Two children hiking in a forest.

The world’s largest sovereign wealth fund has become a leader in ESG (environmental, social and governance) investing. Yet, the money initially came from an unlikely source – fossil fuels.

Read on to find out how Norway’s “oil fund” embraces ESG issues and how you could too.

Norway’s sovereign wealth fund holds around 1.5% of all the world’s listed companies

Officially called the “Government Pension Fund Global”, Norway’s sovereign wealth fund was established in 1990 to invest the surplus revenue of the Norwegian petroleum sector. The fund aimed to mitigate oil price volatility and the Norwegian government also recognised that one day the oil would run out and that the fund was a way to safeguard the future of the economy.

As of March 2023, it held over $1.62 trillion (£1.27 trillion) in assets – translating to around $295,000 (£231,837) for every Norwegian citizen. It’s estimated that the fund could cover Norway’s social costs for 300 years.

The fund invests in more than 8,800 companies from over 70 countries. In fact, it holds around 1.5% of all the world’s listed companies. In terms of assets under management, it’s the largest sovereign wealth fund in the world. Indeed, second place China Investment Corporation trails significantly behind with $1.35 trillion (£1.06 trillion) assets under management.

This gives the fund a huge amount of shareholder power, which has proved useful when it’s championing ESG issues.

Despite its link to petroleum, the fund has a strong focus on ESG investing. In its mission, the fund notes that its purpose is to safeguard and build financial wealth for future generations, which requires “sustainable economic, environmental and social development”. As a result, it aims to “promote long-term value creation at the companies and minimise negative effects on the environment and society”.

The fund has a policy that encourages engagement with companies to improve their operations from an ESG perspective. In addition to engagement, the fund also avoids investing in some companies, including those that are involved in certain types of weapons, tobacco and coal.

The suitability of companies when compared to their responsible investment strategy is frequently reviewed.

For example, according to Bloomberg, in May 2024, the fund decided to exclude Adani Ports & Special Economic Zone Ltd from its portfolio, a logistics business that operates a large network of ports in India. It cited “unacceptable” risks that the company is tied to human rights violations in war and conflict zones.

Similarly, the fund announced it would exclude US-based L3Harris Technologies Inc, which develops components for nuclear weapons. It would also exclude China’s Weichai Power Co. due to concerns it was selling military equipment to Russia and Belarus.

As well as ensuring its investments align with its responsible investment values, this strategy has often proved successful. According to Morningstar, the fund returned 6.3% in the first quarter of 2024, the equivalent of around $110 billion (£86 billion).

ESG investment learning from the sovereign wealth fund

There are some fantastic ESG and investment lessons to be learned from the way the Norway sovereign wealth fund operates.

  • Embracing ESG doesn’t automatically mean lower returns

Norway’s fund proves that incorporating ESG criteria into an investment strategy doesn’t automatically mean missing out on returns.  Our experience with our own ESG portfolios supports this.

However, that doesn’t mean due diligence should be side-lined when selecting a fund or company to invest in. It’s still important to assess if it suits your risk profile and fits into your wider strategy.

  • There’s more than one way to make ESG part of a portfolio

The sovereign wealth fund uses several different ways to invest in line with its ESG strategy. For instance, it may choose to avoid investing in certain companies because of the industry they operate in or their business practices. This strategy is known as “negative screening”. Alternatively, it may use “positive screening” to actively invest in companies that align with its ESG criteria, such as those working on climate change solutions.

While using shareholder power to encourage companies to change is a strategy more suited to institutional investors, lessons can still be learned from this approach.

  • Take a long-term approach to your investments and strategy

Unlike the sovereign wealth fund, you’re probably not planning generations ahead but there’s still value in taking a long-term approach. Investing with a longer time frame means there’s a chance for the ups and downs of the market to smooth out and you could benefit from compounding returns. We would always encourage you to consider your long-term goals and how investing could support them.

Make ESG issues part of your investment strategy

If you’re thinking about making ESG part of your investment strategy in some way, please contact us and we would be delighted to discuss it further with you.

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 investments (and any income from them) 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.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.