Norway’s KLP divests coal and earmarks NOK500m for renewables – but rejects “stranded assets” theory

Mutually owned group finds weak arguments for broad fossil fuel divestment

KLP, the mutually owned Norwegian insurer and asset manager which manages local authority pensions, has announced that it is divesting NOK500m (€59m) from companies which have a high exposure to coal and putting the assets into renewable energy following a review prompted by a client.

But KLP is rejecting the “stranded assets” theory, saying that the arguments for fossil fuel divestment are weaker then they seem when examined on an ethical, social, environmental and financial basis.

KLP, which is Norway’s largest pension fund manager and has assets of around NOK 280bn (€33bn), assessed whether it is possible to contribute to a better environment by pulling its investments out of oil, gas and coal companies without affecting future returns.

It has concluded that divestment from coal companies will have no material impact on future returns, however, any withdrawal of investments in oil and gas would probably do so. Therefore, KLP has decided to only withdraw from coal. It defines coal companies as coal mining companies and coal-fired power companies which derive a proportion of their revenues from coal. At the very least, KLP will exclude those which derive 50% or more of their revenues from coal-based business activities.

KLP will publish the names of the companies to be excluded on December 1.

It will use the proceeds from its sale, estimated at NOK500m, to invest in renewable energy in emerging economies. Possibilities include direct investment, energy funds, listed shares and green bonds.

KLP’s CEO Sverre Thornes said: “We have long been an important source of funding for Norwegian hydropower, and have significantly larger investments in renewable energy than in oil, gas and coal companies combined. That does not prevent us from going further in the same direction by earmarking an additional NOK500m for new renewable energy production capacity in emerging economies, where the need is great and the alternative is often coal. At the same time, we are divesting our interests in coal companies in order to highlight the necessity of switching from fossil fuel to renewable energy.”He added: “KLP will continue to be an active and engaged owner of the companies in which we invest, with a clear ambition to influence them to take responsibility to lower greenhouse gas emissions.”

KLP is already a major investor in renewable energy, with NOK19bn invested in Norway alone. Last year KLP also established a partnership with Norfund for direct investment in renewable energy and finance.

The move comes as the government has set up an expert group to assess fossil fuel exclusion from the state’s Government Pension Fund Global.

Alongside the statement, KLP has published a summary of its thinking, in which it says: “The report finds no support for the ‘stranded assets’ hypothesis.” Its analysis found “little indication” of systematic discrepancy in the pricing of fossil fuel companies.

And the ethical argument for pulling out of fossil fuel companies “is not as weighty” as for divestment from, say, tobacco: “It is difficult to conclude that fossil fuel is a fundamentally unethical product.” In addition, KLP argues there is no statutory or ‘soft law’ instruments specific to fossil fuel exclusion.

So, rather than divest across the board, given that the arguments for divestment “are weaker than certain divestment campaigns have given to believe”, it will “use the tools at its disposal” – such as its involvement with environmental data body CDP – to help the world limit global warming to two degrees Celsius. Thus it will measure its portfolio’s carbon footprint and exercise its power as a shareholder in carbon-intensive companies.

Another factor in its decision, is the question of how influential divestment can be in influencing companies. Despite some “rather weak anecdotal evidence” about cluster bomb manufacturers, KLP says the experience from tobacco shows “no empirical support” that divestment changes behaviour. That’s to say, a fossil fuel firm will still be a fossil fuel firm, whether you own it or not.

“If the purpose is to exert pressure, there is no empirical evidence that a divestment would lead to reduced emissions,” the analysis says.