Norwegian Government Pension Fund Research Articles

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.

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.

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

The Norway Model in Perspective

The authors’ 2012 article on the Norway model spotlighted that country’s sovereign wealth fund. They argued that Norway provides a coherent and compelling approach to managing long-term pools of assets. Since then, the Norwegian Government Pension Fund has grown in scale and complexity, and its structure has evolved. Meanwhile, other models for asset management have been put forward. In this article, the authors review Norway’s investment strategy in the light of the last decade’s experience, put it in a broader context by comparing Norway with alternative approaches, and reexamine the fund’s commitment to responsible investing. Since the authors wrote their earlier paper, environmental and social issues have come to the fore, and there is still much to learn from the Norway model. <b>TOPICS:</b>Foundations &amp; endowments, portfolio theory, portfolio construction, ESG investing <b>Key Findings</b> ▪ Today the Norwegian Government Pension Fund is the world’s largest sovereign wealth fund. It remains a model for long-horizon investors, including those of more modest size. ▪ Norway has considerable freedom in how to invest its assets. It is an asset allocator, not a liability matcher. ▪ Norway is cost conscious and emphasizes transparency, and this influences its strategy. Other investors favor private assets and may prefer different approaches, such as the Yale model or the Canada model. ▪ The fund provides a model for financial investors who wish to be known for transparency and clarity of governance, low management costs, high liquidity, and high standards of ethical behavior.

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.

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.

Brazilian Social Funds: The lessons learned from the Norway fund experience

Since the middle of the last century, the world has seen the emergence of Sovereign Wealth Funds (SWF). According to the Sovereign Wealth Funds Institute (2012), these legal entities can be defined as “a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.” The SWFs are governed by the Santiago Principles, a document constructed by the IMF's International Working Group of Sovereign Wealth Funds (IWG) to recommend and to standardize the applications and investments of this kind of fund. SWFs are created in order to meet macroeconomic demands, using a series of investments strategies, which including foreign assets acquisitions. For instance, the Norwegian Government Pension Fund is one of the world's model SWFs. Its revenue is obtained from petroleum exploitation and is considered a savings fund, although part of the financial return can be applied in budget deficit. Following this example, Brazil created the Pre-Salt Social Fund to invest pre-salt petroleum revenues, and consists of a savings fund, according to the IMF classification. The present article focuses on the analysis and comparison of the legal structures of the Norwegian Government Pension Fund (GPF) and the Brazilian Pre-Salt Social Fund (SF), aiming to understand if the Brazilian fund applies the Norwegian standards.

The Norwegian Government Pension Fund Global. Risk Based Versus Ethical Investments

Summary: Access to finance is crucial if we are to achieve the fundamental transition of our time: securing a safe and just society operating within the planetary boundaries. In the era of global market capitalism and deregulation, Sovereign Wealth Funds (SWFs) offer one of the few public economic institutions capable of injecting ecological and social values into global markets. This article undertakes a case study of one of the world’s largest SWF, the Norwegian Government Pension Global (The Fund). The Fund is well-known for its Ethical Guidelines recommending exclusion of companies based on products and conduct as well as the Fund’s public statements when withdrawing from companies. Still, the ethical basis of overlapping consensus leads to responding to public opinion and media controversy when considering divestment, rather than undertaking due diligence beforehand. In addition, and not well known, more firms have been excluded from the Fund based on the financial risk against the portfolio than based on the Ethical Guidelines. In this article we discuss the basis of both the Ethical Guidelines and of the financial risk management of the portfolio. Still, the majority of the Fund’s investments are on an unsustainable path of ‘business as usual’. A principal thesis of this article is the paradox that the more unsustainable ‘business as usual’ becomes, the importance of financial risk assessment increases and the relevance of the Ethical Guidelines decreases.

La evolución de la estrategia de inversión del fondo soberano noruego (GPFG)

El Fondo Gubernamental de Pensiones Global de Noruega ( Government Pension Fund Global –GPFG–) es el fondo soberano más grande del mundo, con activos bajo gestión equivalentes a un billón de dólares estadounidenses en septiembre de 2017. Es un instrumento macroeconómico de estabilización para suavizar los ciclos económicos al ahorrar en época de precios altos del crudo o auge económico, y gastar en épocas de tiempos difíciles para evitar la recesión en caso de un desplome de los precios del crudo. Pero también es un fondo de ahorro para asegurar la sostenibilidad de las cuentas fiscales y el reparto intergeneracional de los recursos hidrocarburíferos con un horizonte de inversión amplio. Este artículo se centra sobre todo en la evolución de su estrategia de inversión entre 1996 y 2016, desde un enfoque conservador hacia una mayor diversificación en cuanto a tipo de activos y ámbito geográfico, aunque los últimos seis años han estado caracterizados por cierto inmovilismo y conflicto de intereses entre las autoridades políticas y los gestores financieros.

