Oil is frightening investors. The Norwegian sovereign wealth fund that built its fortunes on fossil fuels has decided to zero out all its investments in the oil and gas sector, deeming them too economically risky.
Fossil fuels are frightening the world's largest sovereign wealth fund. The Norwegian sovereign wealth fund Government Pension Fund Global (Gpfg), having already abandoned coal, has now announced that it will sell its stakes in oil and gas sector companies to reduce the risk posed by a permanent decline in oil and gas prices. This is a purely economic decision, not one based on environmental or ethical principles.
The Norwegian sovereign wealth fund is zeroing out its investments in the fossil fuels on which it has until now built its fortunes — so much so that it was formerly known as the Petroleum Fund of Norway. Today the fund manages one trillion dollars, controls 1.5 per cent of global shares and invests in more than 9,000 listed groups. At present, approximately 6 per cent of the fund's assets are invested in fossil fuel equities, with a value of around 30 billion euros. In particular, the fund holds 1.7 per cent of Eni, 2.3 per cent of Shell, 1.6 per cent of BP, 0.9 per cent of Chevron and 0.8 per cent of Exxon.
The decision, which will need to be approved by the Oslo government and parliament, was taken following consultations with the Norwegian central bank (Norges Bank), which advised the fund to reduce its exposure to the oil and gas sector in order to reduce Norway's exposure to the volatility of oil prices — the country's economy already being heavily dependent on hydrocarbons. The motivations behind the fund's decision are purely financial, based on an analysis of the state's overall exposure to the sector. "The equities," Norges Bank deputy governor Egil Matsen told Reuters, "should simply be sold and replaced with investments in companies from other sectors."
The reasons that led Norges Bank to advise the fund to exit fossil fuel investments were set out in a letter sent to the Norwegian finance minister.
"Our analyses," the bank writes, "have shown that oil and gas equities are significantly more exposed than those of other sectors to changes in oil prices: during periods of stable prices, returns from sector equities correlate with the stock market as a whole, but during periods of substantial and prolonged fluctuations in oil prices there is a considerable difference in returns."
The objective of the path undertaken, in the central bank's view, is to "reduce the country's vulnerability to a permanent fall in oil and gas prices, which could be reduced if the sovereign wealth fund were to exit such investments."
It is clear that it is not environmental concerns or ethical principles that change the world. The economic lever has always been the engine of change, but in this case it is more than welcome. Oil is now frightening even the major investors, an ever-increasing number of whom have decided to distance themselves from fossil fuels.
Pension funds such as the California State Teachers Retirement System, universities and insurance companies such as the French firm Axa, as well as the Rockefeller Family Fund, have reduced their investments in the sector, but the Norwegian fund is the first to take a radical decision for total divestment from the oil and gas sector.