Unintended consequences of Norway’s pension fund oil divestment

Nov 24, 2017
If implemented, this decision will be bad news for the fight on climate change

On November 14 Norges Bank governor Oeystein Olsen and Norges Bank Investment Management (NBIM) CEO Yngve Slyngstad sent a letter to the country’s finance ministry. In it they recommend dropping oil and gas shares from the portfolio index of the Norwegian government pension fund.

The letter makes it clear that, firstly, the recommendation is based on a risk analysis focused on the country’s overall exposure to oil prices, via its own oil resources, its near-66 percent stake in Statoil, and the oil and gas stocks it owns through its global pension fund. The country’s economic reliance on this sector is clear. Secondly, the recommendation is not based on environmental considerations.

The Norwegian government is expected to announce its final decision on whether to drop the sector in autumn 2018. Why, if finally implemented, would this decision to divest be bad news for the fight on climate change?

The proposal would mean a blanket exclusion of the oil and gas sector from the government pension fund portfolio, thus not differentiating between the oil and gas companies that have supported the Paris COP21 agreement and are actively working to facilitate a transition to a lower-carbon economy, and those companies that continue to pursue a business-as-usual strategy.

Among the group of leaders in this transition, companies such as BP, Eni, Shell, Statoil and Total have clearly improved transparency on climate risk and scenario analysis, and started using carbon pricing in their Capex allocation processes in new upstream projects. On November 13 Repsol became the latest company to make public its internal carbon pricing policy for 2018 and beyond during its annual sustainability day with analysts in the City of London.

These companies have also been working together since 2014 with other peers in the Oil and Gas Climate Initiative, committing to invest $1 bn in technology start-ups developing new ways to reduce carbon emissions and carbon capture, storage and use. Still unknown to many, through improvements in energy-efficiency programs, these companies have reduced by 17 percent their own direct greenhouse gas emissions during the last decade. To put this into context, the CO2 saved would be equivalent to replacing many millions of combustion engines by electric vehicles every year.

Yet the role the dialogue of responsible investors with these companies has played over the last decade is crucial to understand their level of commitment in the fight against climate change. Engagement and active ownership – voting at their annual general meetings – gives the growing presence of responsible investors in companies the ‘carrot and stick’ tool that allows them to influence corporate strategy and transparency.

According to our research, signatories of the United Nations-backed Principles for Responsible Investors, the largest body among ESG-oriented investors, own 51.1 percent of the $1.3 tn market value of all the shares managed by institutional investors in integrated oil and gas, oil and gas production and oil refining listed companies globally.

Among these signatories, a core group of responsible investors – in which we include NBIM – has led ESG initiatives during the last decade, in particular, with regards to engagement and active ownership with listed companies. According to the most recent public ownership data, NBIM alone manages $30.9 bn, 2.3 percent of the market value owned by institutional investors in this group of companies.

During 2016 NBIM reported voting at 98 percent of the shareholder meetings in the companies in its portfolio, having published its first guideline to companies on its ESG expectations, including climate change, back in 2008. Also in 2016, it publicly announced its support for the climate shareholder proposals at ExxonMobil and Chevron ahead of their annual general meetings, a ground-breaking move that added pressure on other responsible investors to join forces and put pressure on companies to rethink their strategy on climate change. The disclosure proposals received support of 38 percent and 41 percent, respectively, which paved the way for the widely commented-on 2017 successful shareholder votes on climate.

If enacted, however, the proposed divestment from the oil and gas sector would imply in practical terms the departure of NBIM from the frontline of the dialogue with the sector. Being the largest core responsible investor in these companies, NBIM’s exit would understandably weaken the collective positive influence these investors can exert on climate change.

Yet earlier this year, Michael Bloomberg, in his June 15 letter presenting the final recommendations of the Task Force on Climate-related Financial Disclosures, wrote to Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board: ‘Warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors.’

Once divested from the sector, would the new owners of these shares care as much about the climate risk performance of oil and gas companies? Possibly not. Paradoxically, reducing Norway’s exposure to oil price fluctuations by reallocating 4 percent of its global pension fund portfolio could result in a slowing down in the pace of change at some of these companies, increasing climate risk – a systemic risk for all. This is certainly an unintended yet potentially more impactful consequence of divesting from oil and gas stocks.

Heather Keough is a senior ESG consultant and Miguel Santisteve is the founder of Leaders Arena, a London-based advisory group promoting purposeful ESG engagement between listed companies and responsible investors

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