The World’s Biggest Wealth Fund Reaps an Ethical Bonus
(Bloomberg Opinion) -- Norway’s sovereign wealth fund, the world’s biggest with assets of about $945 billion, has seen its returns eroded this year as the Covid-19 pandemic trashes equities. Its ethical approach to investing, however, may help it eventually emerge from the rout with fewer bruises than other asset managers.
Norges Bank Investment Management’s equity portfolio was down about 23% through Wednesday, the fund said last week. That followed a return on stocks of 26% in 2019 that, along with its fixed income and property investments, contributed to an overall return for last year of almost 20%, the best performance since 2009.
None of that was too surprising. Its equity returns act as a proxy for global stocks, which boomed last year and have plummeted in recent weeks. What stands out, though, is how the fund is starting to reap the benefits of putting environmental, social and governance considerations at the forefront of its investment decisions, while the rest of the investing crowd starts to catch up with the need for capital allocation to serve a broader aim of ranges than just corporate profitability. The details provided in the fund’s “Return and Risk” report make it possible to discern a possible pathway to success.
The fund has two broad categories of companies it shuns and ejects from its benchmark calculations: Exclusions based on products discard weapons makers, tobacco companies and those that depend on coal production for their revenue; exclusions based on corporate conduct cover firms guilty of corruption, environmental damage or human rights violations. Overall, kicking miscreants out of the portfolio has boosted returns for the past two years.
The impact of that stance is evolving over time. As the chart shows, swings between positive and negative contributions are getting smaller. When looked at since 2006, returns have been 1.3 percentage points lower than they would have been without the exclusions, according to the fund’s calculations. But the bulk of that underperformance is because of a rip-roaring performance by tobacco companies Philip Morris International Inc. and Altria Group Inc. for most of that time, although they’ve dipped recently.
As a result, the decision to exclude tobacco producers and makers of other potentially harmful products have subtracted 2.1 percentage points from returns in the past decade and a half or so. But that only tells part of the story.
By contrast, the decision to avoid companies on the basis of their conduct toward society has actually boosted returns by 0.8 percentage point since 2006, the fund calculates. Moreover, as environmental, social and governance issues have become more prevalent in portfolio construction across the industry as a whole and more fund managers adopt similar exclusion policies, the Norwegian fund is starting to see benefits from its stance on both categorizations.
Last year, for example, barring companies that depend on coal for their revenue, whether by mining the fossil fuel or using it to generate power, added 8 basis points to returns; shunning tobacco companies, which fell out of favor with investors last year relative to the broader market, added a further 4 basis points.
Those are small numbers given the amount of money involved. But Norway’s sovereign fund has been a trailblazer in its willingness to withhold capital from companies deemed not to share its values. If it can prove that doing good need not mean sacrificing returns, more of the asset management community might be persuaded to follow suit – for all of our sakes.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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