Stockholm (NordSIP) – Norway’s famously oil- and gas dependent €829 billion Sovereign Wealth Fund has announced a plan under consideration to divest its petroleum stocks. The move could entail a dump of as much as $40 billion of shares in companies like Exxon Mobil and Royal Dutch Shell Plc. The proposal is currently being studied by Norway’s Finance Ministry, pending a decision in the fall of 2018.
“The move by the Norwegian Oil Fund is another sign that the tide is turning, showing that improving sustainability is good business sense and not just a matter of ethics,” Linda Zelina, Special Advisor on Sustainability at Re-Define, at think tank that has closely tracked the Norwegian SWF, told NordSIP.
The move would make Norway less vulnerable to declining crude oil prices, according to Norway’s central bank. As such, the initiative has more to do with hedging risk than environmental concerns, however.
“Our perspective here is to spread the risks for the state’s wealth,” commented Egil Matsen, the deputy governor at Norway’s central bank in charge of overseeing Norway’s SWF. “We can do that better by not adding oil price risk through the fund.”
With a fifth of Norway’s economic returns coming from oil and gas, the concern is that Norway is too exposed to current oil price volatility. Norway is western Europe’s largest energy supplier, with oil being the prime source of revenue for the country – something which also contributes to its high standards of living. Environmental groups have praised the plan, and the move is being hailed as a potential game-changer.
Not only would the divestment mark the second major step of diminishing the SWF’s contributions to climate risk following the sale of the majority of its coal stocks two years ago, it also signals a potential tectonic shift in that it could be the first, and largest, institutional investor to abandon fossil fuels altogether. If it treads into effect, the move is also likely to add pressure on producers already struggling with the growth of renewable energy supplies.
“There are still hurdles to overcome to align the oil fund with a more sustainable outlook,” Zelina told NordSIP, however. “The oil fund is still failing to capitalise on opportunities for better returns in emerging markets and green infrastructure (especially unlisted infrastructure), as its mandate remains quite restrictive.”
Redefine released a report earlier this year – “The Promise of Sustainable Investing – The case of the Norwegian Oil fund” (written by Zelina together with Re-Define director Sony Kapoor)– which found that the fund’s use of the FTSE All Cap Global Index as a benchmark undermines the government-imposed sustainability mandate, and that Norway’s central bank is failing to extend mandates imposed on third party asset managers to itself. The report is the latest instance of many years of work on behalf of Re-Define to affect change in how Norway’s SWF invests.
The fund has doubled in value over the past five years and has just been given the green light to boost stock holdings to 70 per cent to help drive returns. As it tracks the aforementioned and other indexes that include oil and gas shares, it could wind up buying even more of such shares, however.
“It’s important that the fund is managed in a way that’s predictable and long-term,” said Nikolai Astrup, leader of the finance committee representing the ruling Conservative party.
The plan, for now, is a “belated victory for common sense over the powerful oil and gas lobby in Norway,” Kapoor told Bloomberg, who also called on the fund to boost its green investments tenfold. Meanwhile, “[i]t will be interesting to see the next moves by the other major oil funds in the Middle East and beyond, as it becomes clearer that diversification is key for funds reliant on fossil fuels,” Zelina told NordSIP.
Image © Shutterstock Andrea Lehmkuhl