Can Norway’s $1.3 Trillion Oil Fund Actually Give Up Oil?

Illustration by II (Fredrik Solstad/Bloomberg)

Illustration by II

(Fredrik Solstad/Bloomberg)

The battle over fossil fuels rages on at the world’s largest allocator.

The pressure is on Nicolai Tangen.

As chief executive of Norges Bank Investment Management — the arm of Norway’s central bank that runs the country’s massive oil fund and the world’s largest sovereign-wealth fund — he’s regularly called to answer questions about where the nation’s wealth is invested. Since Norway got a progressive new prime minister in October, the focus has been on one key question: Will the fund, which owns shares in 9,000 companies, finally divest from oil stocks?

“That is something you should ask the Norwegian politicians,” Tangen told the BBC in November when asked if vast reserves of oil and gas should be left in the ground. “That’s not something I decide or have a view on.” He was appearing on a show called HARDtalk that’s known for not letting guests off the hook — and this interview was no exception.

“You don’t have a view on it?!” the presenter said. “How come?”

“My job is quite straightforward,” Tangen said. “I’m going to look after the capital, safeguard it, and try to increase it.”

He has delivered. Since Tangen was cleared to take over the oil fund in August 2020, its value has soared to 11.4 trillion Norwegian kroner ($1.3 trillion). In January 2022, Norges Bank Investment Management said that last year the fund achieved its second-highest return, 1.6 trillion kroner, an increase of 14.5 percent, thanks to the strong performance of the U.S. stock market.

The good performance looks set to continue as an energy crisis grips Europe. Profits made from oil and gas in Norway are taxed at 78 percent, with the revenue going straight into the oil fund. Already, Norwegian political forces are arguing over the issue: As right-wing parties call for more oil-exploration licenses to meet new demand, left-wing politicians say it wouldn’t make a difference as it would take too long for any new oil fields to start producing oil. Either way, oil and gas make up about 40 percent of Norway’s total exports — meaning an oil-price boom is big business. At the same time, the Norwegian government has instructed the fund to freeze all investments in Russia and to come up with a plan to fully divest from the Russian market, in support of broad international sanctions.

In the middle of all this, Tangen’s insistence that he doesn’t get involved in politics is rapidly sounding outdated.

Weeks after his BBC interview, the Norwegian government put out a statement that categorically favored a net-zero target for the oil fund, with an expert group recommending that Norges Bank Investment Management be given an overall long-term goal of net-zero emissions from the companies in which the fund is invested. “Norges Bank supports such a goal,” the statement read. That same day, the deputy governor of Norges Bank, Øystein Børsum, seemed to refute Tangen’s idea that climate risk is irrelevant to long-term financial management. “For a large, long-term, global fund, there will be nowhere to hide,” he said. “Climate risk is a long-term and important risk that the fund must deal with.” The decision to go net zero could come this month, with the publication of the ministry of finance and Norges Bank Investment Management’s annual white paper on the management of the fund. This has historically been when major decisions about the direction of the fund are proposed. On March 3, Norges Bank Investment Management confirmed that its primary tool to promote responsible investment is to influence companies through dialogue and voting. “When dialogue is not successful, risk-based divestment might be appropriate,” it said.

It’s hard to understate how big a shift this is. Ever since the first transfers were made in 1996, Norway has made a careful effort to keep the fund at arm’s length from political aims. It was conceived of as a national savings account to hedge against fluctuations in the price of oil. But from its inception, people feared it could be manipulated for political ends. They saw successive oligarchies in the Middle East grow rich on oil at the expense of their people. Experts warned Norway was being naive to expect that a democratic society could manage such a big cash flow in a sustainable way.

So Norway made a promise: The oil fund would be a purely financial prospect. Politics and political ideas would not enter into its decision-making. Until now.

“A net-zero goal with a progressive method akin to Paris alignment would be a big step for the fund in a direction that may cause significant change for the climate,” says Jonas Ådnøy Holmqvist from Future in Our Hands (Framtiden I våre hender), Norway’s largest environmental organization. Future in Our Hands has spent years dismantling the argument that the climate crisis should be addressed through the “normal means” of climate agreements and other policies, rather than through the financial interests of the oil fund. Under the former conservative government, it was still the party line that the fund should not be a political tool, but by the Norwegian elections in September, it had quietly shifted to a more neutral strategy, conceding “it is natural there should be some debate over this topic.”

