Norges Bank Investment Management, which manages Norway’s sovereign fund, the Government Pension Fund Global, has published its 2025 Climate Action Plan. In 2022, the government and parliament (the Storting) updated NBIM’s mandate with climate-related recommendations, and NBIM deserves praise for its ambitious interpretation of the upgrade.
However, the mandate unfortunately falls short, and the Storting’s climate-related adjustment was outdated before it was adopted last summer. The Storting decided that NBIM should support net zero greenhouse gas emissions from its portfolio companies by 2050, but did not set emissions targets for the fund at portfolio level nor for the fund’s benchmark index.
So while it may appear that NBIM has become more progressive on climate, the Norwegian Ministry of Finance’s conservative approach, and the Storting’s concurrence, has resulted in the GPFG lagging well behind international best practice and entirely lacking portfolio-level emissions targets.
Asset managers have two main strategies at their disposal to meet portfolio-level emissions targets. First, by exercising ownership and voting rights they can put pressure on portfolio companies to reduce GHG emissions. The other option is to divest from companies that fail to reduce their emissions.
An important challenge when exercising active ownership (stewardship) is that even very large investors such as NBIM own merely a small part of each company they are invested in. Asset managers therefore have limited influence on portfolio companies unless they coordinate with other investors. Importantly, a purely stewardship strategy lacks a clear reward-penalty mechanism for portfolio companies, so pressure by the asset owner or manager may not be credible. Divestment is one way to create such pressure, but emissions can then persist under new shareowners.
The most fundamental question in climate finance is how the financial sector can deliver the right incentives for companies to decarbonise their activities. Stewardship will often not be enough in the case of recalcitrant portfolio companies. Instead, capital costs must increase for companies that fail to reduce their GHG emissions and decrease for companies with ambitious and credible climate transition plans. This can be underpinned by co-operation between asset owners and between asset managers on investment decisions and climate-related stewardship.
The need for such collaboration is a main reason that a number of the world’s most renowned economists called on the GPFG in 2021 to become a member of the United Nations-convened Net Zero Asset Owner Alliance. The Alliance consists of pension funds, insurance companies and sovereign funds that represent nearly 10 times the assets under management by NBIM. Members of the Alliance commit not only to net zero emissions from their portfolios by 2050, but also to intermediate targets of 22% to 32% reduction by 2025, and 49% to 65% reduction by 2030.
As an argument against membership in the Alliance, Norway’s Ministry of Finance has formerly contended that the GPFG ‘should not be an instrument of climate policy’. However, this argument is misplaced since none of the Alliance’s members have such a role – all are commercial investors.
NBIM manages the GPFG based on a benchmark index set by the Ministry of Finance, with limited room for deviation. For managers of index funds, stewardship was until recently the only means of reducing their portfolio carbon footprints. This is no longer the case, however, and a growing number of stock indexes have emissions targets. Historically, it has been challenging to achieve sufficient diversification in so-called green indexes due to a lack of assets with sufficiently low emissions. This limitation has motivated the Ministry of Finance’s resistance to setting emissions targets for the benchmark index. By that reasoning, the portfolio would become too concentrated in too few assets and therefore exhibit higher risk.
However, leading index providers have now established broadly diversified stock market indexes with carbon budgets that are consistent with the 1.5-degree Celsius target (several of these indexes are based on a method developed by Patrick Bolton, Marcin Kacperczyk, and Frédéric Samama). Since such indexes use forward-looking emission projections, emission-intensive companies can be included if they have sufficiently ambitious and verifiable climate transition plans. This makes the investment universe comparable to that of traditional indexes.
To gain access to a net zero index, companies must follow emissions trajectories that are consistent with the 1.5 C target. Contrary to NBIM, that gives asset managers a concrete strategy for excluding recalcitrant companies. Those that are above emission pathways consistent with the 1.5 C target will be excluded from the index if they fail to adjust their transition plans but can be included again with credible strengthening of emissions pathways.
Companies will then compete for inclusion in the index, based on GHG emissions, so that each sector moves faster towards net zero. NBIM’s 2025 Climate Action Plan fails to create such competition because NBIM’s asset management is linked to the benchmark index. NBIM will therefore have limited opportunities to divest companies that fail to curtail emissions.
Importantly, emission trajectories will become progressively steeper over time as the world’s carbon budget shrinks. Time therefore has a cost. While an asset manager that started the journey towards net zero in 2022 will have to cut emissions by 12% annually to meet the 1.5 C target, the required cut will be 20% annually from 2025 and 46% from 2028. In other words, the longer the Storting postpones the establishment of a net zero target for the benchmark index, the more demanding the implementation.
It is now up to Prime Minister Jonas Gahr Støre and the Storting to honour the commitment made at COP26 to make the GPFG a leader in responsible investment and ensure that the fund’s mandate is brought into line with international climate agreements to which Norway has committed. The government and the Storting should as soon as possible commission an assessment of the implications of setting a net zero target for the GPFG, at portfolio level and with emission trajectories that correspond to the 1.5 C target, as well as of membership in the Net Zero Asset Owner Alliance.
Håvard Halland, a Norwegian economist, is the author of a call to action for the GPFG to join the Net Zero Asset Owner Alliance. The statement, published in the OMFIF Global Public Investor 2021, is signed by some of the world’s most reputed economists and policy-makers. Marcin Kacperczyk is a professor of finance at Imperial College London.