Learning by Failing

The Norwegian Government Pension Fund, or more commonly the Norwegian Petroleum Fund, established in 1990, is the world’s largest sovereign wealth fund. The fund is commonly regarded as a successful product of economic foresight in a country with strong traditions of long-term planning. As the fund was established in a period during which leading social scientists strongly doubted the ability of Norwegian political and administrative institutions to handle the large oil riches, the article examines the background of the fund in detail. Government archives reveal that senior advisors in the central administration opposed and delayed the establishment of a petroleum fund. The argument in the article is that the advisors’ previous experience with fund structures, combined with the institutional logic in which the most important advisors were situated, explains both the long-lasting opposition against the fund and how and why the fund acquired its main characteristics.

El Fondo Gubernamental de Pensiones noruego, responsabilidad social corporativa y cambio climático

This paper aims at presenting the Norwegian Government Pension Fund Global (GPFG), the world’s largest Sovereign Wealth Fund, characterized by its pioneering ethical guidelines for investment decisions, based on active ownership and the exclusion of firms from its portfolio. Two major reasons for the exclusion of a company is “severe environmental damage” and “coal production”, leading to the banishment of many companies from the Fund’s holdings. Despite the noble intentions, the GPFG is loaded with inconsistencies, especially because its resources come from the exploitation of fossil fuels that contribute to global greenhouse gas emissions. Moreover, the entire Norwegian environmental policy is fragmented and suffers from contradictions.

Evaluating investments in unlisted equity for the Norwegian Government Pension Fund Global (GPFG)

Evaluating investments in unlisted equity for the Norwegian Government Pension Fund Global (GPFG)

Investing in Sustainability or Feeding on Stranded Assets? The Norwegian Government Pension Fund Global

We know that access to finance is crucial if we are to achieve the fundamental transition necessary to meet the grand challenge of our time: securing a safe and just operating space within the planetary boundaries. In the era of global market capitalism and deregulation, Sovereign Wealth Funds (SWFs) offer one of the few public economic institutions capable of injecting ecological and social values into global markets. This paper undertakes a case study of the world’s largest SWF, the Norwegian Government Pension Global. The Norwegian Fund is well-known for its ethical profile. This includes exclusion of companies based on products (tobacco, certain weapons, and most recently also coal), and observation and potential exclusion based on conduct (including severe violations of human rights, severe environmental damage, gross corruption and other particularly severe violations of fundamental ethical norms), as well as the Fund’s public statements when withdrawing from companies based on conduct in the cases when its attempts at influencing the companies have failed. The principal thesis of the article is that a misleading dichotomy between ethics and economics has held the Norwegian Fund back from contributing to sustainability, leaving the majority of the Fund’s investments on an unsustainable path of ‘business as usual’. Although there are positive indications, major changes are necessary to realise the Fund’s potential to invest in sustainability.

Calculating the real return on a sovereign wealth fund

AbstractWe present a new methodology for calculating the real return on sovereign wealth funds (SWF) that share the investment objective of maximizing international purchasing power in terms of goods and services. Specifically, we modify the traditional approach for deflating the nominal return along three dimensions: the aggregator formula, the measure of international prices and the weighting scheme. We argue that a geometric average of price levels is an appropriate aggregator formula for capturing the deflationary effects of imports increasingly originating from low‐cost countries, and that import prices paid by the SWF owner and weights reflecting the owner's import pattern are consistent with the investment objective. Our proposed approach, using the Norwegian Government Pension Fund Global as an illustration, raises the estimated average annual real rate of return over the sample period of 1998–2012 from 3.1% to 4.9%.

Revisiting the Monitoring Role of Sovereign Wealth Funds - Evidence from a Quasi-Natural Experiment

Using a shock in the expansion of the Norwegian Government Pension Fund Global (GPFG), we examine the long-term organizational consequences of sovereign wealth fund (SWF) investments. Findings from a difference-in-differences test show that firms improve in firm value following the inclusion to GPFG’s U.S. equity portfolio. Cross-sectional tests document that this effect is stronger for firms with higher monitoring demand and higher likelihood to face passive monitoring pressure. Additional analyses indicate that GPFG engagement improves firms’ governance quality, litigation risk, and myopic investment behavior. Our findings are generalizable to monitoring-sensitive SWFs and suggest that these investors create value for firms.