This morning the AFR reported that the Norwegian Sovereign Wealth Fund (SWF) may divest its fossil fuel investments.
Some of Australia’s biggest resources companies could lose a major investor if Norway goes through with a plan to ban its oil-fuelled sovereign wealth fund from investing in fossil fuels including coal, gas and, ironically, oil.
Now it turns out that the broader environmental movement is running a divestment campaign against fossil fuels and will no doubt be lobbying the Norwegian authorities to divest from fossil fuels – although not to actually stop its own fossil fuel extraction activities. I think that it is significant that the environmental movement is targeting public listed firms but not state owned enterprise.
The Norwegian government is going to conduct a review as to whether it should hold investments in fossil fuels or whether it should ban those investments. As it stands the Norwegian government already bans investments in tobacco and armaments.
It seems to me that the issues are both economic and political. The economic issue to my mind is whether the Norwegian oil fund should hold investments in other fossil fuel producers at all. The fund exists to manage Norway’s oil wealth and to provide for some income if and when its own fossil fuels are exhausted. I am not convinced that a SWF is the best way to meet those objectives, but that is a matter for the Norwegians. But if the fund derives its funding from fossil fuel extraction, why would it then invest in other fossil fuel producers? If the SWF exists to diversify away from fossil fuels, then it is very likely to be over-weight in fossil fuels. Given its stated objectives there is a good economic argument for the Norwegian oil fund to be under-weight in fossil fuel investments. The problem I foresee is that if the Norwegian oil fund does decide to exit fossil fuel investment that it will describe that decision in environmental language and not in economic and risk-management language (assuming, of course, that there is an economic argument relating to portfolio risk and management to actually go under-weight in fossil fuels).
What about the political risks? Clearly the environmental movement isn’t lobbying the Norwegians to exit their own fossil fuel extraction activities. The argument then being that the Norwegian government can and should profit from its own mining activities but that other people (foreigners) shouldn’t. In the 1930s we saw countries raising tariffs against each other and restricting trade and prosperity. Economists at the time agreed it was a disastrous policy. It seems to me that this is a similar strategy. Foreign governments start directing their SWFs to engage in non-economic investment strategies that give rise to tit-for-tat retaliations.
Ultimately directing resources for non-economic reasons will lead to wealth destruction for both the Norwegians in the long run and the rest of us who are caught up in their decision making.