Public accounts - Issue 153 - Magazine | Monocle

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Oslo in early spring can look fairly monochromatic – leaden skies end in a slate-grey sea. But bright-red electric buses and powder-blue trams stand out as they cut through the city centre; add to these a rainbow of electric scooters and fluorescent child trailers attached to bicycles and the Norwegian capital looks like a city where the move away from fossil fuels is already well under way.

By many measures, Norway is a leader in the global march to phase out fossil fuels. Last year it was ranked second after Sweden in the World Economic Forum’s energy-transition index and about two thirds of the new cars bought in the country were electric – a far greater proportion than in any other country.

And that’s just at home. Overseas, Oslo has no greater tool to achieve its political ends than the Government Pension Fund Global, a €1.2trn sovereign wealth fund that is overseen by Norges Bank Investment Management (nbim), part of the country’s central bank. The fund manages assets that are worth about the same as Australia’s 2021 gdp and owns about 1.4 per cent of all shares in the world’s publicly listed companies.

Started in 1990 to invest the revenues of the country’s oil wealth, the fund is intended to benefit future generations of Norwegians. Politicians are forbidden from using more than the expected return on the fund, estimated to be about 3 per cent a year. That sliver is enough to contribute about a fifth of Norway’s annual budget, so Carine Smith Ihenacho, nbim’s chief governance and compliance officer, is well aware of the importance of her work.

Yet two paradoxes lie at the heart of the Government Pension Fund Global. Directed by the state, can it be truly apolitical? And can the bank’s oil-revenue-funded investments contribute to environmental progress?

The hushed offices of nbim’s Oslo HQ, across the road from a neat, green square and a few blocks west of the city’s opera house, feel like a cross between a university library and a dated but well-kept hotel. From there, Smith Ihenacho, who has shoulder-length blonde hair and is wearing thick-rimmed glasses and an immaculate black trouser suit, speaks to monocle about the bank’s policies.


The Government Pension Fund Global was founded on and enriched by oil and gas revenues but now it’s starting to move away from fossil fuel. Is that contradictory?
We don’t see that as a contradiction. Yes, the revenues that started the fund were from oil and gas production, and the inflow continues to come from the sector. But that doesn’t mean we shouldn’t manage the fund responsibly. We have divested from [firms whose sole role is to explore for] oil and gas. That’s a sound move from a financial-risk perspective because maybe it doesn’t make much sense to invest in pure upstream companies; that’s where our revenue comes from. We still hold stakes in companies such as Shell and BP [which have renewable energy divisions]; we strongly believe that they have a major role to play in the transition to a low-carbon economy. It will require huge investment and they will be part of it. We want to push companies in the right direction, rather than walking away.

You won’t invest in companies that sell tobacco, landmines or nuclear weapons. Is there anything in which you strictly won’t invest for environmental reasons?
Coal just isn’t a business that the nation wants to be in. It’s more about ethical considerations than stranded assets [investments devalued by changing attitudes]. But one of the things that we do with the fossil-fuel companies that we still own is to ensure that they have a plan, so they don’t sit there with stranded assets when we reach net zero. It’s clear that the world will still need oil and gas for quite some time. It’s more about having a view of how long that will be.

You’re a non-political organisation but one that’s government-controlled. How do you square that circle? And how did it inform the decision to divest Russian assets, following the invasion of Ukraine?
The framework for the fund is set by parliament, by the politicians as representatives of the people. They make the big allocation decisions. We get a mandate but how we execute that is non-political. We are professional investors, following our ambitions for long-term returns. The invasion of Ukraine was a dramatic shift, with huge effects on markets. The government made the decision that we should freeze all of our assets in Russia, then sell them in a manner that’s realistic and practical. We as a fund have to make sure that we don’t break any sanctions.

You’re putting increasing emphasis on investing in stocks that score well in terms of environmental and social responsibility, as well as corporate governance [ESG]. There are so many ESG measurements. How do you ensure that your definition is meaningful?
We have mainly been concerned with companies reporting what’s financially material. We take all of the information that we get from them, the rating agencies [and especially the International Financial Reporting Standards Foundation’s sustainability measures], as well as information that we get from company meetings. Then we do our own internal rating. We basically start with the UN’s guiding principles for business human rights, so I’m not simply setting my own framework here.

In a post-Wirecard world [the payment processor collapsed after scandals over missing cash], has Norges Bank changed its practices for identifying fraud?
We had sold out before the scandal really broke. We had a portfolio manager who thought, “Something funny is going on.” It has changed how we work because we’re focusing even more on auditing and fraud, and going deeper into companies’ accounts.

Opportunity spotting

Massimiliano Castelli, head of global sovereign markets strategy at UBS Asset Management, on...

The fund’s importance: “It’s one of the most transparent funds. The media can see what’s happening when there is market volatility. Many other sovereign institutions look to Norges Bank because it replicates the global stock market index; given its size, it’s a way of indicating where markets are going. It has built a framework for incorporating sustainability and you can see which sectors or companies are excluded.”

Where it might invest next: “Political scrutiny hasn’t prevented the fund from taking risks. About 97.5 per cent is invested in stock and bond markets, with a bit of property and infrastructure. That’s different from typical sovereign wealth funds. Inquiries in Norway have asked, ‘Should we invest more in private equity or in venture capital?’ It has started investing in unlisted property and infrastructure; I believe that it will continue to do so. With interest rates rising, it might soon be more challenging to generate good returns by investing only in public markets. Returns will be much lower – and venture capital and green infrastructure represent important opportunities.”

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