Norway struck oil in the North Sea on October 25, 1969. Exactly 50 years later, the market value of the country’s oil fund hit 10 tn kroner. ‘During this half-century, Norway went from being an oil nation to becoming an oil fund nation,’ says Norges Bank Investment Management (NBIM) in Investing with a mandate, a report marking 30 years since the Petroleum Fund Act set Norway on the path to become home to the world’s largest sovereign wealth fund (SWF) – valued at more than $1 tn.
What is now known as the Government Pension Fund Global, managed by NBIM, started life in 1990, with its first inflow in 1996. A year later, 40 percent was invested in equities and by 2017 that had grown to 70 percent. Today, NBIM is one of the largest and broadest investors in equities in the world, with shares in more than 9,000 companies. On average, it says the fund holds 1.5 percent of all the world’s listed companies. Over the past three decades, as it has grown in size and scope, NBIM has also become increasingly engaged as an investor.
‘We have evolved from a reluctant to an active owner,’ Trond Grande, deputy CEO of NBIM, tells IR Magazine. ‘At the beginning, the idea was simply to buy a slice of global financial markets and our intention was not to exercise any influence over companies.’
But existing standards ‘often lacked the detail or clarity we needed for our ownership,’ he says, adding that over the past 10 years in particular, NBIM has become increasingly active, publishing its own expectations of companies as well as its positions on corporate governance. ‘We aim to strengthen companies through better governance and to improve their management of long-term risks,’ explains Grande. ‘Over time, we have developed clear principles and a systematic approach to our ownership. By being transparent and predictable, we aim to build trust and be a welcome investor in the world’s markets.’
In 2015 NBIM did something new: it published its intention to support the special shareholder resolutions on climate reporting at BP and Royal Dutch Shell, with both resolutions ultimately approved by a significant majority. This advance publication of voting intention is not something NBIM does often. To date, says Grande, ‘we have published 21 voting intentions, mainly on climate risk, mergers and board elections’ – the majority of which, he adds, were tabled by shareholders. But that’s all about to change. From 2021, Grande says voting intentions for all meetings will be published in advance.
The fund already publishes all its votes the day after the meeting, offering an explanation where it has voted against the board’s recommendation. ‘We believe that publishing our voting intentions at individual companies is an effective way of communicating our principles, [but] we also acknowledge that the approach is selective and skewed toward markets with many shareholder proposals,’ says Grande. ‘[So] to further enhance transparency on voting, we will publish all our votes in advance of the meeting from 2021.
‘Our intention is to provide more information to the market and to be fully transparent about how we use our voting rights. We are concerned that a lack of information makes the market for voting advice not fully efficient.’
The Norwegian mindset
The fund was set up to finance the Norwegian welfare state for future generations and this is something that, 30 years later, remains front of mind. ‘This means the fund – and by extension the Norwegian population – owns a slice of most listed companies in the world,’ states NBIM in Investing responsibly, published to mark 20 years since it first began mixing finance and responsibility. Restrictions began with landmines from 2001, human rights (the values it says are held by most Norwegians) from 2004 and long-term risks to sustainable growth – or climate change – from 2010.
‘Ownership comes with both rights and responsibilities. The fund’s investments are held up against Norwegian values and, more specifically, Norway’s international obligations,’ notes the report. A formal mechanism for exclusion was established, with the Norwegian government laying down ethical guidelines to limit what the fund can own and ensure it is ‘not invested in companies whose products or behavior are considered grossly unethical’. At the end of 2019 this meant 134 companies were excluded from investment: the equivalent of 243 bn kroner or 2.4 percent of the value of the fund, restrictions that NBIM says ‘ensure the fund can enjoy broad legitimacy among the Norwegian population and remain aligned with Norway’s international obligations. The cost of restricting ownership has been accepted as necessary to maintain this legitimacy.’
And so the Norwegian mindset is very much a part of the NBIM strategy. It extends beyond investment restrictions and feeds into the fund’s focus on transparency and a principled approach to everything from investments to corporate access.
In 2018, amid concerns around Mifid II changes, NBIM announced that it would not pay for non-deal roadshows. ‘The decision to not pay for non-deal roadshows was driven by our principled view that company management has a responsibility to meet its shareholders,’ explains Grande. ‘Should a company wish to use a broker to arrange its meetings, then NBIM shouldn’t have to pay it for that.’
Unsurprisingly, given the reach and scope of NBIM’s investments, he says the decision did not impact the fund’s ability to secure roadshow meetings, though he says another trend has been observed: ‘Since the introduction of Mifid II we have seen an increasing number of companies arranging roadshow meetings themselves (without the use of a broker) and building out capabilities within their IR teams in order to do so.’
Moving from words to numbers
In 30 years the fund has obviously weathered many tailwinds. As a globally invested fund, it is impacted ‘to some extent by most events taking place in the world’, but having a very long investment horizon also means ‘we tend to be less concerned with short-term market changes,’ says Grande.
He highlights three events of key importance:
– The commodity boom as China entered the global economy and oil prices reached $150 a barrel. ‘We saw significant inflows of new capital to the fund, and over time it became clear that the fund would be bigger and be there for longer than previously assumed. This also contributed to the decision to increase the fund’s equity share over time to 70 percent,’ says Grande
– The global financial crisis ‘and a decade (and more) of low interest rates’
– Globalization, which Grande calls ‘a longer-term trend’ that means ‘an increasing number of equity markets have become investable for a fund with our characteristics’.
So what does Grande want from companies as they emerge from Covid-19 panic mode and into the new normal? Aside from the focus on good governance, ethical standards and financial returns, he talks of having ‘moved from words to numbers’.
‘We are a fund for future generations, and we need to understand the long-term risks to which our investments are exposed,’ he explains. ‘Even with the best standards, we still need hard numbers to manage these risks. We ask companies to explain how they manage long-term risks and encourage them to provide more numbers.’