Sound management of the Government Pension Fund

The Government is today submitting its white paper on the management of the Government Pension Fund in 2016 to the Storting. In addition to reporting on performance in 2016, the paper also discusses further development of the investment strategy for the Fund.

Sound returns in 2016
At yearend 2016, the value of the Government Pension Fund Global (GPFG) was NOK 7,507 billion and the value of the Government Pension Fund Norway (GPFN) was NOK 212 billion. The return on the GPFG last year was
6.9 percent, measured in the currency basket of the Fund. The return on the GPFN was 7.1 percent, measured in Norwegian kroner. Last year, Norges Bank achieved an excess return of 0.15 percentage points, compared to the benchmark index defined by the Ministry. The corresponding figure for Folketrygdfondet was 1.17 percentage points.

Norges Bank and Folketrygdfondet report excess returns, risks and costs, across the various asset management strategies. For the GPFN, there was either a positive or no excess return last year. For the GPFG, there were also some strategies with a negative excess return.

The benefits and costs of the various strategies for the GPFG will be assessed in the upcoming review of Norges Bank’s management. This issue will be discussed in next year’s white paper to the Storting on the management of the Fund.

Responsible management
Within the scope of its overarching financial objective, the Government Pension Fund shall be a responsible investor. Responsible management has evolved considerably over the last decade. The GPFG and the GPFN are playing a leading role internationally in this field.

In 2016, two new criteria were included in the Guidelines for observation and exclusion from the GFPG. One criterion is conduct-based and related to acts or omissions that on an aggregate company level lead to unacceptable greenhouse gas emissions. This criterion is to a large extent an international innovation. The other criterion targets mining companies and energy producers that derive 30 percent or more of their revenues from thermal coal or base 30 percent or more of their operations on thermal coal. The exclusion of 59 companies under the coal criterion, in addition to 11 being placed under observation, was published in 2016.

Important responsible management tools are international standards and research, company dialogue, clear expectations towards companies, as well as the submission of proposals and voting in shareholder meetings. Norges Bank has announced that these efforts will soon be supplemented by a new expectation document on transparency in international corporate taxation.

Climate risk
Climate is an important financial risk factor for the Government Pension Fund in the long run. The Fund is especially exposed to systemic risk because it is large and has a long time horizon as well as investments spread across thousands of companies. Systemic climate risk stems from economic growth and overall corporate earnings being affected by climate change, climate policy and technological development.

– Our funds are large investors in the markets where they operate, and shall promote improved international standards and corporate reporting on climate issues. The funds have developed a number of tools for handling climate risk, says the Minister of Finance, Siv Jensen.

There are, as part of the responsible management effort, separate mandates for environment-related investments in the GPFG. About NOK 64 billion was invested under these mandates at the end of 2016.  

Ongoing initiatives
A commission is reviewing the Central Bank Act and the governance structure of Norges Bank, including alternative governance models for the GPFG. The commission will submit its recommendations by 30 June 2017.