Norway’s $1 trillion wealth fund proposes to drop oil, gas stocks from index

OSLO, (Reuters) - Norway’s trillion-dollar sovereign wealth fund is proposing to drop oil and gas companies from its benchmark index, which would mean cutting its investments in those companies, the deputy central bank chief supervising the fund told Reuters, sending energy stocks lower.

If adopted by parliament, the fund would over time divest billions of dollars from oil and gas stocks, which now represent 6 percent - or around $37 billion - of the fund’s benchmark equity index.

The aim is to make the Norwegian government’s wealth less vulnerable to a permanent drop in oil prices, at a time when the fund is increasing its exposure to equities to 70 percent of the fund’s value from 60 percent earlier.

Europe’s index of oil and gas shares hit its lowest level since mid-October on the news and was trading down 0.39 percent at 16.41 GMT.

The proposal came in a letter sent by the central bank to the finance ministry and signed by its governor, Oeystein Olsen, and the chief executive of the fund, Yngve Slyngstad, Deputy Central Bank Governor Egil Matsen said in an interview.

“Our advice is to simply remove the oil and gas sector, as it is defined in the FTSE reference index, from the fund’s reference index,” Matsen said.

“That would mean all companies that the FTSE has classified with the sector, should be removed from our reference index.”

The fund is the world’s largest sovereign wealth fund. It invests Norway’s revenues from oil and gas production for future generations in stocks, bonds and real estate abroad.

It is among the largest investors in a wide range of oil companies, holding stakes at the end of 2016 of 2.3 percent in Royal Dutch Shell, 1.7 percent of BP, 0.9 percent of Chevron and 0.8 percent of Exxon Mobil .

“The risk for the oil sector is how many investment funds will downsize their exposure to extractive industries,” said Jason Kenney, oil analyst at bank Santander.

The fund also held 1.7 percent of Italy’s Eni, 1.6 percent of France’s Total and 0.9 percent of Sweden’s Lundin Petroleum, among others.

At the end of the third quarter, Royal Dutch Shell was the fund’s third-biggest equity investment overall, worth around $5.34 billion and exceeded only by its ownership in Apple and Nestle.

“This news will be scrutinised very closely by funds around the world who are already looking closely at the climate risks in their portfolios and which sectors and companies will fare best in the low-carbon transition,” said Stephanie Pfeifer, head of the Institutional Investors Group of Climate Change, which groups 140 investors that work on global warming and represent assets of more than 20 trillion euros.

“Investors will look even more carefully at which companies are aligning their business strategies to the transition to a low-carbon energy system and which ones are not. Investors then have a range of options for managing the risks they perceive,” she told Reuters. Others were less sanguine. “My guess is that after the initial market adjustment – which would have been difficult to anticipate – the move may not damage the sector’s long-term performance significantly,” Kevin Gardiner, global investment strategist at Rothschild Wealth Management, told Reuters. BP and Shell declined to comment. The aim of the proposal is to make Norway’s wealth less vulnerable to a permanent drop in oil prices, especially at a time when the fund is increasing the proportion of its portfolio it invests in equities to 70 percent from 60 percent previously.

“That would mean buying more stocks in the oil and gas sector,” said Matsen.

The fund has grown so large that even though the Norwegian state is taking less than 3 percent of the fund’s value every year for its fiscal budget in recent years, oil spending now accounts for one in five crowns spent by the state.