Norway wants its $1.3 trillion wealth fund to invest in fewer companies

EMs are often characterised by weaker institutions, says Norway

Norway’s $1.3 trillion wealth fund may be forced to exclude a number of stocks as the government seeks to adjust the portfolio to impose the same ethical and environmental standards across its investments.
 
The world’s biggest sovereign investment vehicle should follow a revamped set of guidelines that could result in a 25-30 per cent reduction in the number of companies it holds, Finance Minister Jan Tore Sanner said in a speech on Friday. That includes not adding any more emerging markets to the index it tracks.
 
Emerging markets are “a complex group” that are “often characterised by weaker institutions, less openness and weaker protection of the interests of minority shareholders,” Sanner said.
 
The proposal from Oslo’s finance ministry would affect sovereign debt and corporate credit sold by issuers in a wide range of countries, including South Korea, Mexico, Russia, Thailand and Malaysia, Financial Times reported.
 
Its emerging market debt still accounts for 8.2 per cent, or roughly NKr208bn ($24bn), of the NKr2.5tn basket of bonds.
 
While EM debt will be removed from the benchmark, active managers will still be able to allocate funds to EM assets, with a 5 per cent cap, under the proposal, according to Financial Times.

 
The proposal, which still needs to be approved by parliament, marks the latest step in the fund’s shift toward an increasingly sustainable portfolio. In a strategy update earlier this week, the fund said it intends to become a global leader in sustainable investing.
 
In an accompanying white paper also published on Friday, Norway’s finance ministry said the combined market value of the reduction in stocks will be small, even though the number of companies is significant.
 
The benchmark that Norway’s wealth fund uses, now built on the FTSE Global All Cap index, needs to be adjusted to ensure the investor doesn’t end up holding stocks that don’t live up to its criteria, according to the white paper.
 
The proposal is based on guidance from a government-appointed ethics commission, which has previously flagged concerns about the benchmark. Last year, the commission pointed out that FTSE doesn’t consider certain ethical challenges, such as human rights, when classifying countries. It also highlighted increased market and political risks in emerging economies.
 
The finance ministry has already decided that companies based in Saudi Arabia and Romania, which are included in FTSE, shouldn’t be part of the fund’s benchmark, according to the white paper.
 
The fund held stocks in 24 Saudi companies worth 1.6 billion crowns ($188.1 million) as of the end of last year, according to fund data. The fund did not take part in the IPO of Saudi Aramco. The financial impact will be negligible, said a banker in the Gulf who declined to be named due to the sensitivity of the matter. The fund's management, Norges Bank Investment Management, can still invest in Saudi Arabia if it so decides.
 
with inputs from Financial Times