Norway’s riches can combat carbon

Norway’s new prime minister, Erna Solberg, may appear less occupied by global issues than her predecessor, Jens Stoltenberg.

But on a few critical climate matters the Conservative Party leader looks like more of a reformer than Stoltenberg, particularly when it comes to what role Norway’s $790bn sovereign wealth fund, the Government Pension Fund Global (GPFG) could play in financing the transition to a low-carbon economy.

Firstly, the newly elected coalition government intends to set up a separate GPFG mandate for direct investments in infrastructure such as renewables. Secondly, a special programme will be set up within the fund to invest in sustainable companies and projects in developing countries and emerging markets.

The world’s largest sovereign wealth fund is allowed to invest in listed equities, bonds and real estate. If it were permitted to expand its portfolio to include direct investments in wind and solar plants and other infrastructure, this could have a significant impact on the flow of capital to the renewables sector.

The fund’s manager, the Norwegian Central Bank, has asked the Ministry of Finance to let it make direct infrastructure investments. Now, an unusual alliance of leading companies and organisations encompassing finance, religion, renewable energy, the environment and development has put the question at the top of the agenda by calling for the fund to be able to invest directly in infrastructure for the production and distribution of renewables.

Such a move would be good from a financial and a sustainability perspective, argues the alliance, which includes financial institutions KLP, Storebrand Asset Management and the Ulltveit-Moe Group, green-energy company Scatec (my employer), the Catholic Diocese of Oslo, WWF Norway, the Norwegian Climate Foundation, the Development Fund, Future in our Hands, the anti-emissions group Zero, Greenpeace and Friends of the Earth Norway.

They emphasise that other large European pension funds are already investing directly in renewables, and that the GPFG is well positioned to do the same because of its size, its long-term investment horizon and the fact that it does not have ongoing liquidity needs.

Another argument is that global warming threatens the long-term performance of the Government Pension Fund of Norway, of which the GPFG is part. With more extreme weather, the international community must spend an ever-increasing amount on repair and adaptation, at the expense of investments that can yield higher productivity and good returns.

The GPFG could rise to $1trn by 2020. If the fund is allowed to put up to 5% of its assets — equal to the target set for its property investments — into renewables-related infrastructure, it could, on average, allocate about $10bn a year to green-energy investment. This is a modest amount compared with the $500bn a year that is required if we want to limit global warming to 2°C. But it could still make Norway’s sovereign wealth fund perhaps the world’s largest clean-energy investor.

The potential indirect effects are arguably even more important. This is because the GPFG is seen as a leader when it comes to governance and socially responsible investments. The world’s sovereign wealth funds are sitting on more than $5trn, of which 60% belongs to oil and gas exporters. A decision to let Norway’s fund seek direct low-carbon investment opportunities would most likely be followed by other funds. A few, such as Singapore’s Temasek and the Abu Dhabi fund, have already started. More long-term capital allocated to green energy will not by itself lead to more renewables projects, but it will lower the cost of capital to the sector and hence make many more projects bankable.

One prudent approach for the GPFG could be to team up with international development finance institutions to co-invest in projects, or it could allocate mandates to private managers targeting green assets. The emerging green bonds market should also be attractive. Given renewables’ low technological risk, paired with long-term power-purchase agreements, it shouldn’t be difficult to beat the fund’s average real annual return of about 3%.

The incoming government in Oslo will hear arguments about costs and risks. However, opposition to the proposal has more to do with the perception by the finance ministry’s powerful civil servants that this is yet another fashion by popularity-seeking politicians. It is commendable that these civil servants assume the role of “protector” of our savings, but in this case they should dig deeper into the issues.

And if Norway’s international partners think a greening of its vast sovereign wealth fund is a good idea, they should now let their views be heard.

Terje Osmundsen is senior vice-president for business development at Norwegian international solar provider Scatec Solar

This piece was published as part of the Thought Leaders series. Recharge’s Thought Leaders’ Club brings together leading thinkers and participants from the renewable-energy sector to examine the key challenges facing our industry