Norwegian wealth fund rejects companies over ESG risk

Norges Bank Investment Management (NBIM), the entity that manages the Norwegian sovereign wealth fund, has removed nine companies from its portfolio due to concerns over their sustainability risk.

With more than $1.4trn of assets under management, it is one of the world’s largest sovereign wealth funds.

The changes to its portfolio followed a risk-based screening of 442 companies in which it invests.

The fund announced in May that it would systematically assess the sustainability risk of companies that will enter the fund’s equity index.

Following the review, and the uncovering of risks related to human rights and environmental pollution, NBIM announced that it would no longer invest in nine of these companies.

“We concluded that these nine companies could add financial risk to the fund in the long term,” it said.

A further 65 companies with high sustainability risk were also identified in the latter half of the year and will be subject to a follow-up.

“Our pre-screening builds on and strengthens our longstanding work with risk-based divestments,” said Nicolai Tangen, the fund’s CEO. “It’s about weeding out companies that we do not want to be invested in.”

The nine companies represent only a fraction of the total number of companies in which NBIM invests. They are also part of the FTSE Russell equity index, which the fund uses as the basis for its asset allocation.

The index allows NBIM to screen out companies within that index that it does not want to include in its own portfolio. However, the fund has neither named the companies it has screened or the amount of capital involved.

“This is an important but challenging job,” said chief risk officer Dag Huse. “This work has illustrated that the quality and availability of sustainability data for companies that are added to the index is generally low. Most of these companies are small and many have only recently been listed.”

This action is different to divesting in certain companies because they break the fund’s ethical mandate, which is set by parliament. The fund divested from 43 companies in 2021 that were not considered to have sustainable business models and were “exposed to significant risks related to climate change, water management and corruption”, stated the fund.

In all, the Norwegian sovereign fund has divested from 366 companies since 2012.

The fund was created in 1990 in order to invest the huge revenues generated from the country’s oil and gas reserves, hence it has subsequently been referred to as Norway’s ‘oil fund’.

Despite the level of divestment, CEO Tangen has stated that the fund does not intend to divest fully from fossil fuel-related stocks, and said corporate engagement is more effective than divestment when it comes to reducing ESG risks. It is “much more powerful to be an active owner and have a constructive dialogue with these companies”, he told the BBC in an interview.

Investors are under much more pressure to disclose how ESG considerations affect their asset allocations. The European Commission introduced the Sustainable Finance Disclosure Regime earlier this year, which requires fund managers to classify their ESG investment products in a bid to reduce greenwashing.

And companies will find their own sustainability credentials come under greater scrutiny as a result of the EU’s Green Action Plan and a greater focus on ESG factors within supply chains as well as investment  portfolios.