Government Pension Fund Global Research Articles

Plausible futures for the Norwegian offshore energy sector: Business as usual, harvest or rebuild?

The global energy transition from fossil to low-carbon energy challenges the future of the Norwegian petroleum sector, a major factor in the country's economy, now facing financial climate risk and long-term declining demand, particularly for gas to the EU. What energy policies can assist transition into a low-carbon society? We explore three investment scenarios for the Norwegian offshore energy sector from 2020 to 2070: 1) Business as usual, 2) Increasing cash-flow by harvesting existing petroleum fields and cutting investments (Harvest-and-Exit), or 3) Rebuilding with green offshore energy investments. In a new economic model, we compare impacts on key macro- and sector-economic variables. We find that rebuilding by investing moderately in green offshore energy production could reverse the extra job decline that a quicker phase-out of petroleum investments would incur. The impacts on the Norwegian sovereign wealth fund - Government Pension Fund Global - and on gross domestic product (GDP) per capita are insignificant to 2050 and positive by 2070. The simulated investments and economic results can be compared with observations to constitute forward-looking indicators for energy transitioning in producer countries.

Savings natural resource funds: effectiveness of the Norwegian Government Pension Fund Global

Motivation: Many countries that are rich in natural resources struggle with the resource curse — the phenomenon of achieving worse economic development results by economies specializing in the extraction and export of natural resources. To address this problem, an explicit fiscal tool was proposed — natural resource funds. However, empirical studies on the effectiveness of resource funds conducted so far have delivered mixed and inconclusive results. Specifically, the effectiveness of savings funds, otherwise known as funds for future generations, which are a specific type of natural resource funds, is still being questioned.Aim: This study aims to assess the effectiveness of savings natural resource funds in countries which are rich in natural resources on the example of the Norwegian Government Pension Fund Global (GPFG).Results: The main contribution of this study is to demonstrate the effectiveness of GPFG as a savings fund for future generations. In order to achieve the research objective, a classification of funds was presented and the existing natural resource funds were categorized. Funds were divided into stabilization, investment and savings. The specificity of each type of fund was explained in detail. It was found that all savings funds are also investment funds, but the reverse relationship does not apply. The effectiveness of GPFG was studied considering the functions and tasks of individual fund types. The quantitative study confirmed the effectiveness of GPFG in increasing long-term investments in Norway. At the same time, the fulfillment of the stabilization function by the fund was also validated. The study confirms that the savings fund is an important economic policy measure to counteract the resource curse.

Dynamic spending and portfolio decisions with a soft social norm

We explore the implications of a preference ordering for an investor-consumer with a strong preference for keeping consumption above an exogenous social norm, but who is willing to tolerate occasional dips below it. We do this by splicing two CRRA preference orderings, one with high curvature below the norm and the other with low curvature at or above it. We find this formulation appealing for many endowment funds and sovereign wealth funds, including the Norwegian Government Pension Fund Global, which inspired our research. We derive an analytical solution, which we use to describe key properties of the policy functions for consumption and portfolio allocation. We find that annual spending should not only be significantly lower than the expected financial return, but mostly also procyclical. In particular, financial losses should, as a rule, be followed by larger than proportional spending cuts, except when some smoothing is needed to keep spending from falling too far below the social norm. Yet, at very low wealth levels, spending should be kept particularly low in order to build sufficient wealth to raise consumption above the social norm. Financial risk taking should also be modest and procyclical, so that the investor sometimes may want to “buy at the top” and “sell at the bottom.” Many of these features are shared by habit-formation models and other models with some lower bound for consumption. However, our specification is more flexible and thus more easily adaptable to actual fund management. The nonlinearity of the policy functions may present challenges regarding delegation to professional managers. However, simpler rules of thumb with constant or slowly moving equity share and consumption-wealth ratio can reach almost the same expected discounted utility. Nevertheless, the constant levels will then look very different from the implications of expected CRRA utility or Epstein–Zin preferences in that consumption is much lower.

"Business Ethics in Norway: History of Business Ethics in Norway and Guidelines of Council on Ethics for the Government Pension Fund Global "

The aim of this paper is to present business ethics as practiced in Norway. Based on an article published in 1959, a vision of business ethics history in Norway under the rise of industrialism is described. Subsequently, the role of the Council on Ethics for the Norwegian Government Pension Fund Global (GPFG) is explained and its guidelines are presented. Aiming to obtain an overview of business ethics in Norway during both industrial and modern era and understand how views have changed during the time, a comparison is conducted.

