The Government Pension Fund of Norway (“the oil fund”) is the largest sovereign wealth fund in the world, with a market value of approximately $1.2 tn. First, let us remember a bit of history. The day before Christmas Eve in 1969, the Norwegian government was informed that an oil field had been discovered in the North Sea. This oil field made massive revenues for the Norwegian government due to the heavy taxation, but everyone knew that the oil income would not go on forever. The oil fund has been established to ensure responsible and long-term management of these revenues through generations. This mission has been solved by investing in different securities all over the world, effectively diversifying the wealth.
The investment decisions of a sovereign wealth fund of this size will naturally be monitored both domestically and internationally. The Norwegian parliament ultimately controls the oil fund, so to what degree is the oil fund acting on behalf of Norwegian foreign policy?
Historically, the message from the Norwegian parliament has been clear: an oil fund is a financial tool, not a political tool.
As good as this sounds, it is inevitable that an investor of this size must make his own decisions and not just investment decisions. The fund’s policy had to change, and the management imposed internationally acknowledged standards on politically loaded questions like gender egalitarianism, reporting standards, and dividend payouts. So, even the oil fund has admitted that it’s impossible to avoid decisions with political implications.
The oil fund themselves argue that they follow these policies for financial reasons. For example, their reason for implementing policies on board diversity is to avoid groupthink and improve the level of discussions within the boards. And this argument is probably valid. It is, however, not unthinkable that these policies are also implemented to avoid provoking the legislators. Recently, the Norwegian parliament has increasingly communicated opinions about how the oil fund should invest.
In the beginning, the restrictions imposed by the government were not that extensive. The fund should stay away from companies that are corrupt or breaking human rights, and restrictions regarding such investments were implemented quite early.
The list of regulations has been growing through the years. It now also includes a criterion to not invest in companies heavily involved in goods such as tobacco, cannabis, and coal. I will especially emphasize the prohibition of investing in producers of coal. While the restrictions on tobacco companies and producers of nuclear weapons are based on ethics, the authorities included coal in the list “to send a signal.” If the Norwegian government were to use the oil fund to “send signals,” we could be moving in a dangerous direction. Of course, the parliament has every right to decide how the oil fund preserves the wealth of society. No one questions their legitimacy in doing so. There is, however, a considerable distinction between general ethical guidelines and detailed, politically decided criteria to omit specific industries.
The responsible politicians argued that the restrictions on coal investments would eventually be economically wise due to the sustainable consequences of coal. Although this is probably correct, it starts to get dangerous when the parliament feels free to make economic investment decisions on behalf of the oil fund. Will this make it possible for domestic and international lobbyists to pressure Norwegian politicians to make the oil fund act in favor of their own nations’ interests? Is it completely unthinkable that the United States would use such a chance to inflict damage on China by pushing the politicians to make the oil fund sell their Chinese securities?
Suddenly, the oil fund would no longer be there to preserve the wealth of future generations but to make politically motivated investments.
So, what are the prospects for the future management of the oil fund? Quite worrying, unfortunately. Earlier this year, the Norwegian central bank got a new governor. The new governor was Jens Stoltenberg, the current NATO chief and past Norwegian prime minister for the Labor Party. Although he had to turn down the offer due to his responsibilities in NATO, this is perhaps the clearest sign of how politics are entering the doors of the central bank and the oil fund. The new prime minister of Norway, Jonas Gahr Støre, has given more reasons to worry. He has, on several occasions, spoken positively about using the oil fund to achieve foreign policy targets, such as promoting climate measures. Representatives from the Social Left Party, a part of the current governing coalition, went even further in describing the oil fund as a machine for change.
In the last eight years, Norway has been run by a coalition led by the Conservative Party. They have insisted on keeping the oil fund as a financial tool only.
After Gahr Støre and his more progressive government won the election last autumn, we have seen the start of their intentions to turn the oil fund into politics. The new coalition has already presented a net-zero emission target from the fund’s investments. The oil fund is heavily invested in the energy market, so this isolated policy change will significantly affect the sector worldwide.
The Norwegian oil fund’s market size makes its decisions a matter of International Relations. The fund owns about 1,5% of all shares in the world market, making it one of the most influential actors in the world economy.
We have seen the first formal step in politicizing the oil fund with the newly elected government. I suspect preserving wealth for future generations will no longer be the main priority with a politicized oil fund. To quote Thomas Sowell: “(Politicians) are trying to solve their own problems – of which getting elected and re-elected are number one and number two. Whatever is number three is far behind”. Let us leave investment decisions to the economists.