Norway’s giant Government Pension Fund Global may expand its asset allocation outside the current limitations of listed equity, fixed income and real estate. The Ministry of Finance is reviewing GPFG’s investment strategy while the state also conducts a study of the fund’s institutional peers to compare their progress on environmental, social and governance (ESG) integration with the work of GPFG’s asset manager, Norges Bank Investment Management (NBIM).
The study on ESG integration is being conducted by London-based consultancy Inflection Point Capital Management and is due in October. Meanwhile, the ministry’s strategy review of the NOK7.7 trillion ($990 billion) GPFG will include looking into whether the fund should invest in more diversifying assets, namely unlisted equity, and increase its ability to take on risk away from the governing benchmarks, expanding its narrow tracking error.
As of June 2017, the fund’s asset allocation was split between equity (65.1 per cent) fixed income (32.4 per cent) and unlisted real estate (2.5 per cent). The fund returned 2.6 per cent in the second quarter of 2017.
The review and study are linked, since any adjustment to investment strategy could greatly influence the fund’s ability to beef up its ESG remit, which is mostly focused on active equity ownership of the 9000 listed companies in which it invests. The fund emphasises voting at shareholder meetings, engagement and exclusion; it prioritises climate change, water and children’s rights. For transparency, every investment the fund makes is detailed online.
The review will examine the broader responsible investment landscape and what that could look like in years to come.
“The Ministry of Finance conducts broad reviews of Norges Bank’s management of the GPFG at the start of each parliamentary period,” a ministry spokesperson said. “The current review is in line with this practice. The review and the ministry’s assessments, including the tracking error limit, will be presented in a white paper to Parliament in the spring of 2018.”
Because the review is for the ministry, its authors have a chance to persuade NBIM’s lord and master to expand the giant fund’s strategy. The strategic tension between the ministry and NBIM is well known, since the ministry mandates the limits on NBIM’s investment strategy.
GPFG versus its peers
The study will compare ESG progress at NBIM to that of all asset owners, not just sovereign funds. Leaders that could inspire real change at GPFG include Sweden’s AP funds, which are working towards decarbonising their entire portfolios, and Dutch pension fund managers PGGM and APG Asset Management, which are working to align their investments with the sustainable development goals.
Taiwan’s $124 billion Bureau of Labor Funds, the supervisory body for the country’s labour pension funds, could also be influential. It has just awarded its first-ever foreign ESG mandate, a passive measure worth $2.4 billion.
GPFG has gone further with ESG principles than some of its sovereign wealth fund peers. For example, the Kuwait Investment Authority and Qatar Investment Authority are not galvanised into action by an ESG-minded public and face the same conflict as Norway in terms of needing to balance a hydrocarbon economy with an environmental agenda. However, GPFG has done less than leaders such as New Zealand Super, which is using its current chairmanship of the International Forum of Sovereign Wealth Funds (IFSWF) to push sustainability and has just moved its entire NZ$14 billion ($10.1 billion) global passive equities portfolio to low carbon.
Tracking error under scrutiny
One of the biggest restraints on ESG integration at GPFG is a tight 125 basis point, or 1.25 percentage point, tracking error. Returns are measured against a benchmark from the Ministry of Finance, which serves as a general limit for market and currency risk in the management of the fund. The benchmark comprises an equity index based on FTSE Group’s Global All Cap stock index and a bond index based on various indices from Bloomberg Barclays Indices.
ESG proponents argue that investors need to make sizeable bets, rather than just tweak an underlying index; a small nudge on a benchmark weighting doesn’t show much conviction. Also, for GPFG, entire asset classes are still off limits, making good ESG ideas around asset allocation and fund design difficult to realise. NBIM is allowed to invest the fund in unlisted companies that intend to seek a listing but, unlike peers such as Singapore’s GIC and the Abu Dhabi Investment Authority, GPFG has never been allowed to venture into private equity.
“In 2011, the ministry considered unlisted equity investments in the GPFG in the white paper to Parliament,” the ministry spokesperson said. “Although it decided not to open up for such investments, it did pledge to revisit the topic based on the experience with unlisted real estate and possible developments in unlisted markets and new research. The ministry has announced that it aims to present a new assessment of investments in unlisted equity in the white paper to Parliament in the spring of 2018. The assessment will be based on expected risk and return, and whether Norges Bank can be expected to obtain comparative advantages within such investments.”
The Ministry of Finance only gave a green light for the fund to invest in real estate in 2010. Three years later, it broadened this to include Asia and the US.