Central Bank of Norway advises the Sovereign Wealth Fund to sell stocks in oil and gas

In an effort to reduce the Norwegian Sovereign Wealth Fund’s vulnerability to future fall in the oil price, the Central Bank of Norway recently advised the fund to sell off assets in oil and gas. The Norwegian government will thoroughly consider the advice before reaching a decision.

The Norwegian state has significant involvement in the petroleum activities on the Norwegian continental shelf. This, in turn, yields substantial oil and gas revenues which accrue in the Sovereign Wealth Fund (SWF). The petroleum revenues may benefit both current and future generations by government spending the real return on accrued fund assets.

The advice from Central Bank of Norway (Norges Bank) is based on assessments of the exposure of the Norwegian state’s wealth to oil price risk. The Ministry addressed the sensitivity of Norway’s national wealth to a permanent fall in petroleum revenues in a White Paper to Parliament in early 2017 on a Long-term Perspectives. A broad set of policy instruments were considered in this regard. In particular, the Ministry pointed to a well-qualified and competent workforce, a productive private sector and an economic policy which facilitates a stable development in the face of falling petroleum revenues. The advice from Norges Bank differs from that of the White Paper to Parliament. The Bank’s perspective is also limited to one policy instrument – namely to remove the oil and gas sector from the fund’s equity benchmark index.

For many years, environmental organizations, certain political parties and financial experts have called for the SWF to shed its investments in oil and gas. Over 2/3 of all fossil energy reserves cannot be utilized if the world is going to keep global warming under 2 degrees as agreed in the Paris Accords. In this scenario, investors holding fossil energy assets run the risk of losing their investment. In 2015, the Norwegian Parliament decided to instruct the SWF to pull out of coal companies. This decision was considered to be a major victory for world-spanning divestment campaigns which urge stakeholders to redirect investment from fossil energy to renewables. Norwegian environmental organizations are now claiming the win and describe the Central Bank’s decision as an overdue expression of the increasing financial risk associated with fossil energy.

On the other hand, the Bank states that its advice does not reflect any particular view of future movements in oil and gas prices or the profitability or sustainability of the oil and gas sector.

Going forward, the Ministry of Finance will obtain further information and notify Parliament about the ongoing work in the Report on the Management of the Government Pension Fund, to be submitted in the spring of 2018. The Government aims to conclude on this matter in the fall of 2018.

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