One of the two sovereign wealth funds operated by Norway saw losses as the entity divested from certain energy companies, missing the chance to earn outsized returns in the sector.
The Government Pension Fund Global, which manages more than $1.3 trillion in assets, reported a loss of $163 billion last year, constituting 14.1% of the overall fund. Performance slightly trailed a 12.8% decline in the STOXX 600 Index, which tracks major European firms.
“The market was impacted by war in Europe, high inflation, and rising interest rates,” Norges Bank Investment Management CEO Nicolai Tangen said in a statement. “This negatively impacted both the equity market and bond market at the same time, which is very unusual. All the sectors in the equity market had negative returns, with the exception of energy.”
Despite the outsized returns available in the energy sector, the Norwegian Parliament has decided that “the fund should not be invested in companies that contribute to violations of fundamental ethical norms,” such as those that “base their operations on coal.” The Norwegian Ministry of Finance has likewise established ethics guidelines for the fund’s investments such that managers cannot devote money toward companies that “do not conform to prevailing technological, regulatory or environmental trends” or impose “substantial costs on other companies and society as a whole.”
The Government Pension Fund Global is not permitted to invest in companies that engage in petroleum exploration and production, although managers may devote funds to companies that refine or sell the fuel. Among other entities, the fund is barred from investing in Imperial Oil, the second-largest oil company in Canada. Although the fund believes Imperial Oil produces “unacceptable greenhouse gas emissions,” the company saw 27.4% stock market returns over the past year.
Investment funds that subscribe to the environmental, social, and corporate governance movement, also known as ESG, have suffered heavy losses over the past year. Harvard Management Company, which manages the elite university’s endowment, recently admitted that its $2.3 billion loss was attributable to fossil fuel divestment efforts, even though the organization remains “proud to be deeply engaged in the issue of sustainability.”
Critics of the ESG movement assert that the strategy seeks outcomes in political and social causes, such as reducing carbon emissions and achieving racial diversity, in a manner that compromises the maximization of profits.
Government regulators under the Trump administration barred American pension funds from “selecting investments based on non-pecuniary considerations” and required them to “base investment decisions on financial factors” alone. The Biden administration is nevertheless seeking to reverse the prohibition in order to safeguard the economy from “climate-related financial risk that may threaten the life savings and pensions of America’s workers and families.”
Norway’s Government Pension Fund Global was established in 1990 to invest surplus revenues from the country’s oil sector. Norwegian economist Arne Jon Isachsen and Icelandic economist Thorvaldur Gylfason recently contended in an article for the International Monetary Fund that Norway “ought to quit pocketing its oil profits and start giving the money to countries that need help meeting their Paris Agreement climate change goals.”
“If Norway‘s future oil and gas revenues can help the global green shift, there would be good reason to continue pumping from the Norwegian shelf,” they wrote. “In this scenario, Norway’s extraction of fossil fuels would become fundamentally different from that of other countries.”