Sovereign-wealth funds have been slow to adopt net zero, but the dominoes are slowly falling. In January, a group of the world’s largest asset owners, managing some $10.4 trillion, said they would at least halve carbon emissions from their portfolio by 2030. The 69 investors calling themselves the Net-Zero Asset Owner Alliance include the California Public Employees’ Retirement System, University of Toronto Asset Management Corp., and Canadian pension investor Caisse de dépôt et placement du Québec (CDPQ). They said they would cut emissions by between 49 percent and 65 percent over the next eight years, from a 2020 baseline, and committed to engaging with company boards to help them align their businesses to the transition to a low-carbon economy.

But asset managers committing to net zero face multiple hurdles, including their own lack of confidence in their ability to meet their goals. “They have to serve clients who may not be aligned with the net-zero goals, and not all asset managers [and allocators] may be at the same point in their net-zero commitments,” Jackie Cook, director of investment stewardship research at Morningstar, told Institutional Investor in November.

There is also some evidence to suggest that net-zero commitments may — intentionally or not — lead asset managers to delay taking action. Morningstar surveyed 12 asset managers and found that establishing interim targets — for example, a 50 percent reduction in global emissions by 2030 — is the greatest challenge. Cook said that’s because of a lack of standardized data and tools in the industry. “Asset managers may still feel uncomfortable setting goals,” she said.

There is another option: divest entirely. In December, Nest, the £20 billion ($26.2 billion) U.K. government-backed workplace pension scheme, dumped holdings in Exxon Mobil Corp. and four other energy companies after criticizing their progress on managing climate risks. Announcing the decision to sell investments worth £40 million in Exxon, Imperial Oil, Korea Electric Power Corp. (Kepco), Marathon Oil Corp., and Hong Kong-based electric utility company Power Assets, Katharina Lindmeier, a senior responsible investment manager at Nest, said: “These five companies have not done enough to convince us that we should remain shareholders. They will not return to our portfolio until they demonstrate clear progress in preparing for a low-carbon economy.”

Nest followed ABP, a Dutch pension fund for educational workers and civil servants, which said in October it would sell all of its holdings in fossil-fuel companies, then worth more than €15 billion ($16.6 billion). ABP, which is valued at more than €500 billion, said that the opportunities to push for significant acceleration of the energy transition at the majority of the oil, gas, and coal companies in which it is invested were “insufficient.” Instead, the fund said it would focus its efforts on large users of fossil fuels, including electricity companies, the car industry, and aviation. In North America, these decisions were precipitated by the New York State Common Retirement Fund, the third-largest pension fund in the U.S., which pledged in 2020 to dump stocks in energy companies that do not have plans to cut emissions and transition away from fossil fuels. Plus, CDPQ, Canada’s second-largest pension fund, said it would fully divest oil producers from its C$400 billion ($320.2 billion) portfolio by the end of 2022.

When II took a deep look at the campaign to get Norway’s oil fund to drop fossil-fuel stocks in 2018, net zero wasn’t even on the agenda. Then, the talk was all about divesting. In November 2017, Norway’s central bank sent global oil stocks plummeting after it told the government it should dump shares in oil and gas companies — not for environmental reasons, but to avoid the fund’s value being hit by a permanent fall in the oil price. Nonetheless, environmentalists got excited. One described the decision as a “shot heard around the world.” A Greenpeace Nordic executive said other funds would “move like lemmings,” foreshadowing further divestment announcements from institutional investors all around the globe.

But it never happened. A year later, the government revised its decision, saying the fund should stay invested. Not long afterward, in 2019, an outspoken left-wing politician started claiming that the management of the oil fund should not be based purely on the financial principles of safeguarding and growing capital, but that it should be guided by political ideas. “We have to get used to saying that the oil fund is a political tool,” Jonas Gahr Støre said at a conference that year. At that time, he was the leader of the Labor Party, causing a ruckus on a panel that was supposed to be about how Norway could contribute to the phase-out of coal in emerging economies, but ended with a heated debate about the oil fund.

