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November 28, 2017

What They’re Saying: Norway’s “Oil Fund” Might Swap Oil and Gas Exposure in Exchange for Diversification

Headlines continued last week about Norway’s sovereign wealth and its proposed idea to sell off its oil and natural gas holdings.  As usual, activists like 350.org’s Bill McKibben over-exaggerated the news to prematurely claim it as a victory for the divestment movement, but a closer look behind tells a different story.

Norway’s $1 trillion sovereign wealth fund, managed by Norges Bank Investment Management (NBIM), did indeed announce a proposal to  Norway’s Ministry of Finance recommending the removal of oil and gas stocks from the Government Pension Fund Global’s (GPFG’s), often referred to as the “Oil Fund,” benchmark index.   But as a recent op-ed in Bloomberg put it, environmental activists should “hold the champagne.”

Norway’s announcement is in fact not a win for the divestment movement, and for two key reasons.

First of all, the “announcement” is nothing more than a proposal.  The recommendation will be put in front of the Finance Ministry, which has the actual final say on investment decisions.  Depending on what happens, it may even have to go through parliament.  As Bloomberg notes, the Ministry has been known to veto such proposals before.  If approved, it would most likely take several years to unwind Norway’s oil and gas investments.

But even more importantly, the fund explicitly stated that the unwinding of fossil fuel investments is not related to divesting for symbolic reasons, but rather to diversify its holdings:

“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.”

Therefore, as the Bloomberg piece puts it, “The other reason environmentalists should not celebrate is that Norges Bank is very clear that this is not about climate risk. It is simply old-fashioned diversification.”

Still, there is some irony for a fund called the “oil fund” to give up investments in energy companies. Upon the heels of the announcement, other investors from across Europe took the opportunity to push the need for engagement over removal. For example:

Sweden’s First National Pension Fund:

“We believe in engagement and dialogue with the companies we own and within the sectors where we are active. Thus, we have not excluded any companies within the fossil sector.” (November 20, 2017)

Energy Analyst at Allianz, Rohan Murphy:

“I do not see this as the start of a broader trend among major investors.” (November 20, 2017)

Janus Henderson Investors Research Analyst, Noah Barrett:

“In our view, it is important to not confuse allocation decisions by large investors with the underlying fundamentals of the oil and gas industry. Just because Norway feels that it is prudent to manage its energy exposure, the world is not going to start using fewer hydrocarbons. In fact, we believe that diversification cuts both ways. Countries with little to no domestic energy industry may want to increase their wealth fund’s allocation to the sector. As energy tends to be a natural hedge against rising prices, net energy importers could view an allocation to energy stocks as a way to navigate an inflationary environment. Another reason to increase one’s exposure to energy is improving fundamentals.” (November 21, 2017)

Investment Management Firm Quilter Cheviot:

“Nothing is imminent and even if the advice is fully implemented we believe this will have limited impact on the oil and gas producers, as the holdings of Norges Bank are relatively small and no doubt will be disposed of over an extended timeframe.” (November 19, 2017)

The future of Norway’s investment strategy remains undetermined as the Finance Ministry studies the proposal and will likely make a decision at the earliest in sometime in fall 2018.  For now, Norway’s announcement is focused on diversifying its portfolio, not divesting from fossil fuels.