What role can Sovereign wealth funds play when it comes to financing a clean energy future

First of all, I would like to thank you for the opportunity to come here to the Bellona ONS seminar. It is a pleasure to speak on an occasion like this, where so many dedicated and competent people are gathered.

The topic I have been asked to address is what role Sovereign wealth funds can play when it comes to financing a clean energy future. I will say a few words about what we are doing today, and then something about future possibilities.

Before I do that, I will give a very brief presentation of the Government pension fund – Global.

The fund’s assets stem from revenues from the petroleum sector. The fund’s size is approximately 2000 billion Norwegian kroner, equal to about 370 billion USD, which makes it the second largest public fund in the world. It is considered to be a Sovereign Wealth Fund, according to the IMF’s guidelines.

The responsibility for the management of the fund is divided between the Ministry of Finance, acting as the owner of the fund, and Norges Bank who has the role as the fund’s operational manager.There is broad political consensus on the Fund’s strategy, which is to maximize returns, given a moderate level of risk. This underlines the role of the fund as a financial investor.

Now, I will turn to the topic of the Fund’s ethical guidelines. The guidelines were adopted in 2004. There are two policy measures available to the Fund. Firstly the exercise of ownership rights, and secondly, the exclusion of companies from the portfolio. Environmental damages are one of the criteria. Our government is the first to use this criterion for exclusion, and now several companies have been excluded in order to avoid the risk of contributing to severe environmental damages.

The way this criterion is constructed and understood, climate change issues will fall outside of the scope. Environmental risk following climate change is seen as a result of systemic patterns of behaviour, and can hardly be blamed on individual companies. This characteristic however, explains why it makes good sense to address climate change-issues through ownership activities, which in principle can reach all companies in the portfolio. Methods will be, inter alia, the use of voting rights, engaging in dialogue with individual companies, cooperating with other investors, contact with regulatory authorities and conducting research.

The ethical guidelines are built on a premise that sound financial return in the long term is contingent on sustainable development.
-Both in the economic, environmental and social sense. The guidelines state that the financial interests of the Fund shall be strengthened by using the Fund’s ownership interests to promote such sustainable development.

The exercise of ownership rights falls under Norges Bank’s responsibility.

Norges Bank has identified two main priority areas for their ownership work. One of the priority areas is related to environmental sustainability. Norges Bank has singled out companies’ lobbying of national and supranational authorities on questions related to long-term environmental change as an area of special interest. An outcome of this is a series of activities. It is spanning from research to dialogue with companies active in lobbying against climate regulations. Norges Bank is also a signatory to the Carbon Disclosure Project.

I would also like to mention the efforts we have put down relating to introducing real estate as a new asset class in which the fund is allowed to invest. The design and operation of buildings has a major impact on the environment, which suggests that real estate management should be subject to special environmental concerns, in particular within energy efficiency, water consumption and waste treatment. In the Report to the Parliament submitted this spring it is clearly stated that Norges Bank should adhere to and contribute to the development of best practice within the integration of environmental concerns in the management of real estate.

Now, I have spent some time on what we as a large public fund already are doing in terms of promoting environmental sustainability issues, with special emphasis on work related to climate change. I will move on to the question of what can be done in the future.

The Ministry of Finance has started a process of evaluating the Fund’s ethical guidelines. Just before the summer, we submitted a comprehensive hearing document, discussing several subjects relating to the guidelines and responsible investment. One particular question we have raised, relates to the issue of earmarking a part of the fund for special investment purposes. Environmental investment is one possible objective for a special mandate as mentioned.

As many of you will know, the Pension Fund had until 2004 allocated part of the assets to an especially designated Environment Fund. This was dissolved upon the introduction of the current Ethical Guidelines, which was given effect for the whole portfolio of the Fund. Now, in our efforts to keep an eye on best practice in the field of responsible investments, we believe to see a trend developing amongst large institutional investors in the direction of setting up smaller funds earmarked for special purposes.

There are certain important premises we must maintain if we should go in a direction like this. The overall objective of the fund, as laid down in laws and regulations, is to ensure a sound financial return for future generations.

It means that there must also for such investments be an obligation to ensure financial returns over time.

But in line with what I have already said, we have some special characteristics attached to our role as investor, relating especially to our size and long term investment horizon. This might mean that we should also apply more long term approaches in our assessment of which investments may be seen as commercially interesting. Aside from this, we could also explore if there are any other opportunities in such investments, inter alia by moving into new asset classes which the larger fund is not allowed to invest in, or in regions which fall outside of the scope of the investment universe. Some might also assert that low levels of investment in for instance clean energy are a result of market failure. Changing conditions relating to pricing mechanisms, new regulatory regimes or changes in subsidy-structures, might lead to that early investments in clean energy can give a sound return on a long term basis. To summarize this, you can see that there is a broad range of interesting and challenging questions facing us in this area. I would like to welcome all interested parties to comment on these issues in the ongoing hearing, within the deadline for submissions which are 15 September.