Stockholm (NordSIP) – Managing the world’s biggest sovereign wealth fund comes with certain expectations and transparency is definitely one of those. In the spirit of increased transparency, on 7 February, Norges Bank Investment Management (NBIM) officially presented their latest report on responsible investment at a press conference, offering a detailed account of the fund’s sustainable investing accomplishments.
“We are sharing more about our activities and the progress we are making than ever before,” comments Carine Smith Ihenacho, NBIM’s Chief Governance and Compliance Officer. “We are convinced that transparency is important for trust, but also for better results,” she adds. In recognition, the Global Pension Transparency Benchmark awarded NBIM the world’s most transparent fund in 2023 in the category on Responsible Investing.
Stepping up on climate risks
Given that NBIM is shareholder in 8,859 companies, it is hardly surprising that the customary annual statistics on dialogues, voting activity, etc. presented are impressive, despite the team’s efforts to prioritise and focus their activities.
One of the highlights this year is the way NBIM has stepped up its expectations on portfolio companies, shifting the focus from climate targets to concrete transition plans. According to Eivind Fliflet, NBIM’s Head of Environment, climate risk was addressed in more than 800 company meetings during the past year. He points out that a positive trend can be discerned. Whereas in 2022, 56 per cent of emissions in the fund were from companies with net zero targets, the percentage has increased to 68 now.
Focus on AI
No press conference these days can avoid mentioning artificial intelligence. Although the theme is not new for NBIM, Smith Ihenacho reflects on the massive increase of company meetings on AI, 631 during the past year compared to less than 200 in 2022. Three of the AI-related themes that the fund has been paying increasing attention to are health care, technology, and children online.
Last August, NBIM published a paper outlining their view on responsible use of artificial intelligence. “For the companies, this begins with board accountability. It also depends on transparency, explainability, and robust risk management,” comments Nicolai Tangen, NBIM’s Chief Executive Officer.
Selectively opting out
During the year, NBIM has updated the model for assessing companies’ exposure to ESG risks based on their country- and sector classifications, aligning the risk metrics for each sector with the financial materiality framework of the SASB. This has resulted in increasing the scale of screening activities both with regards to companies entering the benchmark index and those already in the portfolio. NBIM reports pre-screening more than 1,000 companies that came into their index in 2023 and deciding to not own 54 of these.
The fund has also selectively divested from a number of portfolio companies that pose ESG risks and identified companies with heightened risks across a variety of ESG topics. According to the report, last year NBIM divested from 86 companies for reasons such as potential violations of human and labour rights, insufficient risk management related to corruption and business models highly exposed to thermal coal. In total, NBIM has made 526 divestment decisions since 2012.
Positive contribution
A special feature in this year’s report presented during the press conference, is the impact of investment decisions such as risk-based divestments on the fund’s returns. Encouragingly, the numbers, both for 2023 and since 2012 shows some positive impact on the equity portfolio from the risk-based divestments. It appears that whether you look at divestments linked to climate change or human rights, these have increased the cumulative return on equity management (by 0.23 and 0.09 percentage point respectively). As a bit of a curious outlier, exclusions linked to corruption have marginally detracted from the fund’s performance.
All in all, since 2012, these investment decisions have contributed NOK 10 billion to the fund’s returns, according to the analysis. “This is great! We can reduce risk, get rid of unsustainable companies and make money, too,” concludes Smith Ihenacho.
