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NBIM Divestments Driven by Social, Governance Risks

2021 Responsible Investment report highlights focus on human rights abuses, corruption, aggressive tax planning.  

More than half of divestments by Norges Bank Investment Management (NBIM) last year were the result of unacceptable social and governance-related risks.

NBIM manages Norway’s sovereign wealth fund, the Government Pension Fund Global (GPFG), which has approximately US$1.1 trillion in assets under management (AUM).

According to the asset owner’s 2021 ‘Responsible Investment’ report, 35 of its total 52 divestments last year were due to issues relating to poor tax transparency, anti-corruption, and human rights.

NBIM, which has divested from 366 companies since 2012, uses an internal framework to identify underperforming companies in high-risk industries and markets with weak regulation and/or business models that do not factor in long-term sustainability measures.

“A clothing manufacturer in a developed market will be subject to more stringent requirements for environmental performance and labour rights than one in an emerging market,” it noted.

Once identified, NBIM will conduct more detailed analysis to get a better understanding of the fund’s risk exposure.

“We monitor companies continuously for serious sustainability incidents,” NBIM noted. “These might be breaches of laws, regulations or norms, or accidents caused by negligence.” In 2021, 121 such incidents were identified, prompting the firm to employ its active ownership strategy. This can escalate action to voting, and, when necessary, resort to risk-based divestment.

Risk-based divesting reduces the fund’s exposure to companies that are not sustainable and may affect the return on NBIM’s equity management, the report noted.

Since 2012, this strategy has increased the cumulative return on equity management by 0.44 percentage points, the equivalent of 0.02 percentage points annually.

“Risk-based divestments linked to climate change and human rights have increased the cumulative return on equity management by 0.28 and 0.08 percentage points respectively,” NBIM said.

Long-term perspective

Companies that did not sufficiently account for social or governance-related risks and did not respond to stewardship were divested from, the report said.

Corporates with overly aggressive tax planning strategies are considered high-risk by NBIM, because they are more likely to be penalised by changes in tax rules.

“As a long-term investor, we are looking for real value creation over time and not short-term gains that might be achieved with aggressive tax planning,” the report said.

NBIM divested from four companies due to their “very poor or non-existent” reporting on tax risks. They also presented an elevated risk of taxes not being paid where the economic value was created, the report added.

The firm divested from four other companies due to “strong indications” of poor corporate governance and mismanagement of corruption risks. Two of these companies also reported inaccurate and misleading information “in an attempt to falsely improve their market position”, the report said.

With companies increasingly being held to account for the human rights performance of their suppliers, particularly companies based in Europe, NBIM said this has added a “new dimension of risk for companies with complex supply chains”. The 29 companies divested from in 2021 demonstrated “unacceptable labour conditions”, thus violating human rights policies, the report added.

Active ownership continues to be a priority for NBIM, the report said, noting that the firm voted at 97.1% of the shareholder meetings that took place in 2021.

NBIM’s present focus on the social and governance-related performance of its investments follows a continued focus on climate-related performance. It has previously published a guide outlining how it addresses climate change as a financial risk.

Its updated 2020-2022 strategy also involves voting against corporate boards with fewer than two women and a tougher stance on corporates emitting high amounts of carbon emissions.

“As companies become more aware of how they impact on the world around them, they are increasingly defining a corporate purpose,” said Nicolai Tangen, NBIM CEO.

“As an investor, we view this as positive, because it requires companies to reflect on their long-term strategy and how they contribute to society. For this purpose to be meaningful, it needs to be translated into culture, strategy, goals and actions. Only then is it more than empty words. We believe that, in time, a corporate purpose of this kind will lead to increased earnings and a more sustainable business.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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