Data reported in Sweden’s biggest financial daily suggests the giant Government Pension Fund Global, Norway’s sovereign wealth fund, would have been some NOK300bn (€31.5bn) better off if it has divested from oil and gas holdings a decade ago.
The figures are cited by Dagens Industri, which points to a report from Bloomberg, which in turn cites data from a presentation put forward by Yngve Slyngstad, the CEO of Norges Bank Investment Management (NBIM), which is mandated by Norway’s Parliament to run the fund.
In the past couple of weeks, Bloomberg also reported that despite a government appointed committee rebuffing proposals put forward by Slyngstad to pursue the divestment course, there was also indicated support for the proposals from the country’s central bank deputy governor Egil Matsen, who then cited risk linked to long term depressed oil prices.
The argument has been made partly on the basis of the low oil prices experienced in 2008 and 2014 in particular. NBIM articulated its position in November 2017, which it followed up with a further letter to the Ministry of Finance in April this year, in which it provided more detail about why the divestment ought to be allowed.
“Oil and gas stocks in the fund’s benchmark index are currently divided into three sectors: oil and gas producers, oil services and distribution, and alternative energy, accounting for 86, 12 and 2 percent of the capital respectively,” the letter stated.
“In the enclosure, we show how the relative return between each of these sectors and the broad equity market has varied with changes in the price of oil. With the first two sectors, we find that movements in oil prices largely explain the difference in returns between the sector and the broad equity market. Companies classified under oil services and distribution have a slightly greater sensitivity to oil prices than those classified as oil and gas producers, but the difference is not significant.”
“When it comes to alternative energy companies, we find no relationship between oil prices and returns relative to the broad equity market. The Ministry could therefore consider retaining companies classified by FTSE as alternative energy companies in both the benchmark index and the investment universe.”
“If oil and gas companies are removed from the investment universe, this will mean that they are regulated in the same way as tobacco companies and other companies that have been excluded on ethical grounds due to the products they produce.”
In its earlier letter, in November 2017, the manager had noted that: “The fund now accounts for a much larger share of government wealth than before, and is an integral part of fiscal policy via the fiscal rule….In this letter, we conclude that the vulnerability of government wealth to a permanent drop in oil and gas prices will be reduced if the fund is not invested in oil and gas stocks, and advise removing these stocks from the fund’s benchmark index. This advice is based exclusively on financial arguments. It does not reflect any particular view of future movements in oil prices or the profitability or sustainability of the oil and gas sector.”
The investment policy ultimately decided for the fund is important because of its size – assets are currently valued at some NOK8.475trn (€890bn) – but also because of what it suggests about a sector that forms a key part of the market cap weighting of benchmark indices such as the FTSE 100 – where oil and gas makes up a 15.4% weighting according to data from iShares.
