Carlos Joly
Norges Bank Investment Management has publicly asked the Ministry of Finance to be allowed to divest of oil and gas companies in Norway’s sovereign fund, aka GPFG or Petroleumsfondet, since all its capital comes from the Norwegian state’s exploitation of its oil and gas reserves. NBIM requires a political decision to do so. You’ve had a Commission explore the matter and they recommend against divestment, masking it as a technical and insurance issue, and so I want to discuss it as it should be discussed: as a political decision.
I am an investment professional with 40 years’ experience. I chaired the expert group that drafted the UN Principles of Responsible Investment and, as a director in Storebrand Kapitalforvaltning, Norway’s largest insurance/funds management company, I was the architect of integrating environmental and social concerns into investment policy. I’m also a Fellow at CISL, Cambridge University.
Honorable Minister, let me urge you to agree with NBIM and discard your Commission’s view. The NBIM should be allowed to divest of all its energy sector holdings excepting solar, wind and other non-carbon-emitting energies. (Nuclear energy should also be off limits.) This is a step in the right direction.
In short, we investment professionals are urging you, the politicians, to do your job. Investment professionals by and large believe we should avoid ethical and political judgments, as if that were unprofessional—but ethical judgments and assumptions are tacitly baked into all investment decisions, just as technical considerations have to be part of political ones.
Ethical investments
No investment policy is amoral. Clearly, how you allocate/invest budgets between the various ministries involves values and politics, i.e. the interests of the electorate. Another example is how a corporate board distributes earnings between dividends to shareholders, pay to senior executives and workers, R&D and reserves—it is pertinent to ask whether the allocation is fair, just and sustainable. The extreme example: we invest in drugs companies, but on purely financial grounds financing cocaine and heroin traffic would be more profitable. Thus, the blatantly illegal is out. But that criterion is too weak. We want coherence between what we value as a civilisation and how we invest our resources and savings, so why not be explicit about both and test their degree of coherence?
If you ask the wrong question, you get the wrong answer. Your terms of reference to the Commission state: “The expert group shall base its assessments solely on financial risk and returns.” To which the Commission answered: divesting of oil and gas companies in NGPF only minimally insures the state against oil and gas risk, given the size of its income and wealth from exploiting its oil and gas reserves. As one commentator already noted: Isn’t some insurance better than none? True. But this does not get to the heart of the matter. The Commission has obviously only reflected on financial risk understood as market volatility risk, not on other types of risks, and it adopts a very narrow-minded view of what Norway’s wealth is even though you also did ask the Commission: “What is an appropriate wealth perspective for assessing investments in energy stocks in the GPFG.” The Commission interpreted “wealth” in the narrowest possible way, simply as the present and fickle monetary valuation of assets.
Here is another way of getting at the problem: is Norway, via the Fund, and via its direct ownership of oil and gas reserves, doing enough to reduce its fossil fuel dependency? Assuming the world will increasingly respond to climate change by limiting carbon emissions, Norway’s economy is way too oil-dependent, putting future generations of Norwegians at occupational risk. In the recent short-lived downturn in oil prices, many Norwegians lost their jobs. Consider a permanent price downturn or demand reduction. Even if the Fund were big enough to pay unemployment insurance to all Norwegians for a long time is that the kind of society we are banking on? What kind of work will our kids and grandkids do? Do we want to sentence them to idleness and uselessness? (Mine are Norwegians living in Oslo, so I have a personal interest in this.) Furthermore, is continuing full-on oil exploitation consistent with Norway’s legal and moral obligations as signatory to the UN SDG’s and to the Paris Climate Accord?
So, the real and present risks to Norway and its people are: first, the actual impacts of climate change (already beginning to be felt) at home (this summer’s sun and drought) and second, the climate risks to peoples abroad. How morally at ease are Norwegian voters with displacing the emissions problem to other countries, as if the small savings of “clean” oil production at home were counterbalancing the huge emissions of Norwegian oil used abroad. These are not technical issues and neither the NGIM nor the Ministry of Finance can continue pretending these questions can be solved by purely financial metrics. Nor is selling Equinor (formerly Statoil) to foreign investors, thus displacing the climate problem rather than responding constructively to it, the solution. Selling off the oil reserves would be like hoping that by infecting somebody with your communicable disease you’d somehow get cured. That’s known as black magic. I suppose the Commission, made up of very smart people, knows this and may have proposed this option as a counterfactual conditional. It brings home the point you can’t pass the problem on to others.
Wealth of a nation
Norway’s wealth is not simply reducible to its current GDP or to the current monetary valuation of its Fund or to the current valuation of its unexploited oil and gas reserves. Monetary valuation can disappear surprisingly quickly when the underlying natural, social and political reality that gives rise to it is undermined, as history has shown repeatedly. This happened not only to the empires of old. We see it happening today in Venezuela, Argentina and Turkey. Norway’s wealth lies in the sustainable use of its natural resources, the productivity of its people, and its strong cultural values and political framework built on principles of fairness, equality, solidarity and compromise. This latter is what has made Norway a success: transforming natural and human resources into goods and services for all its people and for export. Oil is just a chapter in Norwegian history, not the whole story.
