AUM in Action

Norwegian SWF Grapples with Scope 3  

Sovereign wealth fund has increased climate-related activity, including filing proposals for the first time and encouraging transition planning.   

The world’s largest sovereign wealth fund, Norges Bank Investment Management (NBIM), has said its Scope 3 reporting is currently “grossly underestimated”, while in the early stages of testing techniques.  

On 7 February, NBIM, which manages US$1.3 trillion in assets on behalf of Norway’s Government Pension Fund Global, published its responsible investment report for 2023 and the first full year of its climate plan.  

In it, NBIM outlined its approach to Scope 3 reporting, calculated in line with Partnership for Carbon Accounting Financials (PCAF) guidelines.  

Scope 3 reporting reflects an organisation’s greenhouse gas (GHG) emissions outside its operations, such as its supply chain, customer or its investments or lending. It’s currently heavily underreported by companies, but almost always represents their largest source of GHG emissions.  

Scope 3 emissions are notoriously difficult to quantify, given the reliance on data outside a company’s control and the current lack of expertise on how to calculate them robustly. This looks set look to change over the coming years, with new reporting rules in major markets such as California and Europe, and the International Sustainability Standards Board mandating Scope 3 reporting. 

In 2023, NBIM began estimating Scope 3 financed emissions – the emissions of its investments – across sectors in its equity portfolio. It calculated the fund’s financed Scope 3 emissions to be 61 million tonnes of CO2 equivalents in 2023, which is 8% lower than its benchmark index.  

Speaking to ESG Investor, Eivind Fliflet, Head of Environmental at NBIM, said that the numbers it reported are likely “grossly underestimated”, but asserted they were the best currently available.  

“I think that it is important to underline that these are very early estimates. We’ve done some internal work trying to compare different estimation techniques and we landed on an approach that estimates the Scope 3 emissions based on company production data. That gives us higher quality and consistency compared to, for instance, an approach which uses partially reported data and partially estimates,” he said.    

“The financial sector should probably be significantly higher than what we’ve been able to identify.”  

In its Taskforce for Climate-Related Disclosures (TCFD) report in 2023, NBIM said it “observed large deviations in Scope 3 emissions data reported by companies with data points from an estimation model”. 

Climate stewardship 

Last year, NBIM escalated its stewardship on climate change, voting against directors at 22 companies based on climate considerations and filing four shareholder proposals in the US. It supported 27 ‘say on climate’ proposals, but also voted against climate proposals at BP and Total last year.  

“We found shareholder resolutions to be a constructive and effective tool,” said Fliflet. “We saw significant support from independent shareholders, and we take this as a sign of growing recognition of the importance of climate risk in general, and investor appetite for climate emission reduction targets in particular.”  

NBIM also updated its climate change expectations, with greater emphasis on target setting and transition plans. To support new standards on transition planning, it joined a working group of the UK Transition Plan Taskforce (TPT). “A lot of the work has been done on climate target setting,” he said. “Transition planning was the logical next step, so we wanted to contribute to standardisation and guidance for companies. In these efforts, TPT was a great attempt to make it a gold standard for transition plans. That work is now concluded, and we’ll have to consider where we can contribute next.”  

The UK plans to mandate transition plans. This week, the French financial markets regulator published an educational guide on companies’ climate transition plans prepared by its Climate and Sustainable Finance Commission, outlining expectations for compliance under the Corporate Sustainability Reporting Directive.  

Executive remuneration 

NBIM also ramped up its attention on executive remuneration last year, hosting a discussion on US CEO pay at the Council for Institutional Investors conference. It made the case for simpler and longer-term equity incentives and explored the opinions of US asset managers. 

Speaking to ESG Investor, Amy Wilson, Head of Stewardship Strategies, said: “We’re looking for CEO pay that is simple, transparent and that focuses on generating long-term value. For us the best, simplest and most effective way to pay CEOs is by giving them long-term shares that are held ideally for ten years and at least five, regardless of whether they retire or resign.  

“Within that there’s still space for a cash salary and perhaps a small annual incentive scheme, which we recognise plays a part. But for us the bulk of the package should be long-term and focus on share ownership.” 

The average annual salary in the UK, EU and US is £32,000, €33,500 and US$54,132 respectively. Meanwhile, company CEOs are receiving annual remuneration that often edges into the millions. Last year, a group of investors warned UK companies to pay all their workers at least the real living wage, or face shareholder challenges to executive remuneration.   

Some asset owners and managers – like Nest and BNPP AM – indicated in their 2023 global voting guidelines that they may vote against companies on their executive remuneration packages if these are not aligned with their average growth of worker pay.

“In our view, many of the packages used today for CEOs are too complex, they’re too short term and they’re very costly, particularly when you look at a market like the US, where pay levels can be high. There are some examples of companies starting to adopt more of the model that we prefer to see but they are in the minority at the moment.” Wilson added.  

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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