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June 22, 2021updated 27 Jul 2022 1:12pm

Why Norway’s $1.3trn wealth fund prizes transparency so highly

Norges Bank Investment Management owns stakes in some 9,000 companies and seeks to use its huge influence for positive impact. Deputy CEO Trond Grande explains how the fund practises what it preaches when it comes to corporate disclosure.

By Joe Marsh

Trond Grande, Norges Bank Investment Management: “We try to vote at every shareholder meeting”. (Photo courtesy of NBIM)
  • Norges Bank Investment Management (NBIM), which oversees Norway’s huge oil fund, insists transparency is a virtue within investing.
  • Deputy CEO Trond Grande explains that it bases its positions on internationally recognised standards and principles, such as those of the EU, UN or OECD.
  • NBIM publishes dialogue with corporates, including board votes and reporting performance on topics such as human rights or climate change.

When the deputy chief executive of Norway’s sovereign wealth fund addressed a gathering of students in Spain last month, he opened with a frank admission: “My name is Trond Grande. I joined the fund 14 years ago as the chief risk officer, in the fall of 2007. In my first year at work I lost a quarter of the value of the fund – roughly $50bn. That was a humbling and learning experience.”

Of course, Norges Bank Investment Management (NBIM) was not alone in taking a big hit from the 2008 financial crisis. Nonetheless, as Grande pointed out, that proportion of the portfolio would amount to a loss of at least $300bn today, given the fund’s NKr11.649trn ($1.34trn) size.

And there would be no hiding from it. NBIM, which oversees the Government Pension Fund Global, updates its portfolio value in real time on its home page. After all, “this wealth is the Norwegian people’s money”, Grande said during an event on 11 May hosted by the IE Institutional Asset Management Club, part of Madrid’s IE Business School.

By contrast, many state investment funds – such as Abu Dhabi Investment Authority and Singapore’s GIC, to name a couple – never reveal their size.

NBIM sets out its detailed expectations of investee firms across areas related to the United Nations’ Sustainable Development Goals.

NBIM stresses the importance of transparency for itself, the partners it works with and the 9,000-odd companies it invests in. And the institution carries huge weight: 72.8% of its portfolio sits in public equities and it holds, on average, 1.4% of all listed stocks globally and 2.6% of European public companies.

What’s more, NBIM has more direct control over its holdings than most because it manages a whopping 95% of its assets internally and just 5% via external managers.

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Big on voting and engagement

The fund publishes an annual report on responsible investment (RI) – which this year came out in February and ran to 104 pages – and makes a point of naming names.

It provides details such as votes against board recommendations among its top 50 stock holdings in 2020. These incorporate the companies and subject matter in question and feature firms such as Apple, Amazon, Tesla and Johnson & Johnson (see table below).

“We try to vote at every shareholder meeting – there were more than 11,000 last year and more than 120,000 resolutions [11,871 and 121,619, to be precise],” Grande said. Moreover, of the 2,877 meetings it had with corporates last year, 1,754 incorporated discussion of ESG (see graph below), a higher proportion than the year before (61%, up from from 55%). This is clearly labour-intensive, even for an organisation with 520 staff.

“But we don’t outsource [company dialogue and voting] to ISS or some other [opinion] provider," Grande said. "We form our own opinions through position papers and guidelines and implement that into our systems and make sure that our voice is heard.”

Indeed, the RI report goes into specifics about how the fund is addressing issues in certain sectors, from banking to cement and fisheries to metals. Again, it identifies companies and the topics it is discussing with them.

Among many examples, NBIM has engaged with sportswear manufacturer Adidas on the environmental impact of the fashion industry, household products producer Reckitt Benckiser on the responsible marketing of infant formula, and pharmaceuticals giant AstraZeneca on executive remuneration.

NBIM is conscious of the importance of being fair and clear in its policies. “We try not to be perceived as exporting Norwegian values,” said Grande. “We try to base our positions on internationally recognised standards and principles – such as EU, UN or OECD standards. If we don’t do that, we will have less impact on companies because they will get confused as to what they should be adhering to.”

