Tobacco, Weapons Exclusions Reduce Norway Fund’s Returns

Fund manager reports that some ‘ethical exclusions’ have lowered the fund’s performance.

Norges Bank Investment Management, which manages Norway’s $1.1 trillion Government Pension Fund Global, said that the exclusion of tobacco companies and certain weapons manufacturers have reduced the fund’s returns, in a recent report on the fund’s risk and return.

Norway’s Ministry of Finance first issued guidelines for the observation and exclusion of companies from the fund in 2004, and appointed a council on ethics to research and evaluate companies, and to make recommendations on investment exclusions. The guidelines set two types of criteria: one relates to specific product types and excludes companies that produce tobacco or weapons that “violate fundamental humanitarian principles.”

The other set of criteria excludes companies where it is deemed there is an unacceptable risk of conduct that contribute to “serious or systematic human rights violations, serious violations of the rights of individuals in situations of war or conflict, severe environmental damage, gross corruption, or other serious violations of fundamental ethical norms.”

Norges Bank said the so-called “product-based exclusions” have reduced the fund’s cumulative return on the equity index by around 2.4 percentage points, or 0.10 of a percentage point annually. Meanwhile, the conduct-based exclusions have increased the cumulative return on the equity index by around 0.9 of a percentage point, or 0.04 of a percentage point annually.

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“Over the last 12 years, the equity benchmark index has returned 1.6 percentage points less than an index which is unadjusted at constituent level,” said the report, “or 0.06 percentage point less on an annualized basis.”

The report also said that two new criteria were introduced last month. The corporate conduct criteria were broadened to cover companies that are responsible for acts or omissions that on an aggregated company level lead to unacceptable greenhouse gas emissions. The second criterion states that mining companies and power producers that derive 30% or more of their revenue from thermal coal, or base 30% or more of their operations on thermal coal, may now be excluded.

Under its “responsible investing” initiative, the fund aims to identify long-term investment opportunities, and reduce exposure to unacceptable risk.

“We believe there are opportunities for investing in companies and technologies that enable more environmentally friendly economic activity,” said the fund in its 2017 responsible investing report. “At the same time, there are companies where we choose not to be an owner, based on long-term sustainability or ethical assessments.”

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