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Consultation – Responsible investment strategy for the Government Pension Fund Global

Norges Bank's letter to the Ministry of Finance of 24 January 2014.

29 January 2014

We refer to the Ministry of Finance's letter and consultation document of 29 November 2013. The consultation document builds on the report on responsible investment of the Strategy Council for the Government Pension Fund Global dated 11 November 2013. Norges Bank has been invited to comment on the recommendations of the Strategy Council. The Bank's assessments are presented in this letter. We begin with a brief account of our experience of, and the possibilities for, exploiting the synergies between active ownership and other aspects of investment management; cf. our letter to the Ministry of 13 December 2013.

The Strategy Council's report contains a detailed review of the objectives and tools for responsible investment. Norges Bank shares the Council's views in most areas and believes that the recommended changes could help the Fund remain a global leader in responsible investment. The Bank has noted challenges associated with the exclusion mechanism to which both the Strategy Council and the Ministry refer.

The purpose of the Government Pension Fund Global is government saving. The strategy for responsible investment must be rooted in the Fund's objective and role. The aim of investments is to secure the greatest possible international purchasing power for the capital in the Fund given moderate levels of risk. Norges Bank manages the Fund with a view to achieving the highest possible return within the constraints set out in the investment mandate. The Fund is a financial investor and spreads its investments across large numbers of securities.

Experience of active ownership and synergies with investment

Norges Bank uses a variety of tools related to responsible investment. The Bank promotes international principles and standards, expresses expectations as an owner, and exercises active ownership through voting and engagement with companies. Environmental, social and governance issues are integrated into the investment process and risk management. This can lead to adjustments to the portfolio and decisions to divest, or not to buy into specific securities.

There are positive synergies between these various tools and other aspects of investment management. In our active ownership work, we analyse and build knowledge about factors that may be significant for companies’ long-term returns. Environmental, social and governance issues can impact investment returns and risks. The expected benefits of divesting from companies should be weighed against the benefits of being invested in a large number of companies. Significant divestments may entail costs and risks for the Fund in the form of decreased diversification.

In the same way, knowledge built up as a basis for investment decisions can also be used in active ownership work. Through its investment operations, the Bank regularly meets representatives of companies in which the Fund is invested. This paves the way for fruitful dialogue on ownership issues. Our investment operations also give us a very good insight into the companies in which the Fund is invested. This knowledge helps ensure that ownership work is relevant and founded in a holistic understanding of individual companies and issues. This can increase the chances of active ownership having positive results.

Our active ownership builds on the premise that responsibility for a company's business strategy and operations lies with its board and management. The board is accountable to all shareholders and should be familiar with the broad views of leading shareholders without giving preferential treatment or giving special interests unreasonable influence.

In our prioritisation of ownership work, we take account of the Fund's composition. Our experience is that it is particularly important for active ownership and investment decisions to be considered together at companies in which the Fund is a substantial shareholder. We also take account of whether a matter can be considered material at company level and whether it could impact on the valuation of the company. Our dialogue with companies is more consistent when active ownership is put in context with the investment decisions.

Norges Bank has found that there are positive synergies between active ownership and other aspects of investment management and that these are increasingly being exploited.

Norges Bank's comments on the Strategy Council's recommendations

Recommendation 1: Clarify the objective for responsible investment

Norges Bank supports recommendation 1 in the consultation document, including the description of the premises that should be captured by the objective for responsible investment. A mandate with a clear objective will facilitate effective performance and reporting. It will also help the Fund maintain a clear profile in the eyes of the companies and countries in which it invests. The Strategy Council stresses that the Fund’s objective is to seek the maximum return given moderate risk levels, and that the Fund's responsible investment activities should therefore be directed at value-enhancing activities rather than serving other, independent objectives. Norges Bank shares this view.


Recommendation 2: Responsible Investment should be integrated and included in the Investment mandate

Norges Bank supports recommendation 2 in the consultation document. The use of tools for responsible investment must be seen in the context of the Fund's overall investment strategy and the composition of the portfolio. In our opinion, an integrated approach will increase the chances of realising the overall management objective. The recommendation highlights the challenge of the management mandate currently formulating two different objectives – one overall and one for responsible investment in particular. Norges Bank supports the integration of the two, which will bring greater clarity.

Recommendation 3: Develop Responsible Investment principles and base ownership strategies on these

Norges Bank supports recommendation 3 in the consultation document. Norges Bank remains committed to further developing principles covering our use of tools for responsible investment and more general principles expressing our expectations of companies. We agree that such principles can underpin the Fund's behaviour as a predictable investor and could help simplify communication with companies.