Макроэкономические шоки 2022 г. и суверенные фонды

In 2022, instead of getting back to pre-pandemic “new normal” the world entered into another period of severe economic and geopolitical turbulences. In terms of macroeconomics, the most evident and painful was the hike of hydrocarbons’ and food prices. This drove inflation rates to the levels not seen in recent 40 years. In attempts to cool down underlying inflationary pressures the monetary authorities of many countries had to stop the policies of quantitative easing (QE) and started to raise basic interest rates. In this environment the governments, businesses and families are facing massive debt problems. The main stock market indices crushed deeply and simultaneously in 2002 which meant substantial depreciation of assets. All these macroeconomic shocks seriously affected the performance of sovereign wealth funds which currently present a solid and increasingly influential group of global assets’ holders and managers. The steady growth of the value of their assets under management (AUM) was interrupted last year. According to preliminary analysis, the total losses of AUM can reach circa 1 Trillion US$. Just one fund – Norway’s Government Pension Fund Global (GPFG) – reported a depreciation of its assets by as much as 165 Billion US$ as of end‑2022. This is an amount comparable to the GDP of a mid-size country, for instance Ukraine before current military conflict. However, for Norway’s GPFG and similar state-owned investors (SOIs) of other countries such losses were not critical. SWFs are, basically, “tolerant investors” with very long view on value creation and operational planning, so they easily absorb paper losses. Simultaneously, the huge SWFs of oil and gas exporting Gulf countries enjoyed the hike of hydrocarbons’ international prices and hurried up to invest massive influx of unexpected revenues into depreciated assets in troubled economies of the USA and Europe. More countries tended to expand the mandates of their sovereign funds beyond traditional stabilization and saving functions. Strategic development funds became increasingly demanded by the governments and may appear even at the supranational level (the projected European Sovereignty Fund). So far, it may be concluded that in general macroeconomic shocks of 2002 did not undermine the positions of SWFs as strong and resource-rich global investors. On the contrary, it looks like that their role as an efficient tool of governmental policies of offsetting and preventing multiple market failures is getting to be further strengthened in upcoming harsh times.

The environmental policy of the Norwegian Government Pension Fund‐Global and investors' reaction over time

AbstractTaking the greatest socially responsible sovereign wealth fund in the world, namely, the Norwegian Government Pension Fund‐Global (GPF‐G), as a proxy for the world market portfolio, and collecting investment data from 2006 to 2021, our research studies how the attitude of environmentally concerned investors has changed, on different markets, over time, particularly before and after the 2015 Paris Climate Agreement. We investigate, with an event study methodology, what happens to stock prices when companies are excluded from the GPF‐G portfolio for serious environmental violations, unacceptable level of greenhouse gas emissions, or for their involvement in thermal coal processing. In line with previous studies, our results show that Paris Agreement has acted as a catalyst for environmentally conscious behavior by international investors, and this is particularly true in Anglo‐Saxon countries. Especially US, Japanese, Chilean, Indian, and Canadian investors care about the environmental issues that have led to the exclusion from the fund investment portfolio. To the contrary, investors in China, Germany, Australia, and UK seem to have an opposite reaction, as the prices of the excluded stocks increase.

Capital Preservation and Current Spending with Sovereign Wealth Funds and Endowment Funds: A simulation Study

We simulate the future performance of the Norwegian Government Pension Fund Global as a leading example of sovereign wealth funds intended both to preserve wealth and provide regular budget contributions. Withdrawals are limited to the fund’s expected real returns; however, deviations are allowed to fund automatic stabilizers as well as discretionary fiscal policy. It also allows smoothing to avoid abrupt changes. Except for the fiscal policy part, many endowment funds are subject to similar rules. The main findings are: (i) Even if withdrawals matching expected returns maintain the fund’s value in expectation, the fund will be depleted eventually. (ii) Because the fund is invested in foreign currency, long-run purchasing power parity introduces an element of mean reversion and hence a negative serial correlation in the rates of return, so that the fund’s value is not even preserved in expectation. (iii) The use of the fund for fiscal policy introduces a substantial risk of depletion in finite time. (iv) Smoothing raises the risk of depletion after large negative financial returns, though only modestly so. Risk reduction and withdrawal rates below expected returns are explored as remedies. Risk reduction postpones the eventual depletion but does not eliminate it. Lower withdrawal rates help sustainability more fundamentally, but bounds on fiscal policy are needed for depletion risk to be eliminated.

