World’s largest sovereign wealth fund to divest from oil and gas

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Norway’s $1tr sovereign wealth should divest from upstream oil and gas companies to reduce the country’s financial exposure to fossil fuel commodities, the Norwegian government said today.

The government announced its decision in favour of excluding “companies classified as exploration and production companies” in the energy sector this morning, explaining that its aim was to insulate Norway from a “permanent oil price decline”.

The decision follows advice from the Norwegian central bank in 2017 which recommended divestment from oil and gas companies in a bid to make the government’s wealth “less vulnerable to a permanent drop in oil prices”.

Norway is western Europe’s biggest oil and gas producer, with the industry contributing to around 20 per cent of the country’s revenue.

The country’s sovereign wealth fund was built up using wealth from Norway’s hydrocarbon production, and as of last year had around $37bn invested in oil and gas stocks.

However, a growing number of analysts have argued in recent years that exposure to fossil fuel assets brings with it significant financial risks.

Under the so-called ‘carbon bubble’ or ‘stranded asset’ hypothesis, analysts and campaigners have warned that more stringent decarbonisation policies and a rapid shift to low carbon technologies such as electric cars could curb demand for fossil fuels and leave carbon intensive assets looking over-valued.

As such a growing number of investment funds have sought to reduce their exposure to stranded asset risk, either by divesting from the most carbon-intensive fossil fuel assets or calling on fossil fuel companies in which they hold stakes to develop more credible climate change strategies.

Norway’s finance ministry today appeared to partly endorse this analysis, arguing that removing oil and gas stocks from the wealth fund would reduce the country’s “aggregate concentration risk”.

Reports suggested the decision to divest from upstream exploration companies would impact around $7.5bn of shares held in over 130 firms.

However, the ministry also stressed that the country would continue to play a major role in the global fossil fuel market, providing oil and gas reserves as the transition to cleaner fuels continues.

“Like the advice from Norges Bank, this assessment does not reflect any specific view on the oil price, future profitability or sustainability of the petroleum sector,” it said in a statement.

“This assessment is thus independent of the government’s current petroleum policy, which remains unchanged.”

“The oil industry will be an important and major industry in Norway for many years to come. The state’s revenues from the continental shelf are, as a general rule, a consequence of the profitability of exploration and production activities. Therefore this measure is about diversification.”

Norway said the removal of upstream oil and gas assets from its fund would happen gradually, in consultation with Norges Bank. It said it will also ask Norges Bank to review the wealth fund’s exposure to wider climate risks, “with a view to strengthening efforts in relation to those individual companies accounting for the largest contributions to the climate risk associated with the fund”.

The review suggests the fund could become more proactive in engaging with those oil and gas giants that are pivoting investments towards renewables and other low-carbon activities.

The Norwegian government indicated in its release that it expects most of the future growth in renewable energy to come from companies that do not currently have renewable energy as their main business.

Leading figures in finance welcomed the news as a clear signal that oil and gas is falling out of favour with a growing part of the global investment market.

Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis (IEEFA) and former first deputy comptroller for New York State, said oil and gas equities “no longer possess the blue chip status of bygone eras”.

“Today they are too risky to be included in a well-managed portfolio,” he said. “This is long overdue and likely to improve the returns of Norway’s sovereign wealth fund at a time when reliance on fossil fuels is financially unhealthy. We await a full accounting of the companies included under this decision.”

Odd Arild Grefstad, CEO of Norwegian asset manager Storebrand Group, which has $90bn in assets under management, described the divestment decision as “reasonable and forward-looking”.

“By taking the oil and gas shares out of the benchmark index of the Government Pension Fund Global, the Norwegian state’s exposure towards one single sector is clearly reduced,” he said. “When one of the world’s biggest sovereign wealth funds come to the conclusion that they can achieve high returns on investments with moderate risk by reducing exposure to oil and gas, investors will take notice.”

 

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