A commission appointed by the Norway government has recommended against the country’s $1.04 trillion Government Pension Fund Global (GPFG) divesting petroleum stocks, saying it wouldn’t do much to protect the fund against sell-off in oil, while at the same time complicating its investment strategy.
“Divestment of the energy stocks in the Government Pension Fund Global (GPFG) is not an effective insurance against a permanent decline in oil prices,” commission chair Øystein Thøgersen said in a release. “The energy stocks only contribute marginally to Norway’s oil price risk.”
Last November, Norway’s central bank, Norges Bank, which manages the fund, recommended that oil stocks be removed from the fund’s benchmark index. It said the vulnerability of the country’s assets to a permanent reduction in oil and gas prices would be reduced if the fund were not invested in energy stocks.
At the time, the bank said that its conclusion was based solely on financial arguments, and did not reflect potential future movements in the oil price, or the profitability or sustainability of the sector.
The commission was asked to assess whether the GPFG should be invested in energy stocks, such as stocks included in the energy sector as classified by the FTSE Russell index. It said that after taking several factors into consideration, it recommends the GFPG should remain invested in energy stocks.
Energy stocks only made up approximately 4% of the total value of the country’s sovereign wealth fund, or approximately NOK315 billion ($37.8 billion) as of the end of 2017.
The commission said it agreed with Norges Bank that the value of energy stocks is linked to the oil price, especially in the short term, and added that in isolation, this would suggest a reduction of the fund’s investments in energy stocks is prudent. However, it pointed out that it had been asked to take multiple considerations into account—not just financial ones—including the need for, and the benefit of, an insurance against a permanent decline in the value of Norway’s oil and gas resources.
“In a scenario with sustained lower oil prices, the loss in the government’s net cash flow from petroleum activities will be substantial,” said the commission. “However, only around 1% of such a loss will be covered if the GPFG is not invested in energy stocks.”
The commission said a sell-off of energy stocks would also “challenge the current investment strategy of the fund,” with broad diversification of the investments and a high threshold for exclusion.
“This investment strategy is simple, well-founded and has served the fund well,” said the commission. “If energy stocks are excluded from the fund, the composition of the investments will differ from market weights, and the fund will be expected to either achieve lower return or higher risk.”
It added that there is not much of a need to insure Norway’s wealth against a permanent reduction in the oil prices because the country has a high capacity to take on oil price risk, in part because it has a fiscal policy framework in which current oil revenues are placed in the GPFG rather than being spent.