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Norway’s sovereign wealth fund to focus on climate

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Norway’s sovereign wealth fund, built on the sale of Norway’s oil and gas, has published a Climate Action plan which puts climate action centre stage. It details a muscular approach that will be applied to its portfolio of holdings; equities, bonds and real estate.

  • Norway’s sovereign wealth fund publishes Climate Action Plan in which it submits its portfolio to climate change data analysis.
  • Norway’s sovereign wealth fund is the world’s largest, with 9,000 companies in its portfolio and is a bell-wether for sovereign funds.
  • Strategies based on climate change risk exemplified by this move shows that very few companies will avoid scrutiny in their action or lack of towards climate change.

Norges Bank Investment Management (NBIM) which manages Norway’s oil and gas revenues, has suffered from poor performance in 2022, losing $174 billion in the first half of the year.  It is cause for the fund manager to take stock.

It’s Climate Action Plan, published in September 2022, appears to be more than a sop towards current trends. While this is an accusation many ESG reports garner, the Plan  defines its forward-looking approach. 

With the impending trajectory of climate change impacts, how companies position themselves will determine whether they are winners or losers. That point of view is becoming pivotal in the corporate world, and it is one that NBIM is subscribing to.

“Our long-term return will depend on how the companies in our portfolio manage the transition to a zero emissions society,” said its CEO Nicolai Tangen. At the beginning of 2022 a team of specialists appointed by the Ministry of Finance reviewed the active ownership of Norway’s Government Pension Fund Global as NBIM is otherwise known.

Recently the fund has been operating as more of an index and moving to more active management raises a number of conflicting priorities. The team concluded that thinking more strategically would benefit the fund and recommended redirecting the mandate of the fund towards active ownership.

The communication of the Climate Action plan by the fund indicates that the strategy is around managing climate risk among its portfolio.   “Our goal is to be the world’s leading investor in terms of how climate risk is managed,” said Tangen.

Science based climate targets requested from portfolio

The plan is an immediate action plan, 2022- 2025. It will subject all portfolio companies to climate action disclosure. NBIM is requesting science-based targets from all companies in the short, medium and long term out to 2050.

This has to be backed up by regular reporting on progress. What the approach clearly shows is that the fund is choosing the route of engagement over divestment where possible, as the fund plans to engage with companies on the process.

Climate Action Plan on market, portfolio and company levels 

NBIM is applying climate risk screening at market, portfolio and company levels with data as the essential marker. NBIM says, “limited access to high-quality data on the climate risk faced by companies hamper the market’s ability to price climate risk and allocate capital to profitable projects.”

Physical and transition risk will be assessed. S&P Global recently released a data tool translating physical climate risk assessment into financial impact. The physical risk exposure scores help companies quantify their exposure to climate risks, while the financial impact dataset helps companies calculate the cost of adaptation and mitigation, as a proportion of the value of the exposed asset.

Financial markets need climate risk embedded

NBIM sees its advocacy of climate action, through encouraging the establishment of credible transition pathways with associated reporting as contributing to more sustainable and efficient financial markets.

It would like to see mandatory requirements for climate-related reporting for listed and unlisted companies set by regulators and standard-setting bodies. It will proactively engage with them to help develop robust methodologies for climate risk management and transition pathways.

It will also support academic research on the financial impacts of climate change to strengthen the scientific foundations of the management of climate risk in the fund. 

Plan for its equities, bonds and real estate

The fund is mostly weighted in equities.  The plan is to develop principles for measuring and managing climate risk, and stress-test the equity portfolio against a 1.5°C and other climate scenarios on an annual basis.

In respect of its bond holdings, the plan pledges to support the development of sustainable financial markets, including for green bonds.

It also invests in real estate for which it will set a net zero 2050 target for its unlisted real estate portfolio and an interim target for 2030 of reducing scope 1 and 2 greenhouse gas emissions intensity by 40% (compared to 2019). 

The fund made its first investment in renewable energy infrastructure in 2021 and will continue on this track. It also divested from “selected companies with high exposure to financial risk stemming from carbon-intensive business models since 2012”, mostly coal. It will stretch this divestment strategy to include companies with unmitigated climate risks, especially where engagement has failed or is unlikely to succeed.

Evolution of fiduciary duty

The plan shows that where long term investments are concerned, as is a characterisation of pension plans, it is essential for equities and bonds to factor in climate risk.

Over the past year or two there has been a proliferation of alliances among asset managers and pension plan providers such as the Net Zero Asset Managers Alliance to share best practise on how to effectively conduct the net zero transition.

A recent report by Create and DWS said that regulation and social norms are catalysing an evolution in the concept of fiduciary duty. “It now rests on the belief that the future generation of retirees not only needs decent pensions in their golden years, they also need a viable planet fit to live on.”

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