Mercer lists priorities for Norway’s GPFG

A report finding Norway’s $582.7-billion sovereign wealth fund could face significant losses in a range of climate-change scenarios is unlikely to result in changes to the fund’s investment strategy, Norway’s state secretary Hilde Singsaas says.

Norway’s Ministry of Finance released the report into the Government Pension Fund Global’s (GPFG) that it commissioned from Mercer and which recommends the fund make it a priority to increase allocations to low-carbon intensive infrastructure, environmentally friendly real estate and green-investment opportunities in private equity.

Currently, the fund has no allocation to infrastructure, private equity, timberland agricultural land or other alternatives.

Under its current strict investment mandate, GPFG is limited to financial instruments (mainly listed equity) fixed-income real estate and cash.

Singsaas, who heads the Ministry of Finance, which is responsible for management oversight of the fund, believes GPFG is diversified enough to deal with a range of risks, including climate change.

“The fund’s investments are spread across asset classes and sectors all over the world. This reduces its vulnerability to different types of risk, including climate change,” Singsaas says in a written response to Top1000funds.com questions.

“Mercer analyses the potential effects of climate change on returns and risk in the GPFG. Major uncertainty means that it is not possible, based on Mercer’s calculations, to draw concrete conclusions about the consequences for the fund’s future returns. Nevertheless, the analyses are a useful contribution to efforts to improve the understanding of how climate change may affect the fund’s risk and return.”

The fund has an investment mandate that came into effect on January 1 and Singsaas says there is currently no move to revisit the mandate to provide for the types of climate hedges recommended in the report.

This is despite Mercer’s modelling showing that under the two most likely scenarios – delayed action and regionally divergent approaches to tackling climate change – the portfolio would experience cumulative losses of between 8 per cent and 1 to 2 per cent, respectively.

Singsaas says that the uncertainty around climate change and potential risks caused by it mean that the fund should not give too much weight to quantitative analyses on the effect of climate change.

She notes that the fund already manages climate risk as a priority area within active ownership, which is noted in the report.

Water risk is one of the fund’s key focus areas.

In addition, Singsaas points to other long-term risks that could also have substantive effects on capital markets and GPFG’s portfolio.

“The report also emphasises that the analysis is limited to potential isolated (sic) effects of climate change. Other long- term trends, such as demographics and the emergence of new economies and markets, may have other effects on risk and return in the capital markets,” she says.

The report forms part of the ongoing efforts of the ministry to support research into risk factors that may affect long-term investors.

“There is obviously a need for further research on the impact of structural, environmental and societal trends on long-term asset returns. Research is one of the main elements of the ministry’s responsible investment strategy,” she says.

“As a large owner and international investor, the ministry can influence the research agenda on ESG-issues. Participation in research projects will therefore continue to be a priority for the ministry. “

To read the Mercer report into Norway’s sovereign wealth fund’s exposure to climate risk click here.