Norway’s sovereign wealth fund, which has holdings in over half of the world’s publicly traded companies, will use its market reach to push companies toward standard reporting on environmental, social and governance impacts.
In a broad review of its approach to ESG investments, Norges Bank said on Friday it would use its global market penetration to push companies to report the external impact of their activities, and to standardize such reports so that they may more easily be compared and understood.
“In order to fully understand how sustainability issues affect portfolio risk and return, investors need complete and reliable information about the companies they own, including the sustainability-related aspects of their operations,” the bank said.
While ESG-related reporting has become more common, companies do so under their own terms, with little incentive to report unfavorable activities. While many have published reporting frameworks, the heterogeneity of these formats makes comparisons difficult and time-consuming for investors.
“Supporting individual frameworks is a useful exercise, but we believe that the harmonisation of these different sustainability reporting standards is in the interest of both investors and companies,” said Norges Bank. “It will simplify company and portfolio analysis, and reduce the overall reporting burden on companies.”
The fund said that because of its unique breadth in the global market, it is well-positioned to develop and test methodologies and promote company participation.
Like the ubiquitous financial reporting standards, the bank argued that consistent disclosure of “financially material information,” would “improve our understanding of individual companies’ impacts, and how well these are managed,” while smoothing out informational asymmetries, leading to more efficient capital allocation.
“We concluded that as investors we needed to take a more proactive role in guiding companies on what and how to report, down to the level of specific frameworks, standards and data points,” the bank said.
In the meantime, the bank has been active in requesting information about potentially harmful activities to particular companies it is invested in, and in some cases voting against the chairperson if the company does not respond to repeated inquiries.
Since its founding in 1997, the fund has gradually shifted from a sole focus on investment returns to one that takes a more socially conscious approach to company selection and governance.
At the end of last year, 134 companies were excluded from the fund on environmental, social, or governance grounds. Norges Bank had previously invested NOK 243 billion ($27.6 billion), or 2.4% of its total assets in these funds.
The Norwegian government has mandated on three occasions that the fund make positive investments in environmentally friendly securities, resulting in NOK 79 billion ($9 billion), or 0.8% of the fund, across 77 companies and green bonds at the end of 2019.
The world’s largest sovereign wealth fund finished the first half of 2020 down 3.4%, slightly below its benchmark, amounting to NOK 188 billion ($21.26 billion) in losses.
Hedge fund investor Nicolai Tangen is set to take over as the fund’s manager on Sept. 1, after addressing concerns over potential conflicts of interest regarding his own holdings.