FinMin Appointed Expert Group Advises on Climate Risk Regarding Norway SWF

Posted on 08/21/2021

A report from an expert group appointed by Norway’s Ministry of Finance gave some guidance on climate risk regarding Norway Government Pension Fund Global (GPFG). The expert group have proposed that climate risk be incorporated separately in the bank’s principles for responsible investment management.

Some parts of the report reads, “If active ownership eventually turns out not to be successful, and the assessment is that the company’s prospects are characterised by weak profitability, poor investment opportunities and little ability to transition, the bank can divest from the company. If there is an unacceptable risk that the company is associated with serious environmental damage or leads to greenhouse gas emissions to an unacceptable degree, observation or exclusion is relevant.

Better reporting on climate risk from the companies will make financial markets more well-functioning, in that information about this risk will be more readily available and consequently can form the basis for more correct pricing. With more robust business models and more correct pricing of risk, the transition risk in the financial system will gradually be reduced. Emission developments in line with the Paris Agreement should serve as the reference point for the fund’s ownership activities and for the dialogue with the companies in which the fund has invested.

Norges Bank should demand that the companies they have invested in stress test their business models against various climate policy scenarios, including a scenario in which the goals of the Paris Agreement are achieved. In this way, it will be easier to identify deviations from decarbonisation pathways consistent with the climate targets, and to quantify possible economic consequences of this. This in turn provides a better basis for both targeted active ownership and more correct pricing of companies in the market. We also propose that Norges Bank be requested to regularly stress test the portfolio against various climate policy pathways. This will provide a more complete picture of this risk, and be consistent with the reporting requirements the fund itself sets for the companies in which it invests. For the Ministry of Finance as owner of the fund, this reporting will also contribute to a better understanding of risk related to the national wealth and public finances.”

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