Norway’s Government Pension Fund Global: Vast potential for global influence

Addressing climate fossil-fuel investments through exclusion and active ownership. Comments on Report by the Expert Group appointed by the Norwegian Ministry of Finance.

On December 3, 2014, the Expert Group appointed by the Norwegian Ministry of Finance to address climate issues for the Norwegian Government Pension Fund Global (the “Fund”) issued its Report (references in parentheses below are to Chapters and Paragraphs of the Report). The Expert Group’s mandate was to assess for a responsible institutional investor like the Fund (see Chapter III) seeking to engage with climate issues and promote future change, the relative strengths and weaknesses of (a) the exclusion of coal and petroleum companies and (b) the exercise of ownership and exertion of influence. Because the Expert Group was not asked to consider the increasingly powerful financial case for divestment, the comments that follow do not address that issue either, despite its large importance.

Norsk sammendrag
Bevis Longstreth, tidligere leder for børstilsynet i USA, gir her sin analyse av Skancke-utvalgets rapport om fossile investeringer i Oljefondet. Han hevder at fondets utelukkelse av tobakk også åpner for å utelukke alle selskaper som produserer fossile brensler under kriteriet “alvorlig miljøskade,” men innser at dette er usannsynlig gitt at den norske stat er tungt inne i fossil energi bl.a. gjennom Statoil. Imidlertid tar han til orde for utelukkelse av fossile selskaper som motarbeider klimatiltak gjennom f.eks. feilinformasjon og lobbyisme. Hans hovedforslag er å kreve at alle fossile selskaper som ikke vil bli ekskludert skal binde seg til å avslutte letevirksomhet etter nye fossile ressurser innen en gitt periode samt støtte brede og virksomme klimatiltak som karbonpris og fjerning av fossile subsidier. Til sist foreslår han at Statoil kan bli det første selskapet i fossil sektor som følger disse retningslinjene, og dermed gjøre seg selv og Norge til en global leder på klimaområdet. (Av Endre Tvinnereim).

The Fund has large investments in carbon-related industries, including both those in energy and extraction. As of year-end 2013, some 8%, or NOK 255 billion, of the Fund’s equity portfolio was invested in the oil and gas sector. Another 40 billion was invested in some 90 mining companies, of which 40 were engaged solely in coal mining. In contrast, only 14 billion was invested in renewable or alternative energy-sector assets. It is clear that an important nexus exists between the Fund’s portfolio and the matter of climate change.


At 71 pages, the Report is impressively thorough, thoughtful and well reasoned. It offers conclusions, however, that are not supported by the facts adduced in the Report.

The Expert Group concludes (at Para. 170) that “neither exclusion nor the exercise of ownership can be expected to address or affect climate change in a significant way.” Given that the Experts are addressing the largest sovereign wealth fund on the planet, one created and managed for, and dedicated to, the people of Norway, a country within the handful of thought leaders that lead the world in civilizing values, this conclusion is far too modest. Actions taken by the Fund, whether in implementation of the strategy of exclusion or active ownership, would be of incalculable importance to the coal and petroleum industries and to investors in those industries, around the globe, with far reaching consequences.

Fortunately, on this point the Report contradicts itself. Chapter VI describes many ways in which strategies of exclusion and active ownership should contribute to lessening the threat of climate change. Indeed, the Report wisely emphasizes the reinforcing value of using both exclusion and active ownership in combination, suggesting that together they “can be larger than the sum of their parts.” (Para. 138)

Knocking Down A Straw-Man

The Expert Group devotes considerable attention to the idea of using the Fund “directly as a climate policy instrument.” (IV-D) Given the purposes for which the Fund was created, this idea seems to fly in the face of the expected performance by the Fund’s trustees of their fiduciary duties. It is a straw-man that the Expert Group decisively rejects as being “inconsistent with the Fund’s role as a financial investor with financial objectives.” (Chapter VI-D)

In fact, the vast potential for global influence possessed by the Fund to influence others through an aggressive program of exclusion and active ownership of fossil-fuel investments would be seriously impaired by turning the Fund into a climate policy instrument. The potential for global influence arises from the similarity of the Fund to all other endowment-like funds, whether created for pensions, education or philanthropy. It is this similarity that imparts to a fund of the size and stature of the Fund its leadership role. Given that Norway’s source of wealth was derived from fossil-fuel, an aggressive program of exclusion and active ownership, if launched by the Fund, would have special resonance in light of that country’s obvious conflict of interest between the single-minded pursuit of profit by a fiduciary and the effort of a fiduciary recognized as a world leader to wean nations from fossil-fuel dependency.

