Norway’s $840 billion sovereign wealth fund is the biggest investment fund in the world. On average, it owns 1.3 per cent of every publicly listed company. Investors around the world watch its decisions. So when the Norwegian parliament voted late last month to look into selling off its holdings of fossil fuel companies, it was a big deal for both the financial and environmental community. It’s estimated fossil fuel shares make up about 8.4 per cent of the fund’s portfolio – about $44 billion. Divestment would be a huge victory for the climate movement, which has encouraged institutional investors to get out of carbon-intensive companies on both moral and financial grounds.
That being said, some environmentalists say the decision reeks of hypocrisy. Norway’s financial behemoth of an investment fund is entirely funded by profits from state-run Statoil, after all. Its export of oil and gas resources accounts for 500 million tonnes of emissions each year. Taking its vast oil wealth out of fossil fuel companies does raise some concerns about a national greenwashing.
Valid concerns give way to the realistic assessment that the climate movement needs every ally it can get. Especially helpful would be one with so much respect and clout internationally. Ten colleges and universities, 22 cities and towns, and a variety of religious institutions have made the pledge to divest their pension holdings from companies poised to cook the climate. But largely symbolic pledges from small investors can’t possibly worry multinational juggernauts like BP, Shell or BG Group. These three oil giants are in the top ten holdings of Norway’s wealth fund, though, and the potential divestment of the world’s largest investor is likely to raise some eyebrows.
In a world where money is king, even more important than the moral dimension of divestment could be the financial risk of fossil fuels. This is where Norway’s action could lend credence to environmentalist’s latest case for climate action. Briefly explained, the argument is that since humanity needs to leave the majority of Earth’s fossil fuel reserves in the ground, all those assets and the infrastructure that goes alongside them are likely to be worthless when the world finally gets its act together. Stranded assets of coal, oil and gas companies are on their books and in their valuation. When the world realizes we can’t burn it all, the instant devaluation of some of the world’s biggest corporations and the massive the write-off could drag down institutional investors even more so than the financial collapse of 2008. This coming market crisis is known by its adherents as the carbon bubble.
The theory has gained traction in the halls of government, academia and the financial media. But few serious investors have done more than study the problem. If Norway cites the financial risk of fossil fuels in any decision to divest, it would be a colossal coup for the climate movement. Earth’s biggest investment fund taking steps to protect itself from a coming carbon bubble would surely spark a worldwide reevaluation of portfolios. Calls of hypocrisy don’t make much sense, then. If anything, environmentalists should be hoping Norway bases its decision on a raw risk assessment instead of moral grounds. If after a pragmatic review of the risks Norway comes to the conclusion it cannot continue its fossil fuel holdings, other investors could clearly view carbon as an unsafe investment. It would hurt the financials of these companies far more than symbolic efforts at divestment. Translate this to less money for exploration and exploitation of fossil fuels, and therefore less carbon conspiring to cook the climate.