“I think this is very dangerous,” then-Prime Minister Erna Solberg hit back. “I think what Jonas says is incredibly dangerous for Norway as a nation.”

Støre chastised the sitting prime minister for her cautious attitude, and pointed to 2006, when the oil fund banned Walmart for human-rights violations — a decision U.S. interests had decried as politically motivated. The decision itself wasn’t part of any foreign-policy agenda, Støre said, but it was nonetheless a political act to say that companies should not break international agreements — just as it has to be political to say that the fund should divest from tobacco and cluster munitions.

Solberg was not reassured. “We are going to shoot ourselves in the foot,” she said. Norway was already facing pressure from other nations to invest more of its sovereign wealth abroad. But Støre would not be deterred. It was too late for that kind of talk, he said: The climate challenge is now. “You can choose to shoot yourself in the foot or to shoot yourself in the head.”

Since September, Støre is no longer a fringe concern in Norwegian politics, but the elected leader of the country. Rather than soften his tone, he’s doubling down. The fund is “the property of the Norwegian people, and it is up to the Norwegian government and parliament to set the framework. That makes it political, in my sense,” Støre said in his first newspaper interview as prime minister in October.

Most pension funds — in Europe, at least — are sitting on their hands. Fewer than half of the retirement schemes analyzed by Mercer, a consultant, across 12 countries in 2021 said they were considering investment risks posed by climate change. Just 8 percent had pledged to reach net-zero carbon emissions.

The oil fund has no such luxury. At his international debut at the 2021 United Nations Climate Change Conference (COP26) in Glasgow in October, Støre made a promise: The oil fund would contribute to the climate fight. Internationally, it was a bold statement about the world’s largest sovereign-wealth fund. But on home soil, his attitude proved nothing less than incendiary.

Pressure started ramping up last spring, when the Norwegian parliament, under the previous administration, asked the ministry of finance to research a net-zero goal for the fund. The response, in an annual white paper, was due by April 2022. But the details leaked early: A government-sanctioned expert committee led by Martin Skancke recommended that the ministry of finance implement a net-zero target in line with the Paris Agreement. When Støre won the election in September, he supported this decision.

His views are backed by an expert group that assessed climate risk and the oil fund. “There’s no such thing as nonpolitical. To some extent, every decision is political,” Karin Thorburn, a professor at NHH Norwegian School of Economics and a member of that panel, told the Financial Times in August. The panel advised that the mandate of the fund be changed to include climate risk — including a long-term goal that companies in its investment portfolio should have net-zero emissions.

Proponents argue that as an investor in oil and gas stocks, the oil fund can apply pressure on companies from the inside to clean them up. Børsum, deputy governor of the central bank, said a key recommendation from the expert group was that the bank should make long-term efforts toward net-zero emissions from the companies in which the fund is invested — a decision that the central bank also supports. “Some may interpret this as a plan to sell shares in companies with large emissions,” Børsum said. “But that is not our approach, nor is it the expert group’s proposal. Instead of selling out, we will through active ownership be a driving force for the companies to adapt. In order to influence, we must actually be owners.”

Nonetheless, the fund divested from 43 companies in 2021 that it considered “not to have sustainable business models,” including for issues where companies were “exposed to significant risks related to climate change, water management, and corruption.” That brought the total number of companies from which the oil fund has divested since 2012 to 366. Norges Bank Investment Management said earlier in 2021 that it would begin to “systematically assess the sustainability risk of companies that will enter the fund’s equity index.” Although the bank has not given specifics, it has assessed hundreds of companies since June, uncovering “risks related to inadequate management of environmental pollution and human rights . . . [that] could add financial risk to the fund in the long term.”

Also in June, the oil fund supported climate policy initiatives at two annual general meetings: Caterpillar’s and Delta Air Lines’. It called for the board of Caterpillar to “account for material sustainability risks facing the company, and the broader environmental and social consequences of its operations and products.” The call to disclose Caterpillar’s climate activity was rejected by a whisker, with 48 percent of votes cast supporting the proposal. The oil fund made the same call on Delta at its meeting on June 17, leveraging its 0.3 percent stake in the airline, worth $77.9 million at the end of 2020. The majority of shareholders voted in favor of making the airline disclose its climate lobbying efforts.

