Norway’s outgoing center-right government has proposed slashing withdrawals from the country’s US$1.4 trillion Government Pension Global Fund (GPFG) by more than 20% to NOK322.4 billion (US$37.7 billion) in 2022 – but it would still represent the third largest annual withdrawal in the fund’s 31 year history.

The cut comes amid a rebound in the Norwegian economy as the pandemic subsides and oil prices recover, helping to support government revenues. The non-oil deficit was set at 2.6% of the fund’s value at end-2021, which is below the 3.0% cap and down from the 3.6% level set in 2021.

The incoming center-left coalition of the Labor Party and the Center Party will still inherit an expansionary budget at a time when GDP growth is expected to reach just under 4% in 2021 and 2022, up from a 2.5% contraction in 2020.

Winning power with a landslide majority, the new government is likely to throw political impetus behind the GPFG – managed by Norges Bank (NBIM) – adopting a Paris-aligned greenhouse gas emissions target, which could lead to changes in strategic asset allocation. Incoming Prime Minister Jonas Gahr Støre announced in his election campaign that he would push for the fund to reach net zero in accordance with the Paris Agreement targets.

NBIM has come under criticism for a lack of ambition towards net zero – or even setting any kind of target. The GPFG equity portfolio carbon footprint was nearly 108 million tonnes of CO2 equivalent in 2019, which is more than twice the amount of Norway’s annual total emissions, and triple when excluding Norway’s emissions caused by oil and gas extraction. This prompted calls by leading climate experts and economists in August for NBIM to sign up to the Net Zero Asset Owners Alliance and achieve net zero in its portfolio by 2050, if not sooner – and the Labor-led government is likely to steer the fund in that direction.

Climate change risks will inform its entire portfolio management, according to the fund. Responsible management will include holding boards accountable for outcomes of their decisions. At the same time, NBIM will reduce expose to companies with unsustainable business models. NBIM’s report entitled “Climate Change as a Financial Risk to the Fund”, which was published in August, indicates that exclusions remain a central part of its efforts to reduce climate risks. In its paper, NBIM states that “We reviewed the economics of climate change and the results from climate scenario analysis and found that the fund has a vested interest in an orderly transition to a low-carbon economy that prevents severe physical climate risk from materialising.”

There is already a political consensus in favour of improving its climate credentials and NBIM has already committed capital to renewables. NBIM is looking seriously at offshore wind in Europe, which it forecasts will rise four-fold to 102GW by 2030, and it is planning on making chunky investments. Although it has pledged to invest 1% of AUM in renewables by end-2022 (potentially equating to US$140 billion), so far it has pursued acquisitions of existing assets in developed markets rather than funnel liquidity into new projects to expand green energy capacity – notably its acquisition of a 50% stake in the Borssele 1 and 2 wind farm off the Netherlands for US$1.63 billion in April.

Aside from the problems in quantifying carbon intensity and ascertaining how to adapt the portfolio to various scenarios, the fund manager is also missing out on opportunities provided by impact investment.

Lengthy decision-making over choosing asset classes has constrained its ability to reach environmental goals. Altering its mandate can take years to push through parliament, by which time opportunities to invest early for strong returns have passed. For example, in November 2017, Norges Bank recommended to the Ministry of Finance the removal of black stocks from GPFG’s benchmark index, but by end-2020 it still possessed an estimated US$23.3 billion in oil and gas equities.

As well as a lack of nimbleness, NBIM’s conservative approach to portfolio allocations, with a highly limited exposure to private markets, undermines opportunities to move beyond a risk-based approach to adopting an impact approach to climate change.

NBIM’s approach to renewables is similar to its cautious approach to real estate, which has focused on prime markets in developed economies. As a result of this self-imposed restriction, it has failed to meet its initial target of 7% in unlisted properties with a policy of investing in prime locations; the target was revised down to 5% but the current level is still 2.5%. Greater flexibility would enable NBIM to meet renewables objectives and portfolio diversification more easily.

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