Norway Wants Its Wealth Fund to Stop Adding Emerging Markets

(Bloomberg) -- Norway’s $1.3 trillion wealth fund may be forced to exclude a number of stocks as the government seeks to adjust the portfolio to impose the same ethical and environmental standards across its investments.

The world’s biggest sovereign investment vehicle should follow a revamped set of guidelines that could result in a 25-30% reduction in the number of companies it holds, Finance Minister Jan Tore Sanner said in a speech on Friday. That includes not adding any more emerging markets to the index it tracks.

Emerging markets are “a complex group” that are “often characterized by weaker institutions, less openness and weaker protection of the interests of minority shareholders,” Sanner said.

The proposal, which still needs to be approved by parliament, marks the latest step in the fund’s shift toward an increasingly sustainable portfolio. In a strategy update earlier this week, the fund said it intends to become a global leader in sustainable investing.

In an accompanying white paper also published on Friday, Norway’s finance ministry said the combined market value of the reduction in stocks will be small, even though the number of companies is significant.

The benchmark that Norway’s wealth fund uses, now built on the FTSE Global All Cap index, needs to be adjusted to ensure the investor doesn’t end up holding stocks that don’t live up to its criteria, according to the white paper.

The proposal is based on guidance from a government-appointed ethics commission, which has previously flagged concerns about the benchmark. Last year, the commission pointed out that FTSE doesn’t consider certain ethical challenges, such as human rights, when classifying countries. It also highlighted increased market and political risks in emerging economies.

The finance ministry has already decided that companies based in Saudi Arabia and Romania, which are included in FTSE, shouldn’t be part of the fund’s benchmark, according to the white paper.

The fund, which returned 10.9%, or $123 billion, on its total portfolio last year, has invested under strict ethical guidelines, including bans on certain weapons, tobacco and most exposure to coal, since 2004.

The Norwegian government decided in 2019 to review those standards, which include human rights conduct and climate change. Under the fund’s mandate, the central bank needs to approve all markets in which it’s invested, including those in the benchmark index set by the finance ministry.

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