Norway's 'oil fund': Is it making businesses behave better?

Norway's sovereign wealth fund has taken a proactive approach to encouraging businesses to improve their practices, and the scale of its holdings could give it a unique ability to influence investors and businesses. 

Norway, the small Scandinavian nation that boasts of glaciers and mountains and cavernous coastal fjords, says businesses and investors should take ethical and environmental considerations into account, and it’s putting its vast oil resources where its mouth is. 

Earlier this week, Norway’s $900 billion sovereign wealth fund, also known colloquially as the “oil fund”, opted to drop four of Asia’s largest companies due to concern over the severe environmental damage caused by Indonesian palm oil plantations. The companies will now join Walmart, British American Tobacco, Boeing, and a group of around 60 other companies that the fund has excluded due to environmental and social concerns. For years, the Government Pension Fund Global, the Norwegian fund’s official name, has been upheld as an example of how to invest responsibly. But recently, it’s taken a more proactive approach to encouraging businesses to improve their practices. Moreover, the scale of its holdings gives it a unique ability to influence investors, experts say. 

According to government sources, the purpose of the Government Pension Fund is to facilitate government savings, to finance rising public pension expenditures, and to support long-term considerations in the spending of government petroleum revenues. It currently invests in around 9,000 companies in 75 countries. 

“Norway’s sovereign wealth fund is among the largest, and some would argue it is the largest. But more importantly [it is] also viewed really positively for its leadership,” says Patrick Schena, assistant Professor of International Business Relations at the Fletcher School at Tufts University and co-head of SovereigNet, the Fletcher Network for Sovereign Wealth and Global Capital. “So not only governments, but other pension funds and other asset owners and large investors, will look to Norway and engage with what Norway is doing. When it comes to other investors, it’s influential given its size.”

In the last several years, the “oil fund” has made a concerted effort to demonstrate its commitment to responsible investment and divest from the companies and industries it says are beyond redemption. In February, the fund published its first report on responsible investing, providing details on how it has modified its portfolio to focus on combating climate change, among other issues.

According to its own reports, the oil fund has divested from about 114 companies since 2012, 49 in the past year alone. The coal and gold mining industries, as well as the palm oil industry, bore the brunt of these decisions due to concerns over the environmental and social impact of their work. Producers of tobacco and weapons have also been excluded, as have companies whose labor conditions are questionable.

The fund is unique because it equates good governance and responsible environmental management with higher company value, experts say. Nevertheless, concerns over how sustainable certain business models are also plays a significant role in the decision to divest, according to observers.  

“When the fund divested from coal it had two specific rationales. One was environmental, and then there was the financial problem, which is that the coal industry is losing money today all over the world,” says Tom Sanzillo, a former manager of a $156 billion pension fund and current Director of Finance at the Institute of Energy Economics and Financial Analysis, a financial research institute that aims to reduce dependence on coal and other non-renewable energy sources. 

Still, Mr. Sanzillo says that the way the fund balances its economic and ethical priorities is unique.

“The Norwegian fund has one of the most sophisticated processes for reviewing the behavior of the companies they are investing with in the world,” Sanzillo says. “ They have a process of looking at returns because that is their primary concern, of course, but they also have  a systematic way of engaging in discussion with companies, trying to find solutions to problems that are both bottom line and societal, and then try to make their investment decisions accordingly. They do the divestment as a last step after many other steps have been tried.”

The fund’s announcement in February that it would dump most coal-related investment garnered attention from investors and environmental activists worldwide. The new policy requires that it exclude all companies earning more than 30 percent of their revenues, or producing more than 30 percent of their electricity, from coal.

But critics have been quick to say that the divestments didn’t go far enough, and some even claim that the fund was only pretending to divest.

“Instead of reducing its overall exposure to businesses based on coal, the Norwegian Government Pension Fund (GPF) increased its holdings by 3bn Norwegian kroner to NOK 85.8bn ($11 billion) by the end of last year”, a recent report entitled Still Dirty, Still Dangerous stated. Others have also pointed out that the fund’s focus on climate change is somewhat paradoxical given that it’s sustained by Norway’s immense fossil fuel industry.

Marthe Skaar, a spokeswoman for the fund, disputed the study's findings in an email to the Guardian. “It is wrong to say that the money we got from the sale of coal assets has been used to invest in companies that burn coal,” she wrote. “We have specifically asked for their [company] strategy related to a future with less coal demand, estimated cost of separating the mining of coal from the company’s mining operations, and to disclose the potential timeline related to this." 

Meanwhile, Sanzillo says that the pension fund is taking on global political problems that aren't being addressed through normal political channels, and that should be commended. 

“The reason this surfaces in the investment world at the level of these funds is that there is no political solution. We have a system of democracy that says when an issue doesn’t get resolved in the state houses, people still care and they bring it to other venues. So they bring it to pension funds,” says Sanzillo.  “As a result these funds are being asked to answer questions about ethics and politics that they probably should not be asked to answer. But the political system has failed to answer them, the national governments and the international tribunals, such as the UN, have failed.”  

As a result, Sanzillo says, the fund plays a necessary role in ensuring that these debates continue.

“Their process has an inherent integrity that is not true of other large funds around the world, which is a statement of their political consensus on how they would like to see their government and their political participation around the world. And that’s good.”

On average, the fund owns 1.3 percent of every listed company. It is considered one of the world’s four largest investors.