Norway will soon decide whether to let its $1 trillion sovereign wealth fund dump oil and gas stocks in order to reduce the nation’s overall exposure to crude prices.
To Frederic Samama, a French banker who’s taken a particular interest in sovereign funds and who co-heads institutional clients coverage at Amundi SA, Europe’s biggest asset manager, it’s obvious it should, since the fund is built on the state’s petroleum revenues.
“You have been set up to diversify the assets,” he said in a phone interview on Monday. “Why do you extract oil if it is to invest into oil companies?”
The proposal by Norway’s central bank, which manages the fund, sent shock waves through international markets back in 2017, and has sparked considerable debate in the Nordic country, which is western Europe’s biggest oil and gas producer.
While the biggest political parties have been cautious in expressing their views, an expert panel advised against the move, arguing it would be ineffective as insurance against a drop in oil prices and that it could challenge the fund’s governance model.
The Conservative-led government’s conclusion and parliament’s ultimate decision are due in the coming months.
Samama, who said his comments on Norway’s fund shouldn’t be interpreted as Amundi’s views, co-edited a book on sovereign wealth funds with Nobel Economics Prize winner Joseph Stiglitz in 2011 and founded a research center on sovereign investors at the Paris-Dauphine University.
He acknowledged the arguments against the Norwegian fund’s exit from oil stocks, such as the temptation for more political meddling, and that there were obstacles related to “the right governance to put in place.” Yet he said Norway should not only go through with the proposal, but also have its fund “invest massively” in companies that will benefit from a low-carbon economy.
“The next level is really to think about not only how to be exposed, but how to be hedged,” he said. “They should invest into some green technologies. Because the risk is really here that the country will not be allowed to exploit all the natural resources that they have.”
Norway’s central bank has insisted that its proposal is motivated solely by financial considerations about oil-price exposure and not risks related to climate change. The fund relates to climate risk in other ways, such as expectations to how companies report and through ethical rules that can lead to exclusions. It also has environmental mandates, and may soon be allowed to invest in unlisted renewable-energy infrastructure.
Climate change is now “on the agenda of a critical mass of players in the finance industry,” as opposed to only three to five years ago, Samama said. The impact spans wide, from regulatory risk to plunging prices for renewable energy and more extreme-weather events, he said.
“The main topic that I’m discussing with my clients around the planet is how we think that climate is already impacting asset prices, and how it will grow,” Samama said.