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August 24, 2018

Norway’s Government-Appointed Commission Recommends Against Divestment

At this point, we’re used to activists exaggerating claims when it comes to declaring divestment victories, but in the case of Norway they’ve really outdone themselves.

Late last year, headlines swirled about Norway’s sovereign wealth and the proposed idea to sell off its oil and natural gas holdings. As anticipated, activists over-hyped the news to prematurely claim a victory for the divestment movement.

As one headline from the Guardian at the time read, “As Norway sells out of oil, suddenly fossil fuels are starting to look risky.”

Yet a few months later, a government-appointed commission has pumped the breaks on the idea of divestment, serving up a stern rebuff of prior advice from the central bank and eager activist groups.

The commission, which released their recommendation this morning, advised that Norway’s trillion-dollar sovereign wealth fund continue to invest in oil and gas companies.  From the press release:

“The commission has taken a number of considerations into account, and based on an overall assessment, recommends that the GFPG should still be invested in energy stocksA 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.” (emphasis added)

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 loses add up to up to 23 percent over the long term.

According to the recommendation, handed down under Norwegian Commission chair Øystein Thøgersen, using divestment as a strategy to insure against lower oil revenue given the suggested link between the two is not an “effective insurance.“ After taking several considerations into account, the data clearly showed that in the event of sustained lower oil prices and a divested GPFG, only around “1 percent of such a loss will be covered.” Simply put, divestment would be a pointless window dressing with no real benefit for pensioners or investment dividends.

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.”

Commission chair Oeystein Thoegersen told Reuters, “To get that small insurance (against the fluctuation of the oil price by removing energy stocks), it would cost the fund a lot, as it would be less diversified.”

As Divestment Facts pointed out previously, the original announcement that got so much fanfare was merely a proposal.

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 last year:

“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.”

But, in light of this morning’s announcement, it’s clear that divesting would not have the positive diversification impact officials were hoping for.

The final decision rests with the Ministry of Finance, and depending on the chain of events, may need approval by Parliament.

As the government-appointed Commission made clear that the world’s largest sovereign wealth fund should be above politics, but we will know for sure this Fall when the final decision is made.