Integrating ESG at Norway’s giant SWF

How could you integrate ESG into a portfolio of 7,000 stocks? Behind the Strategy Council’s report to the Norwegian Ministry of Finance on responsible investment for the Norwegian Government Pension Fund Global.


The Strategy Council, led by Professor Elroy Dimson from the London Business School and Cambridge Business School, has advised the Norwegian Ministry of Finance on the responsible investment strategy for the giant Norwegian Government Pension Fund Global, focusing on its strategy, issues of transparency and a more integrated approach to responsible investing.

One of the key findings is that the responsibility for managing the investment exclusions moves into Norges Bank Investment Management, which as part of the other responsibilities of asset management.

At present, the Norwegian Parliament decides what will be excluded and on what basis, and the council thinks this should remain.

However the responsibility for implementing that is done by the Council of Ethics separate to the investment management activity.

This would allow for a more integrated approach.

Rob Lake, a consultant and former director at the Principles for Responsible Investment sits on the five-member strategy council.

He says it wasn’t within the council’s mandate to look at the rules for exclusion, they are set by the Norwegian Parliament, but it looked at the process for exclusions made on the basis of those criteria and the relationship between exclusion process and engagement. The aim was to increase efficiency and effectiveness.

“NBIM does all engagement but the exclusion process is done by a separate entity – the Council of Ethics – which is not part of NBIM,” he says. “We recommend there be stronger linkage between the research by the Council of Ethics and engagement.”

He says the council tried to look at what makes sense in terms of ESG given the funds characteristics including its size, the highly diversified nature of its holdings and the fact it is very long term.

The NWPFG has more than 7,000 stock holdings, which at the end of 2012, translates to about 1.2 per cent of the world’s stocks.

“Given the fund’s size, high diversification of holdings and long-term nature, it has all the elements of a universal owner,” Lake says. “It needs to focus on issues and activities that makes sense in the long-term value of the portfolio.”

As part of that Lake says the fund needs to have a good understanding of the long term implications on the value of portfolio at the macro level, things like climate change and water scarcity (which is already one of the fund’s investment principles).

“There is a need for responsible investment to be tied to the long term issues of value creation in the portfolio,” he says.

“The conventional corporate governance agenda still clearly important and given the size of the portfolio and the significance of some of the holdings it makes sense to engage with individual companies. But there is also the more macro issues, such as market stability, and increasingly funds are putting effort into those activities.”

One of the key questions addressed by the council in this regard was getting the right balance between the focus on individual companies and the more market wide, macro, issues.

“There are parts of the portfolio where there is significant exposure to individual companies, essentially active management. So there it makes sense for the fund to understand all the factors for that company’s long-term value creation, including ESG. But that is a relatively small number of companies in a 7,000 stock portfolio, so the fund also more broadly needs to look at more market wide issues.”

But the council was not asked to give prioritisation to that, or to look at the NBIM structure or resources, it was purely a strategic objective.

However it does recommend the need for a structured and transparent process for identifying those priorities.

“Transparency is critical for the fund given its size and scrutiny. It needs the trust of the people of Norway but those needs to be met in an appropriate way,” he says. “The fund needs an integrated range of tools. To engage with individual companies and policy makers and regulators depending on the nature of the issue.”


The Ministry of Finance will conduct a public consultation on the recommendations and then take a formal proposal to the Parliament in the Spring. A review of active management will also form part of the Ministry of Finance’s presentation.