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March 7, 2019

Final Divestment Decision from Norway’s Finance Ministry Should be a Big Rejection

In 2017, headlines swirled over Norway’s trillion-dollar sovereign wealth fund and the proposed idea to sell off its oil and natural gas holdings. Now, nearly two years since the initial proposal was made, the Norwegian Finance Ministry is slated to make a final decision on the matter this Friday.

Ahead of this anticipated announcement, here’s three things to know about Norway’s divestment journey:

  1. The initial announcement was nothing more than a proposal; the final decision lies with the Finance Ministry.

This two-year process began in November 2017 when Norges Bank Investment Management (NBIM), the central bank of Norway, made an official recommendation to remove oil stocks from the investment portfolio of the country’s sovereign wealth fund. Following an analysis of the fund’s holdings and the oil price risk in the government’s wealth, the Bank purported that divestment would make the sovereign wealth fund “less vulnerable” to a permanent drop in oil and gas prices.

Following NBIM’s recommendation, the proposal was put in front of the Finance Ministry, which has the actual final say on investment decisions.  Depending on the outcome, it may even have to go through parliament.  According to Bloomberg, the Ministry has been known to veto such proposals from NBIM before and its pattern of behavior suggests that this instance may be no different.

  1. A government-appointed Commission has already rejected divestment.

Following the initial announcement, Bill McKibben, the founder of 350.org, called it “astonishing” and compared this to the Rockefellers divesting from fossil fuels. The enthusiastic trilling from activists didn’t last long though, as a government-appointed commission pumped the breaks on the idea just a few months later, serving up a stern rebuff of the investment strategy.

The recommendation, handed down by Commission chair Øystein Thøgersen, recommended that Norway’s wealth fund continue to invest in oil and gas companies and minced no words in its rebuke of divestment, saying:

“A sale of energy stocks would challenge the current investment strategy of the Fund, with broad diversification of the investments and a high threshold for exclusion. This investment strategy is simple, well founded and has served the Fund well. If energy stocks are excluded from the Fund, the composition of the investments will differ from market weights, and the Fund will be expected to either achieve lower return or higher risk. A consistent adaption of the GPFG’s investments to other assets of the nation, may have major consequences for the investments – and represent a substantial change of the current investment strategy.”

The idea that divestment leads to lower returns or higher risk is something studied extensively by Prof. Daniel Fischel of the University of Chicago Law School.  He and his team found that fossil fuel divestment leads to risk-adjusted returns that are 0.7 percent lower than a comparable portfolio that did not divest.  These losses add up to up to 23 percent over the long term.

Furthermore, the Commission rejected future attempts to alter investment plans based on changing political winds:

“A consistent adaption of the GPFG’s investments to other assets of the nation, may have major consequences for the investments – and represent a substantial change of the current investment strategy.”

Based on the Commission’s findings, it’s clear that divesting would not have the positive diversification impact NBIM officials were hoping for.

  1. If approved, the goal of divestment will be diversification, not the denouncement of fossil fuels.

The original idea behind the proposal was to help diversify Norway’s investments and financial exposure since the nation’s economy itself is so tied to the oil and gas industry.  The fossil fuel industry accounts for about 20 percent of Norway’s GDP and about half its exports. As Deputy Governor Egil Matsen put it two years ago:

“This advice is based exclusively on financial arguments and analyses of the government’s total oil and gas exposure and does not reflect any particular view of future movements in oil and gas prices or the profitability or sustainability of the oil and gas sector,” said Deputy Governor Egil Matsen.

Rather, the oil-rich country is postulating the idea of diversifying its assets to ensure there is a healthy exposure to fossil fuels without being overweight.  Norway’s economy is very dependent on the fossil fuel industry—which constitutes about 20 percent of its GDP and half of the country’s exports.  The wealth fund is structured to mirror stock and bond indices.  However, since the government is already invested in the state-run Statoil, and the sovereign wealth fund itself is comprised of surplus revenues from oil and gas production, the NBIM concluded that, overall, investments, “result[ed] in a total exposure to oil and gas equities for the government that is twice as large as would be the case in a broad global equity index.”

What does all of this mean?

In Norway, the conversation surrounding divestment has been nuanced and diverse, with prominent government institutions publicly disagreeing on the right course of action. While we can’t anticipate with certainty what the Finance Ministry will decide tomorrow, we can examine the facts: the Finance Ministry’s history of rejecting the recommendations of Norway’s central bank and the government-appointed Commission dismissing the decision as unnecessary and detrimental for the sovereign wealth fund does not bode well for a positive divestment decision. Further, the strategy – if approved by the Finance Ministry – would be for reasons quite contrary to ones purported by divestment activists.

For now, Norway’s decision to divest would be solely focused on diversifying its portfolio, not shaming the fossil fuel industry with which Norway is so intimately intertwined.