Norway Wants Its Wealth Fund to Invest in Fewer Companies

Norway’s $1.3 trillion wealth fund may be forced to exclude a number of stocks as the government seeks to adjust the portfolio by imposing the same ethical and environmental standards across its investments.

The world’s biggest sovereign investment vehicle should follow a revamped set of guidelines that could result in a 25-30% reduction in the number of companies it holds, Finance Minister Jan Tore Sanner said in a speech on Friday. Companies in the portfolio will be cut to 6,600 from 8,800, though those represent only about 2% of the total market value, Sanner said in an interview. The plan includes not adding any more emerging markets to the index it tracks.

“Reducing the number of companies will have little effect on the relationship between risk and return, but it could improve the possibility of responsible management, both because there will be fewer companies, but also because there is less information about the smallest companies,” Sanner said.

The proposal, which still needs parliamentary approval, marks the latest step in the fund’s shift toward an increasingly sustainable portfolio. In a strategy update earlier this week, the fund said it wants to become a global leader in sustainable investing.

Emerging markets tend to have “weaker institutions, weaker protection of minority shareholders, less openness,” the finance minister said. The fund is already invested in a large number of emerging markets, “and it will not contribute to increased diversification to go into more, but it will increase the complexity and risk.”

The benchmark used by the fund, now built on the FTSE Global All Cap index, needs to be adjusted to ensure the investor doesn’t end up holding stocks that don’t live up to its criteria, according to an accompanying white paper published on Friday.

The proposal is based on guidance from a government-appointed ethics commission, which has previously flagged concerns about the benchmark. Last year, the commission pointed out that FTSE doesn’t consider certain ethical challenges, such as human rights, when classifying countries. It also highlighted increased market and political risks in emerging economies.

The finance ministry has already decided that companies based in Saudi Arabia and Romania, which are included in FTSE, shouldn’t be part of the fund’s benchmark, according to the white paper.

Exiting Fossils

The fund, which returned 10.9%, or $123 billion, on its total portfolio last year, has invested under strict ethical guidelines, including bans on certain weapons, tobacco and most exposure to coal, since 2004.

The Norwegian government decided in 2019 to review those standards, which include human rights conduct and climate change. Under the fund’s mandate, the central bank needs to approve all markets in which it’s invested, including those in the benchmark index set by the finance ministry.

The entire portfolio of companies focused on oil exploration and production was sold by the end of last year, after taking a $10 billion hit on oil and gas holdings in 2020. The fund still holds integrated oil companies, with Royal Dutch Shell Plc its seventh largest equity investment when it last disclosed its holdings at the start of last year.

Yet, Socialist Left Party leader Kari Elisabeth Kaski said the proposal falls short, calling it “a lost opportunity for human rights, the environment and the climate.”

“The oil fund is still too heavily invested in coal and oil,” Kaski said in an emailed statement. “It urgently needs to reduce these investments, and step up investments in climate solutions and future winners.”

Norges Bank Governor Oystein Olsen and fund CEO Nicolai Tangen said earlier this year that the fund’s return and risk characteristics wouldn’t be significantly affected if fewer companies were included in the benchmark or if a different index provider, such as MSCI, was used, provided there’s a gradual switch to minimize one-time costs, according to a letter to finance ministry.

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