Norway’s NOK 2385 billion ($390 billion) sovereign wealth fund has overhauled its strategy for active ownership, adding water management as a new focus area, as the fund achieved its biggest ever single quarter return of 12.7 per cent.
Norges Bank’s executive board adopted the revised strategy in June on behalf of the Norwegian Government Pension Fund – Global, which now includes six focus areas and includes water as a new strategic focus in the environmental field.
Outlining the strategy in its latest quarterly report, Norges Bank Investment Management (NBIM) said depending on industrial sector and water consumption, water risk management will be important for companies’ long-term financial performance.
Water is “an important input and output factor” for more than 1100 companies in which Global invests, NBIM said in the report, with the fund’s holdings in these companies worth $43 billion.
The fund’s six focus areas are: equal treatment of shareholders; shareholder influence and board accountability; well functioning financial markets; climate change; water management; and children’s rights.
NBIM has identified seven sectors as particularly exposed towater-related risk: food, agriculture, pulp and paper, pharmaceuticals, mining, manufacturing and power, and water supply.
“Even today, companies with poor water management face significant operational risk associated with supply interruptions and higher treatment costs,” the report noted.
“In the future, securing access to the quantity and quality of water needed for production and complying with requirements for wastewater emissions may become important for more and more companies and their results.”
The second quarter return of 12.7 per cent was largely credited to the upswing in equity markets, and represented an increase in assets of $50 billion.
During the second quarter, Global’s allocation to equities rose to 60.3 per cent, up from 52.6 per cent at the end of the first quarter. The increase was part of a decision taken in 2007 to hike the strategic allocation to equities from 40 to 60 per cent.
During the two-year transition period, the fund invested more than $163 billion in global equity markets, and its ownership interests doubled.
Global’s global bond holdings have decreased as a result to an average holding of 0.7 per cent in Europe, 0.4 per cent in the Americas and 0.2 per cent in Asia and Oceania, the lowest percentage stake in bond markets since 2005.
In both the equity and fixed income portfolios, the fund has a strategic overweight of European investments relative to the size of the markets.
External management amounted to just over $61 billion at the end of the second quarter, an increase of $4.5 billion during the quarter. External management accounts for around 16 per cent of the fund’s assets, up from 13 per cent at the end of 2008.