The results, though mixed, suggest there are opportunities for the fund to wield its influence at shareholder meetings. They support Tangen’s assertion to the BBC that it is “much more powerful to be an active owner and have a constructive dialogue with these companies.” Norwegian climate organizations agree. “A science-based net-zero policy, based on a credible scenario for 1.5 degrees [Celsius], would put very high demand on change for the oil majors,” says Holmqvist from Future in Our Hands. He says the oil fund is such a large investor, it could play a significant role in galvanizing investor action. But the details are important. A 2050 net-zero target is not sufficient to ensure adequate action from investors to influence real-world emissions in the scope needed, he says. Climate policies based on nudging companies to measure and report emissions have not brought about the needed pace of change over the last decade. “A 2030 emission-reduction goal is a minimum requirement to formulate a credible engagement strategy,” he says, adding that the fund should set emissions-reductions goals on a four-year or shorter horizon, with a reasonable projection toward reductions of at least 55 percent.

It sounds ambitious. But some funds, including Norway’s KLP, Germany’s Allianz, and the Netherlands’ ING, are moving forward with such targets, using tools like the Paris Agreement Capital Transition Assessment (PACTA) from the 2° Investing Initiative (2DII), as well as the Science Based Targets initiative (SBTi), to implement net-zero goals. “There is tremendous collective work done now by finance and climate analysts from a large set of financial institutions cooperating in various sector initiatives. It would be a welcome addition to this process if Norges Bank Investment Management set out a clear net-zero goal and added their analytic capacity into this work,” Holmqvist says.

Norges Bank declined to comment for this article. Those who know Tangen and have discussed with him the opportunity for the oil fund to adopt net zero say he is prepared to move the fund to such an agenda if he gets the mandate, which could come this month, when the ministry of finance and Norges Bank Investment Management publish their annual white paper on the management and direction of the fund. However, given the slow and careful progress of the oil fund on such matters, it’s unlikely that any changes will happen before a parliamentary panel on finance meets in May, when parties from across the political spectrum would be able to form a consensus around the idea. The oil fund already missed the opportunity to launch a net-zero goal for the fund at COP26.

Supporters of the net-zero agenda may be relieved that Jens Stoltenberg has retracted his candidacy for central bank governor and chairman of the board of the oil fund, in order to extend his term as the secretary general of NATO, a post he has held since 2014. Some feared Stoltenberg would slow down the process or be unwilling to exclude companies from China or the U.S. when necessary, given his role in international politics. He was due to take up the post on December 1. “I am very confident that there are matters that the ministry of finance has considered when they decided to recommend that I take over as central bank governor,” Stoltenberg told Norwegian news site E24 on February 4. “There are also decisions that are established on clear routines, clear guidelines given by the government and the ministry to the pension fund. I am confident that will be handled in a good way.” It is not yet clear who will replace Stoltenberg. By the time that person joins, the political debate may have already shifted irreversibly toward net zero.

Already, the pressure is on. In the November interview, the BBC asked Tangen: “Does it embarrass you that the total emissions of the companies in your fund far exceed the total emissions of your own country — by double? That’s embarrassing, isn’t it? Particularly for a country which tells the world it is absolutely a pioneer and at the forefront of greening its economy?”

Of course, Tangen said, when you own part of 9,000 companies, some will produce emissions. But the carbon footprint of the fund has halved since 2013. “The important thing here is that we have very clear expectations to the companies when it comes to how they should behave, and we expect that they have policies when it comes to the Paris Agreement and net-zero targets.”

Keeping companies to those targets will require more double-think. In January, the Norwegian government issued 53 licenses to explore new oil fields, ignoring a warning from the International Energy Agency that for the world to reach net zero by 2050, “no new oil and natural gas fields are needed.”

“While the world is changing at record speed from fossil to renewable, the Støre government continues to invest in oil,” Frode Pleym, head of Greenpeace Norway, said in January. As oil prices boom in the wake of Russia’s invasion of Ukraine, it will only become harder for Norway to wean itself off the black gold from which it derives its wealth.