Let us give credit where credit is due. Norway’s government has just agreed to divest all of the Oil fund’s holdings of Oil and Gas production and exploration holdings, currently valued at about $8 billion or less than 1% of the Fund. This is a good move, if belated and insufficient. It will reduce risk at the Fund, and improve its climate footprint, if only marginally.
This is much less than what was expected and than what Re-Define and even the Oil Fund itself had argued for. That was all oil and gas stocks, amounting to between $40 and $50 billion, or almost 5% of the Fund. The argument for divestment is clear.
As we wrote as far back as 2008 in the government White Paper NOU 2008:14 and many times hence, “there are two major risks to maximising the long-term value of the fund – low financial market returns and a low price or low demand for oil.”
The call to divest was based on pure risk-return considerations, but momentum to act against climate change increases the risks of lower future demand for oil. Hence, it makes the decision even more timely and sensible.
This is the culmination of a decade long process that began with our 2008 recommendations.
Based on economic analysis we said that “the oil fund should divest all fossil fuel holdings, and set up a clean energy investment window in order to tackle the excessive risk from the price of oil, as future inflows into the fund come from the sale of fossil fuels.”
However, divestment alone is not enough
However, mere divestment is not enough. As we showed in our latest report on the Oil Fund from 2018, even after divestment, the Oil fund will still have far too much exposure to oil price, as future inflows come from the sale of oil and gas.
“The financially prudent thing to do would be to deploy the billions that divestment would free up into renewable infrastructure investments.”
“Not only would this further reduce the Oil Fund’s excessive exposure to fossil fuels, but it will also help accelerate the much-needed response to fighting climate change. The renewable energy sector is one of the few investments that performs well under different scenarios of climate change that are likely to unfold.”
The decision to limit the divestment to production and exploration only is unjustifiable
The decision to limit the divestment to production and exploration companies alone represents a victory of big oil lobbying over financial prudence and common sense. It diminishes the more than $40 billion of the planned oil and gas divestment to an almost pointless $8 billion, less than 1% of the Fund, making a mockery of the economic arguments.
To say that oil majors, which still invest 95%-98% of their capital in fossil fuels, are important for the transition to clean energy, and use that as a justification for not divesting as the Finance Ministry does, is economically illiterate and deliberately misleading.
Politicians must now veto the Ministry and show they can oversee the Fund effectively
Politicians in the Finance Committee and the Norwegian Parliament must now veto the Ministry’s decision to restrict divestment, and show that they can oversee the management of the Fund effectively. There is no economic argument for limiting the divestment, so the Parliament most show leadership in overruling the Finance Ministry on this, siding with Re-Define and Norges Bank Investment Management.
Some divestment is better than none. Also, better late than never – but this makes no sense
It is surprising and disappointing that it has taken 11 years from when we first did the economic analysis to show that divestment made financial sense, for the government to act on our recommendation. But better late than never. We welcome this belated divestment, and very much hope the money freed up will be deployed in renewable investments.
But to really have any meaningful economic and financial impact, the divestment must be expanded to the whole oil and gas sector, not just the exploration and production niche. The oil majors, such as BP, Exxon and others, which the divestment decision excludes, are far bigger in their exploration and production operations than the companies marked for divestment.
“For the divestment decision to be defensible on any economic and financial grounds, it must be expanded.”
This may lead to knock on divestments by other Sovereign Wealth Funds
If the decision is indeed revised and expanded, we could expect divestments of as much as $200 billion from fossil fuel investments by other oil and gas funded Sovereign Wealth Funds, following the same economic logic of financial prudence and risk diversification.”
But Norway still has far more work to do to diversify
This decision does not mean that Norway is giving up on fossil fuels. Quite the opposite, as the record number of licenses issued for drilling and prospecting last year shows. This is just a first step, but Norway will need to do far more to diversify its single engine economy.
Author: Sony Kapoor, Managing Director of Re-Define and WEF Young Global Leader