Re-Define has just launched a report offering new analysis and insights on four major issues that are part of the on-going policy debate in Norway. Many of these also apply more broadly to other countries with fossil fuel driven sovereign wealth funds.
First, how exposed is Norway to fossil fuel risk? Second, should NBIM divest its fossil fuel holdings to reduce risk? Third, how much should NBIM invest in renewable infrastructure and how? Fourth, how Norway should respond to the rising threat of climate change?
This report shows how the Norwegian state’s financial exposure to fossil fuels exceeds 50% of GDP, and is not falling. Add in the exposure in the private sector and this reaches 60%-75% of GDP.
This reinforces the overall conclusion of the Skancke commission that Norway is exposed to systemic risk from climate change, partly as a result of its dependence on fossil fuels.
Norway has essentially failed to diversify and continues to be excessively dependent on fossil fuels in terms of exports, investments, growth, taxes, finance and overall economy. This is particularly dangerous at a time that urgent action on climate change requires fossil fuel consumption to be cut down sharply.
This report also builds on the case that Re-Define has repeatedly made for NBIM to divest from fossil fuels to reduce risk and improve return, first in 2008, then in 2013 and 2016. Furthermore, it issues a point-by-point rebuttal of the criticism of divestment by the Thøgersen Committee.
Had NBIM followed our recommendations for divestment, it would have reduced risk without compromising return. It would even have out-performed the market, although the only motivation for divestment should be a reduction of risk. All of this analysis also applies to other fossil fuel-driven sovereign wealth funds, which should also divest from all fossil fuel holdings to reduce risk.
Most importantly, the report builds on previous Re-Define analysis and offers several important takeaways.
In order to reduce risk, and generate more stable long-term returns, NBIM should be allowed to invest at least 5% in renewable energy infrastructure.
In addition to reducing excessive fossil fuel risk, such investments perform uniquely well under various climate risk stress test scenarios that are slowly being adopted by large long-term investors around the world.
The report shows that renewable energy infrastructure investment is a promising and fast-growing asset class, and the biggest opportunities lie in emerging markets where such investments contribute substantially to economic development, increasing growth and delivering poverty reduction.
This same recommendation also applies to other fossil fuel-driven sovereign wealth funds, which need to significantly ramp up their renewable infrastructure investments, in order to reduce risks and harness new opportunities.
Renewables are also far more competitive against traditional fossil fuels in most emerging markets, often without any need for subsidies thereby substantially reducing political and policy risk.
In summary, renewable infrastructure investments in emerging economies achieve four goals for the fund simultaneously. First, they reduce the excessive exposure to fossil fuels. Second, they diversify away some of the Fund’s risk in slow growth developed economies in which the fund has more than 85% of its investments. Third, they are a solid source of long-term safe and stable returns the Fund currently lacks, and fourth, they increase the Fund’s and Norway’s contribution to tackling climate change exponentially.
The PDF of the report can be accessed here.