Strengthening climate risk efforts in the Government Pension Fund Global

The Government’s proposals:

• The responsible investment efforts are to be based on a long-term goal that the companies the Fund is invested in align their activities in a way consistent with global net zero emissions in accordance with the Paris Agreement
• Norges Bank shall stipulate principles for the management and measurement of climate risk
• Stress testing of the portfolio, including a scenario in accordance with global warming limited to 1.5 degrees
• Reporting in accordance with recognised standards and leading frameworks
• The responsible investment efforts to be reviewed on a regular basis

“The Government wants to make the GPFG world leading in responsible investment and the management of climate and nature risks. There is, at the same time, a broad political consensus that the Fund has a financial objective and is not a climate policy tool“, says Minister of Finance Trygve Slagsvold Vedum (Centre Party).

Climate change gives rise to financial risk and investment opportunities

Climate change affects the global economy and financial markets. Company earnings will be influenced by climate policy, technological development, changing stakeholder preferences and physical implications of climate change. Uncertainty with regard to how companies and the global economy will be affected gives rise to financial risk, which needs to be managed by investors.

A comprehensive and systematic approach

Climate risk assessments have for a number of years formed an integral part of risk management, investment decisions and active ownership for the GPFG. Climate risk is nonetheless only one of  many risk factors to which the Fund is exposed. Climate risk should therefore continue to be addressed in the context of overall risk management within the general objective of the Fund; to attain the highest possible return given an acceptable level of risk.

The investment strategy should remain unchanged

There is no reason to change the composition of the benchmark index in response to climate risk. This is highlighted both by the expert group and by Norges Bank. A broad, global market index is a suitable basis for managing climate risk and ensuring that the Fund will be exposed to the investment opportunities that arise.

Basing the responsible investment efforts on a long-term goal

As a long-term global investor, the Fund has a financial interest in companies decarbonising and the climate transition taking place in an orderly manner. Responsible investment and active ownership will be of key importance in climate risk management.

The responsible investment efforts shall be based on a long-term goal that the companies the Fund is invested in align their activities in a way consistent with global net zero emissions in accordance with the Paris Agreement. Such a goal was also the recommendation of the expert group, and was supported by Norges Bank. This does not mean that the Fund shall be managed with a view to realising any other objective than the highest possible return, given an acceptable level of risk. The key to reducing climate risk is an effective and predictable climate policy. This falls outside the responsibilities of the GPFG as a financial investor.

Comprehensive climate reporting in line with leading frameworks

Norges Bank must report on climate risk in conformity with recognised principles and standards. Such reporting shall be in accordance with leading frameworks in this field and be further developed  to reflect new knowledge and practises over time.

Since a more ambitious climate risk management and reporting arrangement is now being established for the Fund as a whole, the Ministry of Finance is proposing to remove the management mandate requirement for Norges Bank to establish specific environmental investment mandates. It is the requirement that it proposed removed. This does not mean that the Fund’s investments in climate- and environmentally-related activities must be reduced. The GPFG may still be invested in unlisted renewable energy infrastructure, within the current cap of 2 percent of the market value of the Fund. This implies, in somewhat simplified terms, that the cap on such investments is increased from NOK 120 billion to about NOK 240 billion, based on the market value of the Fund at the beginning of this year.

Read more:

• Responsible long-term management of the Government Pension Fund
• The Government Pension Fund 2022 white paper
• Seminar on climate risk (in Norwegian only)
• Climate risk and the Government Pension Fund Global - report from an expert group