Attitudes towards priority setting in the Norwegian health care system: a general population survey

BackgroundIn an ideal world, everyone would receive medical resources in accordance with their needs. In reality, resources are often scarce and have an alternative use. Thus, we are forced to prioritize. Although Norway is one of the leading countries in normative priority setting work, few descriptive studies have been conducted in the country. To increase legitimacy in priority setting, knowledge about laypeople’s attitudes is central. The aim of the study is therefore to assess the general population’s attitudes towards a broad spectrum of issues pertinent to priority setting in the Norwegian publicly financed health care system.MethodsWe developed an electronic questionnaire that was distributed to a representative sample of 2 540 Norwegians regarding their attitudes towards priority setting in Norway. A total of 1 035 responded (response rate 40.7%). Data were analyzed with descriptive statistics and binary logistic regression.ResultsA majority (73.0%) of respondents preferred increased funding of publicly financed health services at the expense of other sectors in society. Moreover, a larger share of the respondents suggested either increased taxes (37.0%) or drawing from the Government Pension Fund Global (31.0%) as sources of funding. However, the respondents were divided on whether it was acceptable to say “no” to new cancer drugs when the effect is low and the price is high: 38.6% somewhat or fully disagreed that this was acceptable, while 46.5% somewhat or fully agreed. Lastly, 84.0% of the respondents did not find it acceptable that the Norwegian municipalities have different standards for providing care services.ConclusionAlthough the survey suggests support for priority setting among Norwegian laypeople, it has also revealed that a significant minority are reluctant to accept it.

A Review of the Active Management of Norway's Government Pension Fund Global

A Review of the Active Management of Norway's Government Pension Fund Global

Sustainable investing and the environmental awareness through the time: evidence from the Norwegian Government Pension Fund Global companies

Sustainable investing and the environmental awareness through the time: evidence from the Norwegian Government Pension Fund Global companies

Sovereign wealth funds and corporate social responsibility: a comparison of Norway’s Government Pension Fund Global and Abu Dhabi Fund for Development

PurposeThe purpose of this paper is to critically discuss the participation of sovereign wealth funds (SWFs) in the corporate social responsibility (CSR) programmes. Sovereign wealth funds in emerging economies are often involved in corporate social responsibility. However, the 1 Malaysian Development Berhad (1MDB) scandal illustrates the possible use of SWF as a vehicle for corruption and abuse.Design/methodology/approachThe primary objective is to develop good governance practices of CSR by SWFs that could limit corrupt practices. A case study approach is adopted to investigate the CSR involvement of two SWFs – Norway’s Government Pension Fund Global (GPFG) and Abu Dhabi Fund for Development (ADFD).FindingsThe finding shows that SWFs should not be directly involved in CSR. It is proposed that independent Non-government Organisations (NGOs), through a competitive funding model, could serve the CSR purpose of SWFs more effectively and bring socio-economic changes in emerging economies.Originality/valueThe funding model identifies the expected outcomes, priorities and uses of the funds. The funding committee should also be independent of the Board and transparent in its allocations.

The Norwegian Petroleum Fund: Savings for Future Generations?

The Norwegian state-owned Petroleum Fund's market value is more than one trillion US dollars, and the Norwegian state has become one of the world's largest stockowners. The Fund was established in 1990 and in 2006 and renamed the ‘Government Pension Fund Global’, as savings for future generations. What kind of values form the basis for describing the Petroleum Fund in this way? This article shows that the idea that present generations should not empty the North Sea of oil and gas without saving something for future generations has been stable since the 1970s. However, over time, the understanding of how to save has changed. More specifically experts, bureaucrats and politicians have shifted their arguments during four phases: moderation in oil extraction (1974–1983); introduction of the national wealth model (1984–1990); a financial fund for the present and the future (1991–2006); and increased income and new protests (2007–2019). These four periods show that over time the idea of weak sustainability and value commensurability have increasingly come to dominate the argumentation in public documents about the Petroleum Fund.

