Fund Solutions

NBIM Halves Equity Portfolio Carbon Footprint in Seven Years

Reduction suggests market finally pricing in climate risk, but challenges remain in identifying future risks, says Norwegian SWF.

Climate risk is beginning to be better reflected in equity prices, according to Norges Bank Investment Management, which manages Norway’s sovereign wealth fund (SWF). The fund reported that it has halved its equity portfolio’s carbon footprint in just seven years, in a letter to Norway’s Ministry of Finance.

“Much of the decrease can be attributed to the value of companies with low emissions, such as technology companies, having increased more in recent years than the value of companies with high emissions, such as oil companies,” NBIM said.

This follows the Ministry’s request in March that the bank outline the fund’s exposure to and management of climate risk. Officially titled the Government Pension Fund Global, the world’s biggest SWF (US$1.1 trillion AUM) invests in listed equities, tradeable bonds, unlisted real estate and unlisted renewable energy infrastructure.

Through active management, NBIM’s investment decisions have also contributed to the equity portfolio’s carbon footprint being 9% smaller than its benchmark index at the end of last year.

The equity portfolio’s existing carbon footprint is dominated by its remaining holdings from high-emitting sectors, such as mining, oil and gas, and power production. These 100 companies account for almost 60% of its carbon footprint but just 8% of the portfolio’s total value.

However, NBIM noted that calculating the fund’s carbon footprint doesn’t account for how high-emitting companies are transitioning to a low-carbon business model.

“For example, the calculations do not capture the fact that 30 of the 100 highest-emitting companies have set targets for reducing their emissions. Nor do they capture the fact that some of these 100 companies are integrated oil and gas companies with ambitions to be among tomorrow’s most important producers of renewable energy,” the bank said.

Having visibility of the portfolio’s current carbon footprint doesn’t provide insight on future risks, NBIM added.

The SWF outlined its present efforts to conduct scenario analyses of its holdings and to engage with higher risk companies on a regular basis in order to encourage them to transition to a low-carbon economy or risk divestment. To mitigate continued exposure to climate risk, the bank has pledged to prioritise active ownership, collaborate with standard-setters and continue to invest in opportunities that arise as a result of the climate transition.

“Based on studies of the relationship between climate risk and prices for financial assets, we do not believe there is sufficient evidence to claim that climate risk is systematically mispriced,” it said.

This follows updates to NBIM’s updated 2020-2022 strategy, which involves voting against corporate boards with fewer than two women and a tougher stance on corporates emitting high amounts of carbon emissions.

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