Posted inESG

Ethical exclusions lower Norway’s sovereign fund returns

Tree inside the lightbulb

The fund’s latest return and risk report said product-based exclusions, including tobacco companies and weapons manufacturers that violated fundamental humanitarian principles, had reduced the cumulative return on the equity index by around 2.4 percentage points, or 0.1 percentage point annually.

The report also said conduct-based exclusions – including human rights violations, severe environmental damage, gross corruption, or other violations of fundamental ethical norms – had actually increased the cumulative return on equity index by around 0.9 percentage points, or 0.04 percentage points annually. So, taken together the product-based losses and conduct-based gains created the overall decline of 1.6 percentage points.

The sovereign fund which has $1trn (€806.7bn) in assets, has also recently set out a series of strong anti-corruption measures it expected the 8,985 companies it invests in to have, but the impact this change was not included in the report.

Return impact of equity benchmark index exclusions relative to an unadjusted index at constituent level

* Measured in dollars and reported in percentage points.

Source: Norges Bank Investment Management

Exclusion impact

Sarasin and Partners’ 2018 Compendium of Investment report pointed to MSCI data on ethical investment restrictions, that said if a fund excluded companies that had revenue related to adult entertainment, alcohol, gambling, tobacco, and weapons, shale oil and tar sands producers, and thermal coal reserves producers, it would be excluding 21.9% of the entire investment universe.

The reported noted that this demonstrated that careful consideration needed to be given to the percentage of revenue that companies generated from the restricted sector.

Hermes Investment Management head of sustainable investing, Andrew Parry, said that using negative screens and exclusions was an old approach to sustainable investing and that it was responsible for the perception that funds that included environmental, social, and governance (ESG) concepts delivered below-market returns.

He said that the investment assessment had now changed with a higher focus on positive reasons for investing in a sustainable way.

“Impact investing was originally driven by philanthropists, NGOs [non-government organisations] and foundations who tended not to put financial return into the equation. But over the last decade people have begun to realise that doing so gives it greater duration and helps reach more people’s lives,” he said.

“The Bill and Melinda Gates Foundation, the Ford Foundation, and the Heron Foundation, are examples of groups that have done this successfully.”

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

Part of the Mark Allen Group.