Greening the Swiss National Bank's Portfolio

We analyze the carbon footprint and emissions of the Swiss National Bank's (SNB) U.S. equity portfolio and compare its carbon performance to those of the world's largest asset manager, BlackRock, and to the Norwegian Government Pension Fund Global (GPFG). The SNB portfolio does as well as BlackRock's but has a significantly worse carbon footprint than the portfolio of GPFG. Few firms are responsible for much of the carbon emissions of the SNB portfolio so that carbon conscious investment approaches have a large impact on portfolio emissions but little impact on performance, diversification, or tracking error. We explore several avenues to reduce the carbon footprint of the SNB's portfolio, while not altering its financial performance. If the SNB excluded the firms with the highest carbon intensity rep- resenting 1% of the portfolio value and reinvested in the companies with the lowest intensity in the same sector, the total financed carbon emissions would be reduced by 22% in 2019, with no impact on the portfolio's financial performance.

СТРАТЕГИИ УПРАВЛЕНИЯ ГОСУДАРСТВЕННЫМИ СУВЕРЕННЫМИ ИНВЕСТИЦИОННЫМИ ФОНДАМИ (SWF) В ПЕРИОД ПАНДЕМИИ COVID-19

This paper examines the transformational shifts in investment strategies of sovereign wealth funds. It analyzes the basic theory of sovereign wealth funds and justifies the need for its development. It identifies the similarities and distinguishing features of sovereign wealth funds. Four types of sovereign wealth funds are characterized, and the key requirements for their management system are clarified. Analysis results for the changing capital among the world’s largest sovereign wealth funds since the start of the Covid-19 pandemic are given. Market value trends of the Government Pension Fund Global (Norway) for 1998-2021 were revealed, and a prediction of its changes for the period until 2026 was created. The influence of the Covid-19 epidemic on the structure of investment portfolios (including the emergence of a new class of assets) was presented, along with GPFG’s investment strategy. Changes in the amount of NWF’s funds (Russia) for the period 2008-2021 were presented and its growth for 2022-2023 was predicted. The transformation of NWF’s liquidity regulatory structure was assessed. New trends in the investment activities of sovereign wealth funds, which occurred under the influence of the Covid-19 epidemic, were revealed. These include reduced risk appetite, increased investment activity, and a higher share of direct investments in asset portfolios. Individual sovereign wealth funds were used to compile a chart of their investment portfolios, which were diversified depending on investment goals and risk level. Recommendations for building the investment strategy of sovereign wealth funds were formulated, with a proposed algorithm for its formulation, including three consecutive stages. It is noted that the results of implementing the investment strategy of sovereign wealth funds directly depends on management quality, whose efficiency can be assessed using special indicators.

How Norway’s sovereign wealth fund negative screening affects firms’ value and behaviour

AbstractThis paper examines the impact of negative screening by responsible sovereign wealth funds on the value of excluded firms. We focus on the main sovereign wealth fund, the Government Pension Fund Global of Norway, which excluded 149 firms from its portfolio during the period 2006–2018. Using an event study methodology, we document a significant decrease in excluded firms’ stock prices. Moreover, we find that the nature of screening matters: norm‐based exclusions suffer from a significant and permanent decrease in their stock value, suggesting that market participants reacted to the Government Pension Fund Global of Norway exclusions. Overall, it can be asserted that the Norwegian fund has a strong signalling effect on financial markets, in terms of social and environmental information. We conclude that sovereign wealth funds could be used by governments as investment vehicles in order to promote responsible investments on a large scale.

Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows

We consider the portfolio choice of a government with a Sovereign Wealth Fund (SWF) when government revenues depend on exhaustible resources, such as oil and gas. The question is whether the SWF portfolio should underweight shares in the resource industry. Some studies have found that these share prices correlate more closely with the overall stock market than the resource price, which would seem to weaken the case for underweighting. However, equity price movements depend not only on changes in expectations of future cash flows, but also on time variation in discount factors. We analyze cash flows directly, rather than trying to disentangle these effects. We have collected cash-flow data for the companies in all of the major industries of the FTSE Global All Cap index, the basis for the strategic index of the Norwegian Government Pension Fund Global. Subsequently, we look at the correlations between each industry’s cash flow and the Norwegian government’s cash flow from oil and gas. We find a close, statistically significant, and persistent correlation for the oil and gas industry. The correlations for other industries are small and mostly insignificant. We believe that our findings can be used to support proposals for SWFs in countries with significant petroleum revenues to underweight shares in this industry.