The Report Impressively Moves Beyond Concern over Fiduciary Duty

Annex I of the Report, in setting out the mandate for the Expert Group, states the objective of the Fund as follows:

The objective of the Government Pension Fund Global … is to support saving by the Norwegian State to fund the pension expenditure of the Norwegian national insurance scheme and to safeguard long-term interests relating to the use of the State’s petroleum revenue. The investment objective is to achieve the highest possible international purchasing power for the capital in the Fund, given a moderate level of risk.

There is nothing exceptional about this objective that distinguishes it from those of the institutional funds managed by fiduciaries throughout the world, whether as pension funds, endowments of educational institutions, philanthropies, religious organizations or otherwise. And yet, in considering the alternative strategies of active ownership and exclusion for “addressing climate issues and promoting future change” (Annex I), the Expert Group does not devote even a paragraph of its 71 page Report to questions of fiduciary duty. It is simply assumed that, as a responsible investor with ethical guidelines that, in the case of the Fund, are written in considerable detail but that, written or not, should guide any fiduciary in composing its portfolio, the duty to “achieve the highest possible international purchasing power for capital” is subject to the overriding duties of being a responsible investor.

The Expert Group’s approach to fiduciary duty is remarkably, and one should add, refreshingly, different from the defensive one adopted by many fiduciaries in the United States, who have wrapped themselves in the duty of care to avoid confronting the fossil fuel industry by either exclusion or engagement through active ownership. It will be important for the Expert Group’s approach to become known, considered and, in due course, followed by others.

The Basis for Both Active Ownership and Exclusion of Fossil Fuel Companies Are Well Developed in the Report

The Ministry of Finance of Norway, as owner of the Fund, has adopted ethical criteria for the exclusion of companies where, through their products or business conduct, they “represent an unacceptable risk of the Fund contributing to grossly unethical activities.” (See generally Chapter III) However, in practice, exclusion has been limited to what the Report refers to as “the worst offenders against ethical norms.” (Para. 50) The Fund has implemented its ethical criteria on the assumption that active ownership rather than exclusion will be successful. Out of some 8,000 companies in the Fund’s portfolio, only 61 companies have been excluded. Included are producers of tobacco and weapons that violate fundamental humanitarian principles through normal use. To date there has been no exclusion of a company based solely on climate damage. And, given the importance of fossil fuels to Norway, and its controlling interest in Statoil, a blanket exclusion of all companies causing climate damage through carbon-emitting activities is hard to imagine, despite an already established basis for doing so because of the Fund’s exclusion of tobacco.

However, the Expert Group rejects exclusion of fossil fuel companies on a product-based approach because of a perceived inconsistency with tobacco. Since one could exclude only the product in the case of tobacco (users could not be barred from smoking) but could exclude both the product and some users in the case of a fossil fuel like coal, the Expert Group rejects treating fossil fuel like tobacco in the Fund’s portfolio. The logic of this treatment is hard to follow or accept. (Para. 109-112)

Norway could provide exactly the dramatic step needed to make active ownership through engagement a realistic and promising enterprise

On the other hand, the Fund’s criteria for exclusion based on company conduct (rather than its products) would easily call for exclusion of many of the largest fossil fuel companies engaged in extraction. Thus, a company is subject to exclusion “if there is an unacceptable risk that the company contributes to, or is itself responsible for”, among other things, “severe environmental damage” or “other particularly serious violations of fundamental ethical norms.” (Para. 46) The conduct of many of the giants in these industries in manufacturing misinformation to confuse and mislead the public and corrupt the political process has long been egregious and well documented. See, e.g. Private Empire by Stephen Coll, Merchants of Doubt by Naomi Oreskes, and extensive data collected by Greenpeace. These activities have led in the past, and continue now to lead, to severe environmental damage that could be averted if misinformation and political capture through the corrupting influence of money were not being deployed to prevent governments from acting to limit carbon emissions. Here, one speaks not of isolated damage that can be remedied but irreversible damage on a planetary scale. It is beyond dispute that these activities warrant exclusion under the criteria established for the Fund.

In fact, the Expert Group gives encouragement to the notion of exclusion of fossil fuel companies based on their conduct. Thus, the Report recommends amending the ethical guidelines to explicitly include climate change-related conduct. (Para. 115) The specific proposal is to allow exclusion not only if a company contributes to or is responsible for “severe environmental damage” but for “acts or omissions that, on an aggregate company level, are severely harmful to the climate.”

