Norway’s $1.4 Trillion Fund Warns Climate Goals May Hit Returns

Norway’s sovereign wealth fund cautioned against changing its investment mandate, arguing that the inclusion of climate targets could put returns at risk.

“We should be careful about making major changes to the principles underlying the fund’s investment strategy,” Norges Bank Governor Oystein Olsen and wealth fund’s Deputy CEO Trond Grande said in a letter to the Finance Ministry.

Norges Bank Investment Management, the world’s largest sovereign wealth fund, was responding to Norway’s Finance Ministry about how to handle climate risk after lawmakers pushed the country’s minority government to consider emission targets for its portfolio.

Norway, western Europe’s biggest oil and gas producer, has spent almost three decades funneling its fossil-fuel riches into its wealth fund, which then invests outside the country to protect its economy from overheating. Norway recently stepped up its climate ambitions, with the Finance Ministry stating in April that it wants the fund to become a global leader in sustainability.

Including specific climate goals in the fund’s investment mandate would assume that climate risk is mispriced in the market and that the fund either has an advantage or better information than other investors, Olsen and Grande wrote in a joint letter.

“We do not believe there is sufficient evidence to claim that climate risk is systematically mispriced,” they wrote. The other implication of including climate goals into NBIM’s mandate would be to decide that the fund should be managed with a view to achieving objectives other than the highest possible return, Olsen and Grande said.

While environmental targets have been embraced by a number of Wall Street giants such as BlackRock Inc. and JPMorgan Chase & Co., many of these investors differ from the wealth fund in that the role of the benchmark index is to set general limits for risk, the Finance Ministry has said previously. In its letter on Friday, the fund also sought to scotch the idea of replacing the fund’s broad, global equity index with a climate-adjusted index, suggesting that the ministry or the index provider wouldn’t be able to assess financial climate risk better than the market.

The carbon footprint of the Norwegian fund’s equity portfolio halved during the seven years through 2020 and the fund already seeks to reduce its exposure to climate risk, it said. It’s also on the lookout for opportunities that may arise from climate policy changes, the emergence of new technology, and evolving consumer preferences and plans to increase its engagement with the highest-emitting companies in its portfolio.

The fund said in the letter on Friday that a stress test of its equity holdings for temperature increases of up to 3 degrees celsius by 2080 showed that long-term losses due to transition risk could be as high as 9% and about 4% for physical climate risk.

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