NBIM transparently explains half year results

The semi annual report of the giant Norway sovereign wealth fund is testament to its commitment to transparency, unambiguously outlining the half year results which came in 0.04 per cent under benchmark. The fund did benefit from a nearly 15 per cent exposure to tech stocks, but was let down by returns in renewable energy infrastructure.

Norway’s $1.7 trillion Government Pension Fund Global returned 8.6 per cent, equivalent to $138 billion, in the first half of 2024, a result that was 0.04 per cent below it’s benchmark. It’s semi annual report, which outlines the results, is testament to its commitment to transparency with one SWF investor commenting: “it’s a gold standard for transparency and accuracy. No Mickey Mouse creative accounting to disguise lack of real performance”. (See also Why transparency is a strategic initiative for Norway’s SWF).

The fund’s returns were driven by strong equity markets, with equities accounting for around three quarters of the value of the fund. Although the report also outlines the slight underweight in equities relative to the benchmark lost the fund 0.08 per cent in the period.

Real estate and renewable energy infrastructure were a drag on performance.

The fund’s equity investments returned 12.5 per cent for the period, led by technology, financials and healthcare stocks.  About 25 per cent of the equity holdings are in technology stocks which returned 27.9 per cent for the period.

Bank revenues buoyed returns due to the increase in consumer borrowing and health care stocks benefited from major clinical studies and increased demand for innovative treatments and technologies, said Nicolai Tangen, CEO of Norges Bank Investment Management, presenting the results at the Norwegian democracy festival Arendalsuka.

The investor’s largest fixed income allocations are to US (29.1 per cent) Japanese (5.6 per cent) and German government bonds, and euro-denominated government bonds accounted for 12.3 percent of fixed income. The fund’s fixed-income investments also include an allocation to emerging markets, which made a negative contribution to the relative return for the period.

The real estate portfolio is split roughly 50:50 between unlisted and listed real estate investments and managed under a combined strategy. (See NBIM: Listed and private real estate is all the same in the long run).

Unlisted real estate investments are primarily in office, retail and logistics properties and the latest negative return was driven by investments in the US office sector where values have been negatively affected by higher vacancy and a persistently high policy rate. There was also little activity in the market during the period, making property valuations a challenge, the fund stated.

The portfolio was also hit by poor returns in unlisted renewable energy infrastructure (-17.7 per cent) due to poor net income from power sales and changes in the value of the investments, with a higher cost of capital adversely affecting the value of the investments during the period. In the first half of the year NBIM made three renewable energy infrastructure investments with all of its investments listed on its website.

Commitment to voting

NBIM is an active owner and voting is one of the most important tools it uses for excersicing its ownership rights. In another shout out to transparency NBIM publishes its voting instructions five days before the shareholder meeting, and in cases where it votes against the board’s recommendation, it provides an explanation.

In the first half of the year it voted on 90,449 proposals at 8.277 shareholder meetings.

The separation of CEO and chair remains one of the most common reasons it votes against corporate directors. Although NBIM notes improvements in board independence levels globally, it remains concerned by the roles of chair and CEO being held by the same person, most prevalent in companies in the US and South Korea.

“We have long advocated for the separation of chair and CEO and believe that a non-executive chair is in a stronger position to guide strategy, oversee management and promote the interests of shareholders,” states the fund.

CEO pay has been another key area of focus. It voted against around one in ten CEO pay packages, including in the US where NBIM sees pay structures as most problematic and misaligned with long-term value creation.

Its primary concern is the use of one-off awards such as ‘golden hellos’, awards that are paid out over too short a timeframe, or instances where NBIM considers the board had not taken sufficient steps to respond to concerns from shareholders regarding pay in previous years.

The investor also has 1,175 meetings with companies during the period, raising governance and sustainability issues at around two thirds of them. These issues mostly concerned capital management, climate change and human capital.

“We believe that boards are accountable, in their oversight role, for ensuring that companies manage material sustainability risks in their business planning and do not contribute to unacceptable environmental or social outcomes,” it says.

In a new development, NBIM and UNICEF are working together on an initiative to highlight how companies impact children’s rights through their digital activities, hoping to improve corporate reporting in the area.

“We hope that this work will foster discussion and raise the bar on transparency by producing a comprehensive set of child rights-based disclosures in relation to digital technologies that companies can lean on to support their reporting efforts,” said Carine Smith Ihenacho, chief governance and compliance officer at Norges Bank Investment Management.

To produce the set of disclosures, NBIM and UNICEF will take a collaborative approach and consult with a wide range of stakeholders, including companies, academia and civil society organisations, to understand current market practices and identify gaps that may exist. It expects to finalise and publish the set of disclosures in 2025.

“As a global investor in almost 9,000 companies, corporate reporting on sustainability efforts is key to our ability to gauge sustainability risks in our portfolio. This initiative will hopefully enable us as an investor to better understand the efforts companies are making to respect children’s rights in the digital sphere and address negative impacts,” she concluded.