ESG changes to Norway fund could lead to €910m sell off

Changes to the ethical guidelines of Norway’s $1.15tn Government Pension Fund Global (GPFG) could lead to assets worth NOK 10bn (€910m) being sold off, with engagement being offered as a third way.

Norges Bank, which manages the GPFG investment portfolio – the world’s largest sovereign wealth fund – made the estimate in response to proposals by the Ethics Committee that were published in June.

Under the proposals, companies could be banned based on their human rights record, perceived exposure to corruption or production of weapons.

“The commission writes that the Council on Ethics’ secretariat has identified a handful of companies that could be excluded on the basis of the commission’s proposals,” Norges Bank Governor Øystein Olsen and Executive Director Birger Vikøren wrote in a letter to the Ministry of Finance.

“At the end of 2019, the GPFG had invested just over NOK 10bn in these companies.”

Currently, 144 companies are excluded.

But the pair noted that any changes to exclusions could hit returns.

“Extensive use of negative screening and exclusion may, in Norges Bank’s view, entail substantial costs in the form of lower expected return or higher market risk and in the form of less transparency in assessing investment management,” the letter said.

Norges Bank says the annual return on the GPFG benchmark equity index for the period 2006-2019 was 0.04 percentage points lower than for a hypothetical benchmark index that did not have exclusions.

Given the current size of the equity portfolio, this would amount to a loss of NOK 2.8bn a year.

While Norges Bank wants the threshold for exclusion to remain high, it points out that exercising ownership rights to get companies to change their conduct would be a useful alternative.

Olsen and Vikøren agreed with the committee that the fund’s framework, which was established 16 years ago, has functioned well, and that its proposals necessitated a continuation of the current model.

The committee was asked to assess the line between company and state, including “considerations relating to the GPFG’s investments in countries whose statutes and regulations violate internationally recognised conventions and standards”.

It discussed how recommendations for countries that did not tick the fund’s box exactly could undergo risk assessments of both the country and business sector.

However, the bank’s leaders warned that any changes to the ethical guidelines in this way could hit returns.

“In Norges Bank’s view, there are good reasons to continue to adhere to the principle that the recommendations must be thorough, with specific assessments of companies,” Olsen and Vikøren said.

“A change to the ethical guidelines that blurs the distinction between company and state may raise doubts about the GPFG’s role,” they said.