Given the specific focus the Expert Group has now given to environmental damage related to climate change, the challenge for the Fund is how to fulfill its potential as a global leader among institutional investors while respecting the multiple ways in which the Norwegian economy is tied to fossil fuels. One possible answer to this dilemma is set forth below.

How, Given Norway’s Control of Statoil, to Dovetail Active Ownership With Exclusion

There are some social, environmental and governance (“SEG”) issues where active ownership has been used to engage with portfolio companies and has been successful. However, the closer one comes to trying to affect core business issues or issues involving the safety, security and compensation of officers and directors, the less successful engagement becomes. In fact it’s a bust. Thus, for example, trying to convince Phillip Morris to give up making cigarettes or Johnny Walker to abandon its distilleries will most certainly be a fool’s errand. Likewise, trying to convince GM or Microsoft to abandon stock options or to institute a nominating system that allows shareholders to nominate and elect directors from a slate larger than the number to be elected will prove to be equally ineffective.

It is for this reason that divestment became the tool of choice in addressing tobacco companies. And companies heavily engaged in profitable businesses in South Africa under apartheid.

In regard to fossil fuel companies directly engaged in extractive activities, it is unrealistic, without dramatic steps, to imagine them being swayed by shareholder arguments to get out of their core business of exploring for, extracting and selling carbon-emitting fuel. The problem goes beyond just the high likelihood of spinning wheels and accomplishing nothing in addressing the urgent need for global action. Indeed, engagement is likely to assist Big Oil and Big Coal in postponing the day when governments limit the burning of fossil fuels. The International Energy Agency reckons that, if governments act to compel adherence to the “carbon budget” necessary to have a chance of holding the planet to only a 2-degree Celsius rise in temperature from pre-industrial levels, it will cause Big Oil and Big Coal to lose about $1 trillion a year. Engagement with institutional investors could give the fossil fuel giants protective cover in stretching out the transition process to renewables for as long as they can. It legitimizes talk over action. In truth, if the engagement strategy didn’t exist, the fossil fuel giants would by now have invented it.

Statoil would become the measure against which all other fossil fuel companies would be tested for inclusion or exclusion from portfolios

However, Norway could provide exactly the dramatic step needed to make active ownership through engagement a realistic and promising enterprise. The Fund occupies a unique position in serving the people of Norway, a country with one of the largest oil companies in the world, Statoil, which is controlled by the Norwegian Government. The Fund could try engagement with the fossil fuel companies held in its portfolio, but only if first, the Government were to align the behavior of Statoil with the demands the Fund would then make on those portfolio companies. (See, generally, Para. 146)

There are three fundamental requirements that a fossil fuel company should meet to avoid exclusion from portfolios managed by responsible fiduciaries seeking to acknowledge the global threat of climate change. They are:

1. Publicly accept the science of climate change, including recognition of the scientifically rooted predictions of damage to the planet and its people if we fail to halt carbon emissions.
2. Within a reasonable period, cease CAPEX (capital expenditures) in search of more fossil fuel.
3. Use the company’s lobbying forces wherever active in the world publicly to lobby for (a) elimination of all fossil fuel subsidies, which globally today total some $600 billion a year, (b) imposition of carbon taxes or other means to internalize the costs to the planet of burning fossil fuels, and (c) legislation to reduce carbon emissions to a level, globally, that will not harm the planet.

There may be other demands that investors want to make on fossil fuel companies, but these three are fundamental, fair and can be instituted immediately. Any company accepting them would change from being a global pariah that is increasingly viewed as such throughout the world to become a responsible corporate citizen whose securities need not be excluded from portfolios. Any company rejecting one or more of them would remain a pariah and be excluded.

By instituting these three policies, Statoil would establish itself (and vicariously the Government of Norway and its people) as first among those global leaders seeking to address the most existential threat the world has ever faced. Statoil would become the measure against which all other fossil fuel companies would be tested for inclusion or exclusion from portfolios everywhere. Of course, this course of action could be costly to Statoil. That would depend on many factors, including the price of oil, the cost of exploration and development, the status of renewables and other alternative sources of energy and the uses to which funds earmarked for CAPEX were put. Measured against the vast positive impact such actions would have in propelling the solution to climate change forward, whatever net costs were incurred would be well worth bearing.