To achieve results in the long term, the Fund's ownership work must be consistent and predictable for companies and markets alike. Basing our work on clear principles contributes to this. To ensure that the Fund is viewed as an investor with legitimate interests, we apply internationally recognised principles and standards.

Recommendation 4: Initiate research to elevate the understanding of portfolio performance.

Norges Bank agrees that there may be a need for further research to increase understanding of the factors that may impact on future returns. We aim to contribute actively to this. The Norwegian Finance Initiative (NFI) is one of several relevant tools that can be used in this context.

Recommendation 5: Endorse policy changes that enhance portfolio value.

Norges Bank shares the view that the Fund should endorse regulatory changes and new standards that can be expected to enhance the value of the portfolio. Norges Bank aims to act in accordance with our understanding of the role of a shareholder in order to maintain an investor profile that allows for long-term influence.

Recommendation 6: Disclose the Responsible Investment Principles and ownership strategies

Norges Bank supports recommendation 6 in the consultation document. The management of the Government Pension Fund Global is characterised by a high degree of transparency. Like the Strategy Council, we believe that public disclosure of ongoing company engagements may be detrimental to their progress and to future engagements. The need for transparency means that the Bank may report information on these engagements at a more aggregated level. Principles developed in line with recommendation 3 will be published in the same way as other governing documents for investment management at Norges Bank. This promotes transparency vis-à-vis companies, regulators and the Fund's owners.

Recommendation 7: Report on impacts of responsible investment strategy

Norges Bank aims to expand its reporting on responsible investment. In many cases it will be hard to identify the concrete results of active ownership. Companies are keen to present positive changes as their own initiatives rather than the result of pressure from investors. Analysis of the effects of responsible investment activities will nevertheless be a priority in Norges Bank’s future work.

Recommendation 8: Exclusion decisions to become part of an integrated chain of ownership tools

In our opinion, making exclusion part of an integrated chain of instruments for active ownership will increase the Fund's chances of long-term influence. Following the evaluation of the ethical guidelines in 2009, there was an intention to increase the interaction between these instruments. As the Ministry notes in the consultation document, this has only been achieved to a certain extent.

We also note that the Strategy Council points out that product-based exclusion can be achieved by guidelines clearly stating which products are considered unacceptable. Norges Bank can manage these exclusions. In this context, Norges Bank would recommend that the Ministry assesses materiality criteria for cases where companies produce a variety of products.

The existing framework for responsible investment allows for an integrated approach where Norges Bank, based on consideration of risks and returns, divests from individual companies where an assessment of environmental or social risks forms part of a holistic financial assessment. Against this background, Norges Bank has divested from a number of companies since 2012 where we have concluded that their business model is not sustainable in the long term.

The tools will be most effective when viewed collectively. Often the tools for responsible investment will be mutually supportive, but there will also be cases where the use of one could hamper effective use of another. For example, divestment will preclude active ownership work with a company. In such cases, the effects and costs of the various tools should be seen in context.

Recommendation 9: Delegate exclusion decisions to Norges Bank

Norges Bank believes that it is appropriate to bring together the various tools used in the operational management of the Fund. Such a solution is a natural consequence of the assessments in recommendation 8 and is commonplace in investment management and at peer funds. We assume that any decision to bring together the tools for the operational management of the Fund will take account of the overall delegation of roles and responsibilities. Norges Bank must have adequate independence to organise and execute its management task in the most appropriate manner possible, which includes the design of its internal decision-making structure.

We also assume that this will be integrated into Norges Bank’s management mandate in a way that takes account of the mandate’s overall structure and purpose, where the overarching goal is long-term financial returns. Norges Bank's reporting must contribute to the greatest possible transparency in its investment management.


Recommendation 10: Ensure accountability and alignment of interest

We do not believe that the Strategy Council's recommendation, to deduct some costs from management costs is appropriate, as it will result in unnecessary complexity.



Norges Bank believes that the main thrust of the Strategy Council's recommendations is feasible and will contribute to a more holistic approach to responsible investment. The changes outlined will strengthen the Fund's profile as a responsible investor.

It will be natural to return to the more detailed implementation of the Strategy Council's recommendations, including the development of the mandate for the management of the Fund, following the Storting's consideration of the Report on the Government Pension Fund for 2013.