Jon Nicolaisen: Responsible investment and active ownership Speech by Mr Jon Nicolaisen, Deputy Governor of Norges Bank (Central Bank of Norway), at Norges Bank, Oslo, 19 November 2019. * * * The graphs can be found on the Norges Bank’s website. Introduction In 1990, visionary politicians decided to establish the Government Petroleum Fund, later renamed the Government Pension Fund Global (GPFG). On Tuesday of this week, the value of the fund passed NOK 11 000 billion – or over 3½ times Norwegian mainland GDP. The fund is now among the largest shareholders in many of the world’s listed companies. Chart: From natural resources to financial wealth What started as oil wealth in the ground has been transformed into savings and financial wealth abroad. Under the fiscal rule, we should only spend the expected real return on the fund. As long as we only spend the return, we ensure that the fund will benefit future generations. In 2020, withdrawals from the fund accounted for more than one krone in five in the central government budget. This means that the fund indirectly finances tens of thousands of public sector employees and ensures that taxes are lower than they would otherwise be. We might say that Norway has moved from being an oil nation to being an investment fund nation. The assets in the fund belong to the Norwegian people. The most important decisions, such the choice of the fund’s equity share, are anchored in the Storting (Norwegian parliament).
The Ministry of Finance decides how the fund is to be managed and lays down guidelines in a mandate for Norges Bank. The Bank is tasked with making investment decisions and exercising the fund’s ownership rights. Norges Bank’s Executive Board sets the limits for the Bank’s asset management within the guidelines in the mandate. Operational management and investment decisions linked to individual companies are the responsibility of the Bank’s investment management organisation – Norges Bank Investment Management (NBIM). Chart: Management objectives Central to the mandate is the benchmark index. It is set by the Ministry of Finance and is constructed on the basis of sub-indexes from external index providers. The benchmark index divides the funds’ assets into global investments in equities and bonds. On the equities side, the benchmark index comprises 8 000 companies in 47 countries. The Ministry also sets risk limits for the Bank’s asset management. The objective of the management of the fund is to achieve the highest possible return net of costs within the limits set in the mandate. Chart: Enhanced indexing The fund’s investment strategy reflects the mandate’s requirement to track the benchmark index fairly closely. Since the fund is subject to an index-tracking requirement, the fund’s return largely follows the return on the benchmark index. Moreover, fluctuations in the benchmark index provide a good proxy for the risk in the fund. But this does not mean that asset management is unimportant. On the contrary. Even minor deviations from the benchmark portfolio can have a large impact over time.