A severe economic and financial crisis is what is in store for Norway if the world fails to maintain carbon dioxide equivalents in the atmosphere below the tipping point, the level required to avoid catastrophic and sustained climate change. As the reality of soil degradation and nature’s patterns of rainfall changes, as agricultural lands become fallow in many parts of Africa, Asia and Latin America, the resulting forced migrations will make today’s crossings of the Mediterranean pale by comparison, exacerbating Europe’s immigration dilemmas—with unhappy consequences in the political arena. The economies of the developed nations will not necessarily be able to adapt in time either to their own changed climates. US agricultural production is already at risk from contaminated and diminishing aquifers and soil exhaustion. This summer some nuclear reactors along Europe’s rivers have had to close down for lack of sufficient waterflow for cooling. We already see European cities unprepared for heat waves and cold waves. The world has fallen behind in emissions reduction and in adaptation to climate change, and this necessarily means macroeconomic crises and political crises translating into stock and bond market crises. Timing this is a fool’s errand. Working towards avoiding it or developing resilience to it is not.
Forward planning
What we need is for your government to do what the voters expect: develop a realistic plan and timetable to transform Norway’s economy away from oil dependence to the industries of the future. These require brainpower, infotech talent, engineering talent, health care know how, climate adaptation capabilities. Invest more in educating and retraining people for jobs for industry as it needs to be in the coming years. Thirty years from now oil and gas will be a thing of the past. This is a much bigger problem than today’s immigration problem.
As long as current incentives and taxation favors oil and gas, forward-looking private and institutional investors can tilt our portfolios, we can reduce or screen out oil and gas, but Norway will still pump it and nothing will change. Excluding cigarettes from portfolios does not stop cigarette manufacture or people from smoking—what is stopping it is high consumer prices, prohibition on smoking in restaurants, bars and other public places, and effective ad campaigns that change consumer attitudes towards smoking and smokers. We investors can and do give signals to government, and that is what the NGIM is doing, but if you in government do not follow through by putting in place the right transformative policies, the right incentives and regulations, the decisions of forward-looking investors remain at the margin. We may feel better, but that in itself doesn’t change business models and company actions.
You should seriously consider changing the Fund’s benchmark index. It is now forced to hold sectors and companies and business models that clearly cannot do well in a climate-changed world. You should be commissioning R&D to come up with a benchmark index that favours companies that create positive environmental and social impacts on the ground as they go about making money and that can evolve to acknowledge the UN SDGs. Your current index forces a passive investment strategy that makes little sense in a fast-changing world. The Commission’s argument that it has worked well so far provides no assurance. There’s a good reason why you require mutual funds to state “Past performance is no guarantee of future performance.”
Portfolio values
Let’s not forget that the decision to include oil and gas companies in the Fund’s index, and to construct the index based on the widest possible worldwide inclusion of all sectors, is also a political decision based on the worldview that the market knows what is right and that following it is the best way to make money. The indices are built on the modern portfolio theory view that holds the current market price of companies is the right price. That involves the fantasy of believing the market is rational and reflects a correct evaluation of all types of risks and rewards—a view that has been repeatedly debunked. Bubbles, crashes, and corrections would not be possible were the theory correct; nor would we have sectors or countries systematically undervalued or overvalued relative to their income-producing realities and prospects. For example, the market valuing China at CAPE of 16.8 and PE of 7.4 vs the US’s 31.2 and 21.4 arguably undervalues China, its companies and its prospects.
In modern portfolio theory, the price of a stock or bond at any given moment is not only “efficient” but right, as by definition it is supposed to reflect all available information to market participants, who are also supposed to be acting purely rationally in each seeking to maximize their profit. In the real world, the application of modern portfolio theory becomes its reductio ad absurdum in equating the efficient price with the right price. It looks only at risk internally defined as market volatility, ignoring all other real world risks, including climate change. It is like staring at your own navel to find out whether it is raining outside.
Conclusion
Dear Minister, surely your voters do not want to risk getting stuck with a stranded economy a generation from now. Your government should come up with a real transformative plan and a realistic timetable that will keep its good welfare state going on a solid and an environmentally sound basis. Sustainable development is not a pipe dream. It means sensible policies that force businesses to change. The next general election should be about that—who has a realistic, doable and committed plan to transform the Norwegian economy from oil to high tech, info tech, robotics, health service, tourism and green development; engineering, entertainment, and value-added products. History is replete with examples of once prosperous countries that became poor by not adapting to a changing world. Unless Norway starts to get ready for the world of 2030 and 2050, if it keeps going for the short-term gains by investing in pumping all the oil and gas it can manage and exploring for more, it will end up a has-been rich country. Letting the NGIM divest of international oil and gas companies is a step in the right direction and a strong signal to investors, companies, and other governments around the world.
Dear Minister, be courageous. Dare to do the right thing! Invest the public’s savings in accord with the public’s values!
Carlos Joly is a fellow at the Cambridge Institute for Sustainability Leadership, Cambridge University, where he founded the Investment Leaders Group. He was chair of the United Nations Environment Programme Finance Initiative.