NBIM cuts ESG managers to save on costs as returns fall short

Feb 12, 2019
Manager of world’s largest sovereign wealth fund seeks to cut costs with greater in-house management

Norges Bank Investment Management (NBIM), which runs the NOK8.7 tn ($1 tn) Government Pension Fund Global – or oil fund, as it’s often termed – has announced that it took all of its environment-related mandates in-house last year.

Since their inception in 2010, the environment-focused mandates have been both internally and externally managed, says NBIM, with a spokesperson confirming that the externally managed portion had accounted for NOK20 bn. 

‘To reduce costs in the management of the fund, the externally managed, environment-related mandates were terminated in 2018. Today, the environment-related mandates are in their entirety internally managed,’ says NBIM in its latest annual Responsible investments report. 

NBIM is required by the Norwegian government to invest between NOK30 bn and NOK60 bn in dedicated environment-related mandates. ‘At the end of 2018, we had NOK43.3 bn invested in shares in 77 companies and NOK13.4 bn invested in green bonds under these mandates,’ says NBIM.

But equity investments under these ESG-related mandates retuned -8.3 percent in 2018, with NBIM stating that the annualized return since these mandates began in 2010 has been 4.5 percent. By contrast, the annualized return on the MSCI Global Environment Index since 2010 has been 7.3 percent, according to NBIM data. 

Now the fund manager says it has brought all environment-focused mandates fully in-house, in a bid to cut costs across its ESG investments. To do this, it says: ‘We have built up extensive internal expertise in environmental technology. Much of our work now involves defining the universe for environmental investments. By analyzing companies’ activities, we can identify suppliers of goods and services with a stronger environmental profile than the wider stock market.’ 

Explaining more about its environment-related investment process, NBIM states: ‘We screen our environmental investments against information supplied by specialist external data providers and integrated into our sustainability databases. Our goal is to determine the extent to which our investments are exposed to selected environmental themes through their revenue or activities. We also flag any [ESG] risks in companies’ operations for consideration by our portfolio managers.’

Across ESG-focused areas, the fund manager says it invests in three main areas: low-emission energy and alternative fuels, clean energy and energy efficiency, and natural resource management – and companies must have at least 20 percent of their business in one of these areas to be included in NBIM’s environment-related universe. 

NBIM is well known for its ESG focus and the blacklisting of companies or sectors that fall foul of its remit. In an interview with IR Magazine early last year, Marthe Skaar, communications and external relations manager at NBIM, explained what the fund manager wanted to see from companies – and from IR – when it comes to ESG issues. 

‘As a long-term investor, we rely on sustainable economic growth to create long-term returns. Sustainability and governance issues have thereby increasingly come to our attention, and managing these is an embedded part of the management of the fund,’ she explained. 

And when it comes to what the fund wants from IR, Skaar had this to say: ‘We encourage companies to have in place strategies on how to deal with ESG issues and disclose their commitment, strategy, policy and processes. For investors, it is important to have quantitative information on these issues and we therefore encourage companies to use metrics that enable year-on-year comparison, in line with applicable internationally accepted reporting or initiatives.’

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