OSLO (Reuters) - Norway’s trillion-dollar sovereign wealth fund is proposing to drop oil and gas companies from its benchmark index, which would mean cutting its investments in those companies, the deputy central bank chief supervising the fund told Reuters, sending energy stocks lower.
If adopted by parliament, the fund would over time divest billions of dollars from oil and gas stocks, which now represent 6 percent - or around $37 billion - of the fund’s benchmark equity index.
The aim is to make the Norwegian government’s wealth less vulnerable to a permanent drop in oil prices, at a time when the fund is increasing its exposure to equities to 70 percent of the fund’s value from 60 percent earlier.
Europe's index of oil and gas shares .SXEP hit its lowest level since mid-October on the news and was trading down 0.39 percent at 16.41 GMT .
The proposal came in a letter sent by the central bank to the finance ministry and signed by its governor, Oeystein Olsen, and the chief executive of the fund, Yngve Slyngstad, Deputy Central Bank Governor Egil Matsen said in an interview.
“Our advice is to simply remove the oil and gas sector, as it is defined in the FTSE reference index, from the fund’s reference index,” Matsen said.
“That would mean all companies that the FTSE has classified with the sector, should be removed from our reference index.”
The fund is the world’s largest sovereign wealth fund. It invests Norway’s revenues from oil and gas production for future generations in stocks, bonds and real estate abroad.
(For a graphic of the largest sovereign wealth funds in the world click tmsnrt.rs/2tskfub )
It is among the largest investors in a wide range of oil companies, holding stakes at the end of 2016 of 2.3 percent in Royal Dutch Shell RDSa.L, 1.7 percent of BP BP.L, 0.9 percent of Chevron CVX.N and 0.8 percent of Exxon Mobil XOM.N.
“The risk for the oil sector is how many investment funds will downsize their exposure to extractive industries,” said Jason Kenney, oil analyst at bank Santander.
At the end of the third quarter, Royal Dutch Shell was the fund's third-biggest equity investment overall, worth around $5.34 billion and exceeded only by its ownership in Apple APPL.O and Nestle NESN.S.
“This news will be scrutinized very closely by funds around the world who are already looking closely at the climate risks in their portfolios and which sectors and companies will fare best in the low-carbon transition,” said Stephanie Pfeifer, head of the Institutional Investors Group of Climate Change, which groups 140 investors that work on global warming and represent assets of more than 20 trillion euros.
“Investors will look even more carefully at which companies are aligning their business strategies to the transition to a low-carbon energy system and which ones are not. Investors then have a range of options for managing the risks they perceive,” she told Reuters.
Others were less sanguine.
“My guess is that after the initial market adjustment – which would have been difficult to anticipate – the move may not damage the sector’s long-term performance significantly,” Kevin Gardiner, global investment strategist at Rothschild Wealth Management, told Reuters.
BP and Shell declined to comment.
PROTECTING NORWAY’S WEALTH
The aim of the proposal is to make Norway’s wealth less vulnerable to a permanent drop in oil prices, especially at a time when the fund is increasing the proportion of its portfolio it invests in equities to 70 percent from 60 percent previously.
“That would mean buying more stocks in the oil and gas sector,” said Matsen.
The fund has grown so large that even though the Norwegian state is taking less than 3 percent of the fund’s value every year for its fiscal budget in recent years, oil spending now accounts for one in five crowns spent by the state.
In addition to its holdings via the fund, Norway has its own exposure to oil and gas through untapped offshore hydrocarbon reserves, as well as its 67 percent stake in the national oil company, Statoil STL.OL.
“Oil price exposure of the government’s wealth position can be reduced by not having the fund invested in oil and gas stocks,” said Matsen.
The fund could still invest in the sector if other parts of the fund’s mandate are fulfilled by having some investments in some of the companies, he said.
“But clearly the direction is that ... if the ministry and the politicians think it is good advice and they say yes to it, clearly the investments in the oil and gas sector will decrease over time,” he added.
Initial reactions from Norwegian politicians were positive, with two key centrist opposition parties backing the proposal. Green campaigners also welcomed the news.
“Bravo Norway, and let’s hope it gets through because the future of fossil fuel investment is looking shaky indeed,” said Rachel Kennerley, climate campaigner at Friends of the Earth.
“This is astonishing — as astonishing as the moment when the Rockefellers divested the world’s oldest oil fortune,” said Bill McKibben, founder of the 350.org campaign group.
“This is the biggest pile of money on the planet, most of it derived from oil — but that hasn’t blinded its owners to the realities of the world we now inhabit.”
COAL FIRST, OIL AND GAS NEXT
Since 2015, the fund no longer invests in companies that derive more than 30 percent of their revenues or activities from coal - one of an early group of investors to do so, which has made the coal sector less attractive to some investors.
Oil and gas stocks would be replaced by investments in other companies, Matsen said. “The straight answer is that all other sectors would be weighted up in proportion ... (under) our current mandate,” he said.
At the end of 2016, the fund’s equity investments were split between investments in the financial sector (23.3 percent), industrial companies (14.1 percent), consumer goods (13.7 percent), consumer services (10.3 percent), healthcare (10.2 percent), technology (9,5 percent), oil and gas (6.4 percent), basic materials (5.6 percent), telecoms (3.2 percent) and utilities (3.1 percent).
The proposal has to be reviewed by the Finance Ministry, which in turn needs to decide whether to propose it to parliament. The Finance Ministry said it would conclude with its own view in the autumn of 2018.
If it backs the central bank’s proposal, Parliament could vote on it in June 2019 at the earliest.
“It’s great to have that luxury, isn’t it?” Peter Fitzgerald, Aviva Investors head of multi-assets, told Reuters. “You make all your money from one asset class and then you sell your holdings.”
($1 = 8.2016 Norwegian crowns)
Additional reporting by Terje Solsvik in Oslo, Nina Chestney and Alister Doyle in Bonn, Helen Reid and Ron Bousso in London, Stephen Jewkes in Milan, editing by Larry King
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