Norway’s plan to ditch a host of oil and gas companies has highlighted the pressure on petroleum-rich sovereign funds to cut their exposure to a sector that is facing serious questions from investors over its long-term prospects.
Norway’s $1tn sovereign wealth fund, the biggest in the world, last month said it planned to divest holdings worth about $7.5bn from oil and gas companies that focus on exploration and production.
It stopped short of dumping larger energy companies such as BP and ExxonMobil but the move, which is subject to parliamentary approval, is still likely to result in one of the largest divestments of fossil fuel assets. The fund owns oil and gas shares worth about $37bn in its $623bn equities portfolio.
Norway’s divestment proposal was prompted by a desire to limit the country’s dependence on the oil sector. Last year the fund received NKr34bn ($4bn) from its petroleum reserves but policymakers do not want it to increase its exposure by using that capital to buy shares in the sector.
“They are a massive reference point for the entire industry,” says Mark Lewis, global head of sustainability research at BNP Paribas Asset Management. “It is going to force people to think harder about oil and gas.”
Nevertheless Norway is regarded as something of an exception when compared with its sovereign wealth fund peers.
“I don’t see SWFs as a whole group pulling out of oil and gas. [Norway] is bit of an outlier,” says Michael Maduell, president of the Sovereign Wealth Fund Institute. “For them to drop those companies was pretty big.”
However, recognition is growing of the longer term financial risk about investing in the sector when an investment vehicle’s source of capital is also oil and gas.
The oil sector faces many challenges: the rise in electric vehicles and renewable energy, tougher environmental legislation and investor pressure to axe fossil fuel stocks following the 2015 Paris climate change agreement.
Wood Mackenzie, an oil consultancy, last year forecast that global oil demand would peak within two decades, citing changes in transport technologies.
“The debate among most sovereigns [on] how to get investments that are fundamentally different from their source of capital . . . has become more of an issue for most of them,” says Cyrille Urfer, head of sovereign wealth funds and institutional clients in the Middle East at Unigestion.
Investment vehicles in Saudi Arabia and Abu Dhabi have both made attempts to diversify.
Saudi Arabia’s Public Investment Fund, which has more than $300bn in assets, was created with the mandate to diversify the kingdom’s economy from oil and gas. It invests domestically, concentrating on funding companies in non-oil sectors such as entertainment and tourism both at home and overseas.
Eye-catching deals include the $2bn it has put into ride-hailing group Uber. It has also committed up to $20bn for a fund with New York private equity group Blackstone and up to $45bn for a new tech fund, the SoftBank Vision Fund, which will be managed by the technology group. It has no direct investments in listed oil and gas companies.
The PIF is focused on “the development and diversification of Saudi Arabia’s economy as well as driving forward non-oil sources of revenues,” a spokesperson said.
Although growth and new investment under Crown Prince Mohammed bin Salman’s Vision 2030 plan, launched in 2016, has been subdued, the goal to reduce the economy’s dependence on oil by creating new industries and bolstering the private sector endures.
Initiatives in Vision 2030 include the Red Sea Project, a plan to develop uninhabited islands on Saudi Arabia’s west coast into tourist resorts. The PIF owns the company leading the development.
The Abu Dhabi Investment Authority also has a mandate to diversify the local economy away from oil and gas. It has some fossil fuel investments that it is compelled to hold in its indexed equities portfolio but it limits its investment in the Middle East. The fund does not plan to make any changes to its portfolio based on Norway’s decision, according to a person with knowledge of the situation. ADIA declined to comment.
The Qatar Investment Authority also declined to comment and the Kuwait Investment Authority did not respond to a request for comment.
In the US, the New Mexico State Investment Council indicated it was not planning to follow Norway. The NMSIC manages the state’s permanent funds, two of which derive their underlying wealth from oil and gas — in one case from the award of land when statehood was granted in 1912, in the other from taxes generated by fossil fuel extraction.
The funds’ returns are mainly directed towards running the state’s schools. Together they have assets of $22.5bn with exposure to further oil and gas companies in their listed equities and real assets portfolios.
A spokesman said that while Norway’s move was “worthy of additional consideration as to how additional diversification initiatives might work here,” the topic had not come up for discussion at a subsequent meeting of the fund’s 11 fiduciary members. He added that the Norwegians’ decision took place only recently.
Although at a global level the debate on fossil fuel exposures is framed as managing financial risk as much as a desire to protect the environment — with question marks over long-term demand for the commodities — opinions differ over the pace at which Gulf funds exposed to oil may alter their view.
Mr Urfer does not think big divestments are on the cards in the immediate future and that the funds have yet to be convinced that it will not affect the return of their portfolio if they sell down. He says, however, that behind-the-scenes pressure is rising, especially with a trend in favour of managing assets in-house, which would lead to a greater responsibility for performance.
“They are managing more and more money internally,” he says. “They have the final decision.”
Frédéric Samama, deputy global head of institutional and sovereign clients at Amundi, believes there are signs of change in terms of Middle Eastern funds becoming more open to environmental considerations, which may in time affect their portfolios.
In 2018 six sovereign wealth funds, including four Middle Eastern funds, supported the creation of the One Planet SWF framework, by which they made a non-binding pledge to “integrate the consideration of climate change-related risks and opportunities into investment management to improve the resilience of long-term investment portfolios”.
One Planet’s overarching aim is to combat climate change in line with the 2015 Paris climate change agreement.
“Does it make sense that a sovereign wealth fund meant to stabilise the economy invests in the stocks vulnerable to shocks?” asks Mr Samama.
Norway is “clearly a leader in that process,” Mr Urfer says but adds that, elsewhere, “the outcome is certainly very difficult to predict.”