOK7bn had already been invested under this programme.
In a separate letter, on investment strategy, it’s argued that assets classes “such as timberland, farmland, patents, commodities and insurance products could enter the fund’s investment universe under new proposals to change the fund’s investment allocation.”
Meanwhile, a new four-strong Strategy Council has been set up report on the long term investment strategy of the fund by December 1, 2010. The panel consists of Elroy Dimson of the London Business School, Brevan Howard’s Antti Ilmanen, DnB NOR Markets’ Øystein Stephansen and Eva Liljeblom of Finland’s Hanken School of Economics.