Skancke-led advisory group tells NBIM to introduce regular climate stress tests

Norges Bank Investment Management (NBIM) should “regularly” stress test Norway’s trillion-dollar sovereign wealth fund against “various climate pathways”, an expert group appointed by the Ministry of Finance has recommended.

The taskforce was appointed in February to consider how climate change and related policy might affect the wealth fund, Government Pension Fund Global (GPFG). It is led by the Chair of the Principles of Responsible Investment, Martin Skancke, who helped set up the fund during his tenure as Head Asset Management at Norway’s finance ministry – a position he left in 2011. 

In addition to his PRI role, Skancke is currently a board member at both Norwegian financial services company Storebrand and the Taskforce for Climate-related Financial Disclosures (TCFD). He is joined on the expert group by former Norwegian Minister of Finance Kristin Halvorsen, now a director at the country’s Center for International Climate Research.

In its findings, released today, the group said that stress testing the GPFG’s portfolio against climate scenarios would “provide a more complete picture of the fund’s climate risk, and be consistent with the requirements for TCFD reporting the fund itself sets for companies in which they invest”.

The authors also recommended that NBIM, which manages GPFG, should require its portfolio companies to test their resilience using climate scenarios, so that the fund can better “identify deviations from decarbonisation pathways consistent with the climate targets, and to quantify possible economic consequences of this”.

They acknowledged in the report that while NBIM does not yet regularly report against climate scenarios, work is being done on this at the fund. 

One of the core recommendations is that the Finance Ministry revises the fund’s mandate to strengthen NBIM’s responsible investment and active ownership, particularly increasing requirements around “measuring, managing and reporting climate risk”. 

For instance, they suggest including in the mandate language such as “Responsible investment management shall form an integral part of the management of the investment portfolio”, and “[a] good long-term return is considered to depend on sustainable economic, environmental and social development, as well as on well-functioning, legitimate and efficient markets”.

The group also recommended that the fund set a Net Zero emissions target “to help demonstrate consistency between the guidelines for managing the fund and the ambitions in the Paris Agreement to which Norway is a party”.

On the exclusion of sectors perceived to have “specific climate-related risk”, the expert group was sceptical, describing such an approach as a “very ineffective tool for risk management”, and one that “leads to poorer risk diversification”.

Earlier this week, NBIM posted strong half year financial results, which it attributed in part to good performance from the energy sector, buoyed by rising oil prices. 

“Decarbonisation of the fund should happen through contributing to decarbonisation of the companies in which the fund is invested. This is the best path to reduce climate risk for our common wealth,” said Skancke.

The report notes that the investment industry gives “too little priority to active ownership”, although investor engagement bodies such as Climate Action 100+ are tackling this. It goes on to criticise GPFG for having a “somewhat restrictive attitude to formalised cooperation”, saying it should be a “priority area for the fund”. 

“The fund is very long-term and broadly invested, and has a strong self-interest in investors on the whole not under-prioritising this work,” the report states. “The fund is among the world’s largest shareholders – which carries an obligation. We have therefore proposed that this work be anchored separately in the mandate for the fund”.