The Norwegian Government Pension Fund Global - a financial investor, not a political policy tool

Over the last few months Norway has witnessed a political debate about whether the Government Pension Fund Global (GPFG) should divest from all coal or petroleum companies. Today we announce that we have asked an Expert Group to look at how we should address the issue of climate gas emissions from coal and petroleum companies. The Expert Group's conclusions will be presented in Autumn 2014. However, independent of its recommendations, the GPFG will continue to be a well-diversified, global financial investor and not a policy tool. This has broad political support.

The management objective of the GPFG is to maximise its long-term international purchasing power. This is the fundamental basis for the investment strategy. It rests on a premise both of inter-generational equality and saving for future government expenditure, and of avoiding over-heating of today's domestic economy.

The GPFG is a transparent and predictable investor. This is expressed for example by our commitment to the Santiago-principles, the international principles for prudent and sound management of sovereign wealth funds. In my opinion, it is imperative to maintain that the GPFG is not an instrument in Norwegian foreign or environment policy. This basis is supported by a majority of Norwegian politicians – and is crucial for maintaining a stable and legitimate investment strategy over time.

We integrate environmental considerations and we have ethical guidelines
Our financial investments do not, however, exist in a vacuum. In the mandate the Ministry of Finance has given the operational manager, the Central Bank of Norway (Norges Bank), stipulations include provisions on risk, financial instruments, responsibility, active ownership and reporting. Norges Bank shall integrate environmental considerations in the management of the Fund.

Another self-imposed limitation on our investments are the Guidelines for Observation and Exclusion of Companies from the Fund's universe (the Ethical Guidelines). These entail that the Fund shall not invest in companies that produce certain products or are responsible for serious violations of fundamental ethical norms. In the former group you will typically find production of weapons that violate fundamental humanitarian principles. The latter group includes companies responsible for serious or systematic human rights violations, gross corruption or severe environmental damage.

Currently the Fund is invested in more than 8 000 companies around the world. About 60 companies have been excluded from the Fund universe on an ethical basis. Similarly, roughly 60 primarily palm oil and mining companies have been strategically sold by Norges Bank.

Climate gas emissions from coal and petroleum companies
We have a long history for taking climate issues seriously in our fund management. We also have an established tradition for broad and open analysis before any major changes in the investment strategy. The government has stated very clearly that it is important to let conclusion follow evaluation, rather than the opposite. It is in this spirit the Norwegian Parliament has asked the government to appoint a group of experts to address climate gas emissions from the Fund's investments in coal and petroleum companies. We welcome this decision, which was reached by agreement between the ruling coalition parties and our parliamentary partners.

Ethical exclusion is a relatively limited tool – as a financial investor we cannot entirely "sell our way" out of potential problems in the investment portfolio. Exclusion may also not be the best way to promote change in companies, or to safeguard the financial value of the Fund's investments. Exclusion as it has been used by the Fund is a "measure of last resort" and reserved for the most severe cases.

The Expert Group's report
The Expert Group will discuss whether exclusion of coal and petroleum companies is a more effective strategy for the GPFG when addressing climate issues, than the exercise of ownership. The ethical side of companies' or sectors' contributions to climate change is a complex one. The ambition to reach the best possible conclusion is why we have asked for the Expert Group's advice, and I will naturally not preempt any of the experts' conclusions.

I will say, however, that what is not up for discussion is the Fund's strategy as a well-diversified, global financial investor. We do not expect any major changes to this fundamental basis for the investment strategy. A large deviation away from the market portfolio, such as curtailing a significant part of the investment universe, is a major strategic question which must be subject to a thorough theoretical analysis and debate.

Our responsible investment strategy is not static. The developments in this particular area have been rapid in recent decades. We will continue to pay the utmost attention to the ethical and financial aspects of our investment strategy. We strive for the best possible management of our Fund. It is certainly not the last time we will ask independent experts challenging questions about how to develop our strategy.