The fund sets out its detailed expectations of investee firms across areas related to the United Nations’ Sustainable Development Goals (SDGs). These include climate change strategy (SDGs 7 and 13); water management and ocean sustainability (SDGs 6, 12 and 14); human and children’s rights (UN SDGs 4, 5 and 8); anti-corruption (SDG 16); and tax and transparency (SDG 17).

For instance, under ‘children’s rights’, NBIM specifies four broad things it expects portfolio companies to do (each of which contains various detailed sub-points): integrate children’s rights into policies and strategy​; integrate salient children’s rights into risk management; report on those rights; and engage transparently and responsibly in relation to them, including through grievance mechanisms.

In respect of anti-corruption, the fund’s three broad expectations are: establish clear policy on anti-corruption; integrate anti-corruption policy into business operations; and report and engage on anti-corruption programmes.

NBIM also assesses companies’ reporting on these areas and publishes its findings. Interestingly, their overall performance was a lot better for climate change disclosure than for, say, ‘anti-corruption’ or ‘tax and transparency’.

Disclosure push

Moreover, the fund constantly urges regulators to improve corporate disclosure standards. It sent a letter to the US Securities and Exchange Commission on June 15 on its consultation on mandatory climate change reporting by listed companies, flagging the need for more complete and easily comparable information.

Similarly, NBIM also this month welcomed a proposal by the China Securities and Regulatory Commission (CSRC) to enhance listed firms’ ESG disclosures, but called for more detailed guidance.

“The CSRC could also consider introducing a core set of disclosure requirements [that] would help improve the quality and comparability of disclosures,” the fund wrote in a letter to the regulator on 7 June.

While NBIM has a strong emphasis on engaging with companies to drive change, it also has a divestment policy for certain stocks and sectors.

Norway's Council on Ethics (CoE) – whose members are appointed by the Ministry of Finance after recommendations from Norges Bank, the Norwegian central bank – advises the fund on which investments to monitor and which to avoid. The latter group includes tobacco, certain types of weapons, coal mines and heavy coal users, says Grande. The fund will also not invest in companies that engage in unethical activities, such as human rights violations, major environmental damage and corruption.

“This is a mechanism that is very public,” he adds. “We disclose the names of the companies that we think are in violation of these areas and we sell out of them.”

We try not to be perceived as exporting Norwegian values.  Trond Grande, Norges Bank Investment Management

Last year, NBIM’s divestments included positions in Brazilian power company Eletrobras and Taiwan-based Formosa Chemicals & Fibre Corp for human rights violations, and in AGL Energy, Anglo American, Glencore, RWE and Sasol for thermal coal mining or coal-based power production.

More recently, Japan's Kirin Holdings was put on NBIM's watch list in March for possible exclusion from the portfolio over the beverage giant's business ties to Myanmar's military, after a recommendation from the CoE. This came after the army toppled the democratically elected government in February.

"Kirin recently announced an intention to end this business cooperation, and the implementation of this will be followed up as a part of the observation," an NBIM spokesman tells Capital Monitor.

In addition to its ethics-based exclusions, the fund also makes risk-based divestments of companies that impose substantial costs on other companies and society as a whole, and so are not considered long-term sustainable.

It views such asset disposals as a way to improve long-term performance, says Audun Grønn, a special adviser to the governor of Norges Bank. “When they divest from companies not deemed to have sustainable business models, it is to increase returns and reduce risk – not as a good example or for reputational purposes," he tells Capital Monitor.

Be that as it may, other investors – not to mention corporates and service providers – most certainly do take note of what NBIM does and why.

The fund's approach ultimately brings to mind an adage popularised by the Spider-Man comics and movies: “With great power comes great responsibility.”

Norway’s oil fund is not shirking the burden of exercising it – and sees clarity of purpose and action as key to that process.

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