The largest sovereign wealth fund in the world, Norway’s US$930 billion Government Pension Fund Global, is seen as the epitome of socially responsible finance. But if this is the best the investment world can offer, it offers scant hope that sustainability can be achieved through the influence of investors.
The fund, which owes its size to profits from Norway’s oil and gas industry, has become a powerful player in global markets since getting its first injection of capital in 1996. Despite its deep links to the fossil fuel industry, it has managed to foster a benign reputation thanks to a set of ethical guidelines and its Council on Ethics.
The Council can recommend the fund sells stakes in companies that violate the guidelines – or can place companies on an observation list. The Bank of Norway makes the final decisions. Companies – Walmart among them – can be excluded if they deal in products like tobacco or weapons, or if their conduct leads to things like environmental damage or human rights violations. Exclusions are made public, with a written explanation.
It is a thorough, but slow, process. It has also been criticised for being based on a so-called “overlapping consensus” approach. This means the Council might only assesses a case if, for example, a massive media reaction indicates the people of Norway find a company’s conduct intolerable.
In some ways, the ethics focus overshadows the day-to-day management of the fund by Norges Bank Investment Management (NBIM). NBIM is mandated to aim for the highest return possible through responsible investment management. The goal is broad diversification and long-term investments which are sustainable in economic, environmental and social terms.
In other words, the fund managers are supposed to be incorporating sustainability into decision-making in order to identify systemic risks and make investments accordingly. It does do so to a certain extent. NBIM has divested from more companies on its own initiative, based on risk assessment, than on advice from the Council on Ethics.
There is a clear and fundamental flaw here, however. The fund’s mandate, investment strategies and guidelines do not acknowledge that broad investment in equities in all markets is unwise when the large majority of companies are simply pursuing a “business as usual” track and ignoring those systemic risks.
Simply put, if the investment universe as a whole is headed towards a cliff of environmental, social and economic crises, then the only economically sustainable path for the world’s largest sovereign wealth fund is to use its financial muscle to shift the direction of the investment universe. Through its own investments, and through the example it sets, the fund could be a real game changer.
Instead, the fund illustrates a false dichotomy between the economy and ethics. Human rights, the environment and climate change are bundled together as the responsibility of the Council on Ethics. NBIM has the job of ensuring financial returns for the welfare of future generations of Norwegians.
But on the kind of long-term economic perspective the fund adopts, it is meaningless to hold back on being a wholehearted part of the shift towards sustainability. Working towards this, including staying within planetary boundaries, is a prerequisite for long-term return on investments.
Climate risk is the clearest example of how this model is failing. “Business as usual” carries the risk of investing in projects which become stranded if the world makes a decisive shift away from fossil fuels and towards renewable energy in line with the goals of the Paris Agreement.
There are several signs that this shift has started to happen. For that reason alone, a focus on fossil fuel projects is a significant risk. Capital needs to be channelled towards environmentally, socially and economically sustainable projects which enable the world to stave of crises and avoid the risk of societal breakdown, but in creating a gulf between ethics and economics, these crucial issues are ignored.
We can see the result of this flawed thinking in the fund’s involvement with the Dakota Access pipeline, the controversial US project to transport oil from fracking sites. The fund has US$1.2 billion of investments in the pipeline companies.
Any project designed to move 470,000 barrels of oil a day would be deeply problematic from a climate perspective, but the pipeline also raises social and environmental issues, including risks to drinking water for indigenous people. The Nordic Saami people have reacted strongly, sparking Norwegian media interest.
The issue has been perceived as one for the Council on Ethics, rather than a matter of economics. The Council may or may not recommend a divestment, but that will only be clear several months down the line. In the meantime, practically all other Norwegian financial institutions have divested from the pipeline, including the country’s second largest pension fund. NBIM has not acted even though two of its three responsible investment focus areas are climate change and water management.
The problem may not lie primarily with NBIM. The fund managers listen to the Ministry of Finance, and ultimately the Norwegian parliament. NBIM has recently suggested that the fund should be allowed to invest in unlisted infrastructure. If this were directed towards renewables projects, it would be an important step towards filling the investment gap in this sector, especially in Africa and Asia.
The Ministry of Finance has recommended that parliament rejects this proposal, despite the prospect of very strong returns. It argues that the fund’s focus must be the economic security of future generations, and it “should not be used as a tool for foreign or climate policy”.
However, the point is that this is not a question of placing ethics above economics. It is a simple matter of understanding that economic returns – like everything else in the long run – are dependent on stable living conditions on earth.