The government today presents the annual white paper on the management of the Government Pension Fund. The paper reports on results in the management of the Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (GPFN), and discusses development of the investment strategy and framework for responsible investment.
– The GPFG provides Norway with considerable fiscal space. Due to the coronavirus outbreak, comprehensive economic measures have been adopted in 2020. Once the situation in the economy normalises, the spending of petroleum revenue will be reduced. This is important in order to ensure that also future generations will benefit from the Norwegian petroleum wealth, says Minister of Finance Jan Tore Sanner.
2019 was a year with strong development in the equity markets, both in Norway and internationally. This contributed to high return on our savings in the Government Pension Fund. The return on the GPFG was 19.9 percent in 2019, whilst the return on the GPFN was 12.4 percent. At yearend, the market values of the two funds were NOK 10,084 billion and NOK 269 billion, respectively. This implies an increase of NOK 1,832 billion and NOK 30 billion. In 2019, the return on the GPFG was 0.23 percentage points higher than the benchmark return, whilst the GPFN outperformed its benchmark by 0.40 percentage points.
The coronavirus pandemic and related restrictions on economic activity in many countries led to significant movements in the equity markets in 2020. The return on the GPFG in the first six months of the year was -3.4 percent. During this period, substantial transfers between the fund and the national budget were made. The market value of the Fund still increased to NOK 10,398 billion, following the weakening of the Norwegian Krone. The return on the GPFN was -4.4 percent in the first half of 2020, and the market value decreased to NOK 257 billion.
– The recent market turbulence demonstrates that we need to be prepared for sudden and large movements in the financial markets. We have a long-term perspective and a robust investment strategy. This will serve us well in the long run, says Minister of Finance Jan Tore Sanner.
Changes to the geographical distribution of the GPFG equity benchmark
The Ministry of Finance is proposing to adjust the geographical distribution of the GPFG equity benchmark. The share of developed markets in Europe in the benchmark is to be somewhat reduced, whilst the share of the United States and Canada is to be increased correspondingly. This adjustment is in line with advice received from Norges Bank.
– The changes we are proposing will ensure the investments better represent the distribution of value creation in listed companies globally, says the Minister of Finance.
Emerging equity market investments may contribute to enhanced diversification and bring opportunities for higher expected returns. At the same time, emerging markets are typically characterised by weaker institutions, less transparency and weaker protection of minority shareholders. Such country-specific issues make maintaining the role as a responsible investor more challenging.
The Ministry will continue reviewing the composition of the emerging market sub-benchmark and present its assessment in the white paper in the spring of 2021. The report from the committee that has reviewed the ethically motivated guidelines for the GPFG, together with analysis and assessments from Norges Bank, will form part of the decision basis. New markets will not be included in the GPFG equity benchmark until the Ministry has concluded on its composition.
The Ministry to consider framework for withdrawal from the GPFN
The GPFN ownership shares in companies listed on Oslo Stock Exchange have reached a level where there is considerable risk of breaching the 15 percent ownership share limit for individual companies.
Folketrygdfondet has recommended to reduce the share invested in Norway and correspondingly increase the allocation to Denmark, Finland and Sweden. Folketrygdfondet also discussed alternative solutions, including expanding the scope for investment in unlisted companies pursuing listing, and withdrawals.
The Ministry of Finance proposes to keep the allocation to Denmark, Finland and Sweden unchanged at 15 percent. The Government Pension Fund also has a presence in the Nordics through the GPFG, and having two funds in the same market is in isolation not efficient. Increasing the GPFN allocation to the Nordics would magnify this issue. The challenge of high ownership shares in companies listed on Oslo Stock Exchange should in the Ministry’s view be resolved, fully or in part, through withdrawals from the GPFN.
– A withdrawal from the GPFN will require further assessment. We will continue working on establishing the scope and framework for such withdrawals, in order to resolve the issue Folketrygdfondet has raised in a sound and appropriate manner, says the Minister of Finance.
The Ministry will at the same time review whether the scope for investing the GPFN in unlisted companies seeking listing may to some degree be expanded.
The GPFG work on climate risk
As a large, long-term investor with ownership stakes in thousands of companies worldwide, the Fund risk and return will be affected by climate change, climate policy and new technology. This is a complex and multifaceted risk factor, and there is limited knowledge on how investors can best manage the risk arising from climate change. The white paper describes Norges Bank’s efforts on climate risk.
– Climate risk forms an integrated part of risk management, investment decisions and active ownership at Norges Bank. There is every reason to believe the future importance of climate will be significant. In my opinion, Norges Bank should therefore further strengthen its work on this issue, says Minister of Finance Jan Tore Sanner.