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One of the world's largest investors may become a net-zero
activist shareholder, but has no plans to take the net-zero pledge
itself amid rising market risks.
Norway's Government Pension Fund Global (GPFG), a sovereign
wealth fund that invests the surplus revenues of the petroleum
sector in its $1.4 trillion in assets, owns about 1.5% of the
world's listed companies according to fund manager Norges
Bank.
As part of the Ministry of Finance's annual reviews of Norges
Bank's mandate, its 1 April white paper seeks to pile the
pressure on invested companies to reach net-zero GHGs while the
country itself aims for that target by 2050.
It envisages a change of the fund's ESG aims, replacing its
environmental mandate and reference index with a
climate-risk-oriented index for the entire fund. The jury is still
out, however, on whether this will cause its green investment to
grow or shrink as the details of the index are yet to come,
according to observers.
"I think that the intention by the Ministry of Finance now is to
give the fund actually a bit more room to make smarter decisions.
Up until now, they have only been allowed to deviate 1.5% from the
reference index, which is very little room to manoeuvre in a fast
changing world," Martin Norman, global investment stewardship
director of the Oslo-based advocacy group Australasian Centre for
Corporate Responsibility told Net-Zero Business Daily by
S&P Global Commodities Insights.
The ministry worried about rising market risk yet wanted Norway
to lead in managing "climate and nature risks" in the context of
"several types of risk" it faces.
Today's market volatility meant the fund could lose value,
threatening the welfare programs it finances. "Financial markets
are however volatile, and we need to be prepared for potential fund
value reductions. As an ever-increasing share of the Norwegian
welfare state is funded by transfers from the GPFG, we are becoming
more vulnerable to fund value fluctuations," said the Minister of
Finance Trygve Slagsvold Vedum in a 1 April statement.
Escalation of Russia's war in Ukraine could mean "substantial"
market losses for banks. Already, the war has raised market risks
through increased market volatility, lower equity valuations, and
wider credit spreads, the European Banking Authority noted in its 1
April risk report.
Many companies saw credit downgrades on 7 March according to data from S&P Global
Commodities Insights.
In February, when Russia invaded Ukraine, the Ministry of
Finance asked Norges Bank to
immediately make plans to divest from Russian assets.
The white paper's recommendations now go to the Finance
Committee within the Norwegian legislature, the Storting, where
they could be changed before becoming law.
Net-zero stance weaker than some
The fund must pressure companies it invests in to align toward
the global net-zero emissions goal within the Paris Agreement, the
ministry said.
This could be done through regular reporting on companies'
forward-looking decarbonization pathways using today's leading
frameworks.
The fund, which has a minority stake in many companies, is not
expected to engage in typical activist investing. "I wouldn't say
activist because the mandate is very clearly to secure long-term
income with low to moderate risk, but in a world that has to change
there are all kinds of issues at hand, and they need to have a
clear mandate so that they can be more proactive in their
approach," said Norman.
This proposed pseudo-activism shifts the burden of reaching net
zero, however, away from the fund and onto its portfolio
companies.
It falls short of Norway's commitment at the COP26 climate
conference last year to make GPFG "the leading fund in responsible
investment and the management of climate risk," said Håvard
Halland, a senior economist for global policy forum OECD's
Development Centre.
"It's an important step ahead as they now commit [on behalf of
the fund] to working toward net-zero emissions within portfolio
companies through active ownership, but the index remains largely
as it is," he said.
"They don't commit to a certain emissions reduction at portfolio
level: They commit to doing their best," he added.
More net-zero pressure could be brought to bear if the GPFG
joined the UN initiative Net-Zero Asset Owner Alliance, which
commits to net-zero emissions, an academic paper and a think tank argued last year.
But the Ministry of Finance's white paper examined Norges Bank's
steering of the GPFG, and found it was "satisfactory."
The white paper highlighted the advice of an expert group on
climate risk that found that nearly all volatility in the returns
of the fund can be explained by benchmark index developments.
Justifying the decision not to stop investing in specific
industries, the ministry's expert group did not find that climate
risk is systematically mispriced. The best approach to risk is
diversifying and active management, it found.
In particular, the ministry emphasized the fund's aim was
achieving returns and managing risk, rather than specific climate
policy objectives.
Halland, who campaigns for the fund to have a net-zero emissions
target, said: "This issue of the fund not being an instrument of
climate policy is an argument against an emissions target at the
portfolio level. My view is that none of the investors in the
Net-Zero Asset Alliance are climate policy instruments."
This included insurance companies with a similar value to the
fund. New Zealand had made a net-zero pledge for its sovereign
wealth fund, Halland observed, adding that assets held abroad by
sovereign wealth funds were a loophole for countries aiming for
net-zero.
Environmental mandate gone, but not forgotten
As of 2021, the fund had a mandate to invest between $3 billion
and $13 billion, or less than 1% of the fund's value, in
environmental investments.
The fund's focus on climate has become broader, but the removal
of the environmental mandate was mainly because it blurs the line
between the ministry as specifying the mandate, and the bank
finding the best ways to invest, Knut Anton Mork, professor
emeritus at the Norwegian University of Science and Technology,
told Net-Zero Business Daily.
"I think that argument is that it's a streamlining. It helps the
distribution of responsibilities between the Ministry of Finance
and the central bank. In any case, the environmental mandate was a
very small share of total assets," added Halland.
On the other hand, without the mandate, investment in
environmental projects will not be guaranteed because a shift to
indexing emphasizes projects' market performance.
Mork warned that, pending finalization, this shift may mean less
green investing. "Although the paper makes a big deal out of
climate as an overarching principle, it is most unclear what this
is supposed to mean in practice," said Mork.
However, the move to an index may be promising, as many green
companies that formed part of the index used for the environmental
mandate five or six years ago have now taken their place within the
bank's standard reference index that is based on FTSE, said
Norman.
"Today there are so many of these companies that are an
increasingly big part of the main index, and with the overarching
mandate and [the country] aiming for net-zero by 2050, I don't
think this is a move away from any environmental investments," said
Norman.
Offshore wind investment growing
More unlisted renewable companies will also become eligible for
GPFG investment under the proposals.
They are now included in the pot set aside for unlisted
investments, limited to $13 billion (NOK 120 billion), but the
limit could be raised to $27 billion (NOK 240 billion).
Last year under the existing threshold, the GPFG invested in
Øsrsted's Borssele 1 & 2 offshore wind farm off the
Netherlands, which was its first investment in renewable energy
infrastructure.
The ministry welcoming more risky unlisted investments may be
seen as continued progress for renewable energy advocates.
"It was in 2008 when [Norges Bank] asked for permission to
invest in unlisted renewable infrastructure, and it took them 10
years to get that mandate," said Norman.
Posted 07 April 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.