Bærekraft, etikk og profitt

As climate change is getting detrimental for an increasing number of living beings, firms being negatively exposed for these changes also increases. This makes the broad financial investment profile of the Norwegian Government Pension Fund Global (GPFG) more important for the sustainability of the portfolio. The Ethical Guidelines have so far a less visible role, hence the GPFG can still be a guide for other investors but more caused by sustainability effect on profit, and less reasoned by ethics.

The Optimal Extraction Rate versus the Expected Real Return of a Sovereign Wealth Fund

With reference to funds established for the benefits of the public at large, a university endowment, or other similar sovereign wealth fund, we demonstrate that the optimal extraction rate from the fund is significantly smaller than the expected real rate of return on the underlying fund. We consider the situation where the influx to the fund has stopped, it is in a steady state, and is invested broadly in the international financial markets. The optimal spending rate secures that the fund is a perpetuity, i.e., it will last 'forever', where the real value of the fund after payments is stationary, while spending according to the expected rate of return will deplete the fund with probability 1. Optimal portfolio choice and spending are then inconsistent. Our conclusions are contrary to the recommendations of an expert panel to the Norwegian Government Pension Fund Global, as well as at odds with part of the extant literature on the management of endowments of universities.

State investments and human rights? The case of the Norwegian Government Pension Fund Global

PurposeThe purpose of this paper is to explore how the Norwegian Government incorporated its responsibility for human rights into the investment practices of its Global Pension Fund and how human rights issues were negotiated when exclusion was considered.Design/methodology/approachDrawing on a series of interviews the authors analyse the way in which responsibility for human rights has been translated into the practices of the Norwegian Government Pension Fund Global.FindingsThe paper documents how a large investment fund used several mechanisms to address human rights risks. The authors demonstrate that different logics among actors sometimes impeded addressing human rights issues. The findings demonstrate that sovereign wealth funds (SWF) can be held accountable for human rights.Research limitations/implicationsThe paper illustrates the difficulty of co-operation between actors with different logics. This can result in institutional conflict, but also in positive outcomes for human rights.Practical implicationsAttempts to introduce human rights into state investments may result in increased institutional complexity. The findings indicate that state investors can address human rights issues, but that the ability to do so is diminished where divestment creates political tension.Social implicationsLarge investors can influence companies on specific human rights issues.Originality/valueThis is one of the first empirical investigations of the human rights practices of a SWF. The authors contribute to the literatures on accounting and human rights, SWF and institutional theory.

Dirty Banking: Probing the Gap in Sustainable Finance

In 2016, the Global Sustainable Investment Alliance estimated the market for sustainable investments to have reached 22.89 trillion USD of assets under management. While financial institutions have embraced the idea of sustainable finance as a business opportunity, they have arguably done little, but to piggy-back on investors’ demand. Today, it is not unusual for a single firm to retail fossil free investment funds and concomitantly offer commercial loans towards fracking, coal, and Arctic drilling. This paradox is underpinned by a major gap in the way sustainability has permeated primary and secondary markets which, we argue, calls for a serious rethinking of the sustainability transition in finance. This article proposes two contributions in this direction. First, we develop an original conceptualisation of finance as a socio-technical system to discuss the dynamics that both hinder and promote a transition from mainstream to sustainable finance. Second, we propose to study how investment banks integrate sustainability in their underwriting services. To do so, we filter through close to half a million of debt and equity underwriting deals (2005–2017) using the Government Pension Fund Global of Norway’s list of 153 excluded companies. Our results suggest that investment banks do not shy away from underwriting companies that have been flagged for major environmental, social, and governance misconduct, neither do they restrain from underwriting companies providing contentious products, such as tobacco, coal, and nuclear weapons. Moving forward, we suggest ways to address this problem and call for further research on the responsibility and agency of finance and advanced business services firms in sustainability transitions.