May 12, 2023
Norway’s huge sovereign wealth fund is set to use its shareholder power to push companies to tackle key ESG (environmental, social, and governance) issues. Read on to find out what active ownership means and how you could incorporate ESG into your investment decisions.
Norway’s government established the sovereign wealth fund in 1990 to invest surplus profits from the country’s oil and gas reserves, which led to it being dubbed Norway’s “oil fund”. It was designed to counter the anticipated decline of the petroleum sector. And, if you look at the size of the fund, it’s achieved that aim. The wealth fund is the world’s largest single investor, with assets of around 13 trillion Norwegian kroner (£1 trillion) – the equivalent of around £200,000 for each Norwegian citizen. The fund holds around 1.3% of the stocks of all the world’s listed companies. In the last decade, the fund has taken steps to be more active in company governance.
Now, it has warned company directors it will vote against their re-election if they don’t start tackling ESG issues, including the climate crisis, human rights abuses, and boardroom diversity. The fund is reportedly preparing to vote against the re-election of 80 company boards for failing to set or reach ESG targets and could divest if they don’t make progress.
According to the Guardian, only around 17% of the 9,000 companies the fund invests in have set out “clear science-based net zero targets” to address climate change. Last year, this led to Norway’s oil fund voting against the entire board of 18 companies.
Active ownership is when a shareholder engages with a company they’ve invested in to influence its strategy and action. And it’s not only used for ESG issues. For example, an investor could use their shareholder power to pressure a company to change its strategy because they believe it could improve profitability. From an ESG perspective, active ownership could mean engaging with a company to improve human rights in its supply chain or reduce its carbon footprint.
One of the key ways investors elicit change is by voting. As a stakeholder, investors can vote for or against proposals at a company’s annual general meeting (AGM) and even put forward their own suggestions. Investors may work together to combine their stakeholder power. For example, the Church of England Pensions Board and Robeco co-led engagement with fossil fuel company Shell about its transition to being net zero in 2021. The pressure led to the company setting out short- and medium-term targets to realistically reach net zero by 2050.
As active ownership often requires you to have a significant stake in a company to drive change, the approach is not suitable for the average investor. Yet, your investments could still play a role in active ownership. Your pension, for instance, is often pooled with other savings and invested. As a result, your pension fund could use its shareholder power to place pressure on companies that leads to change. Pension and investment funds may publish active ownership reports so you can see how they’ve engaged with companies.
There are other ways to make ESG part of your investment decisions – common strategies include negative screening and positive screening.
With negative screening, you’d avoid investing in companies that don’t match your ESG values. For example, you may choose not to invest in oil and gas companies if tackling climate change is important to you.
With this strategy, rather than avoiding certain businesses, you actively invest in those that support your ESG outlook. So, while your portfolio may contain fossil fuel companies, you could dedicate a proportion of it to invest in sustainable energy.
You don’t have to actively manage your investments to make ESG issues part of your plan. There are plenty of investment funds that consider key challenges. Each will have its own criteria, so you could choose one that matches your values.
If you’d like to reflect ESG issues in your investment portfolio, please contact us. We can work with you to create a balanced portfolio that considers your ESG concerns, risk profile and goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Chester Rose Financial Planning Limited does not provide advice on buying or selling individual company equities.