“Circumstances can change”: Norges Bank is reversing divestment decisions
“We have been busy”, said Carine Smith Ihenacho, chief governance and compliance officer at Norges Bank Investment Management. Ihenacho was speaking at a press conference organised by NBIM to announce the publication of its latest responsible investment report.
NBIM is the asset management arm of Norway’s Government Pension Fund Global, one of the world’s largest asset owners.
With an extensive financial footprint courtesy of $1.8 tn in assets under management, NBIM holds a slice of the pie in nearly 9000 companies across 70 economies.
Yet, the world’s largest single owner of stocks has a well-known policy for selling them if companies do not meet the fund’s climate expectations. NBIM’s latest responsible investment report, reveals details of how the fund approaches divestment decisions and importantly, why it reverses them.
Bad apples
For NBIM, the decision to move a company out of the fund’s investment universe takes two forms – one is financially motivated and the other ethically. The latter are known as ‘exclusions’ and include some of the world’s largest emitters including Glencore, AGL Energy, Coal India and China Coal Energy.
The former are referred to as “risk-based divestments” of which there were 49 in 2024.The decisions were motivated by a range of factors, including unsatisfactory climate risk management.
“These are financial decisions. We sell the bad apples”, affirmed Ihenacho.
In 2024, five divestments were made based on high GHG emissions, coal mining and coal-based electricity generation. Others were based on biodiversity (2), water management (3) and ‘significant sustainability risks’ (8).
Since 2012, NBIM has announced 575 divestments, of which 195 are related to climate change.
Risky business
The failure of engagement is not the only rationale behind these decisions.
Financial prudence is a key piece of NBIM’s divestment puzzle. Defending the fund’s divestment decisions, Ihenacho stressed: “on this [divestment], we make money”.
According to the report, divestments have increased the cumulative return from the fund’s equity portfolio. Climate change related divestments alone increased the fund’s return on equity by 0.30 percentage points.
Never say never
Yet, for NBIM, divestment is not the end of the road. Companies are still offered the opportunity to show improvement.
“As part of our risk management, we sell companies that we don’t think have a sustainable business model. If companies improve, we can reverse that decision”, said Ihenacho.
Reverse they did. 16 companies were moved back into the fund’s investment universe in 2024. Improved climate risk management over several years was part of the rationale.
The fund did not disclose names of individual companies in its report but says it had divested from three ‘Asian industrial companies’ back in 2014, citing concerns with high GHG emissions.
By 2024, not only were these companies disclosing emissions but they were also committing to reduce them through net zero targets. Adopting targets, for NBIM, is a critical part of not only the fund’s expectations from companies but also its own Climate Action Plan. 74% of the fund’s portfolio emissions are covered by net zero targets.
“Those without targets reduce [emissions] less than those with”, said NBIM’s global head of active ownership Wilhelm Mohn.
Consequently, NBIM reversed their divestment decision and brought the companies back into the fund’s investment universe.
Evidence
NBIM’s reversals speak to a wider debate over divestment. They seemingly suggest that divestment by large asset owners could incentivise companies to do better -provided the divestment is up for reassessment.
In so doing, NBIM’s report circles back to a question posed by Dr. Tom Gosling - now a professor at the London School of Economics - in a commissioned research report for the Border to Coast Pensions Partnership in 2024: does divestment work?
These reversals add nuance to the answer, which in any case is not straightforward. While they might not reflect causal links between divestment and altered corporate behaviour, the two did occur in tandem. Correlation is not causation, as the adage goes, but it does offer evidence worth considering.
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