Early this year, Norway put its toe in the global movement to drop investments in fossil fuel companies. Its sovereign wealth fund (the Fund), at $850 billion the world's largest, divested from 14 coal mining companies, five tar-sands oil producers and a few other companies heavily involved with fossil fuel.
Late last year, an Expert Group appointed by Norway's Finance Ministry released a 71 page report addressing whether the Fund, as a responsible investor sensitive to the global threat of climate change, should exclude fossil fuel companies from its portfolio or exercise its ownership and influence by engaging with those companies.
The Expert Group rejected an "either-or" approach, describing the many ways in which strategies of exclusion and active ownership can contribute to lessening the climate change danger. Indeed, it wisely emphasized the reinforcing value of using both exclusion and active ownership in combination, suggesting that together they "can be larger than the sum of their parts."
In exploring these strategies, the Group ignored concerns of fiduciary duty. This is important. There is nothing exceptional about the Fund's objectives that distinguishes it, in regard to investments, from the vast majority of institutional funds managed by fiduciaries throughout the world, whether as pension funds, endowments of educational institutions, philanthropies or others. This approach to fiduciary duty is remarkably, and refreshingly, different from the defensive one adopted by many fiduciaries in the United States, who have wrapped themselves in the duty of care to avoid confronting the fossil fuel industry by either exclusion or engagement through active ownership.
In acting upon the Expert Group's report, Norway has a problem. Not only is the Fund's immense wealth derived from North Sea oil, the Norwegian Parliament controls Statoil, one of the largest oil companies in the world. These facts pose a dilemma. They also offer Norway a unique opportunity.
In regard to fossil fuel companies directly engaged in extractive activities, it is unrealistic, without dramatic steps, to imagine them being swayed by shareholder arguments to get out of their core business of exploring for, extracting and selling carbon-emitting fuel. The problem goes beyond just the high likelihood of spinning wheels and accomplishing nothing in addressing the urgent need for global action. Indeed, engagement is likely to assist Big Oil and Big Coal in postponing the day when governments limit the burning of fossil fuels. The International Energy Agency reckons that, if governments act to compel adherence to the "carbon budget" necessary to have a chance of holding the planet to only a 2-degree Celsius rise in temperature from pre-industrial levels, it will cause Big Oil and Big Coal to lose about $1 trillion a year. Engagement with institutional investors could give the fossil fuel giants protective cover in stretching out the transition process to renewables for as long as they can. It legitimizes talk over action.
However, Norway could provide exactly the dramatic step needed to make active ownership through engagement a realistic and promising enterprise. The Fund could try engagement with the fossil fuel companies held in its portfolio, but only if first, the government were to align the behavior of Statoil with the demands the Fund would then make on those portfolio companies. Parliament has the power, and Norway is recognized as a global leader in both thought and deed.
There are three fundamental requirements that a fossil fuel company should meet to avoid exclusion from portfolios managed by responsible fiduciaries seeking to acknowledge the global threat of climate change. They are:
- Publicly accept the science of climate change, including recognition of the scientifically rooted predictions of damage to the planet and its people if we fail to halt carbon emissions.
- Within a reasonable period, cease CAPEX (capital expenditures) in search of more fossil fuel.
- Use the company's lobbying forces wherever active in the world publicly and constructively to lobby for (a) elimination of all fossil fuel subsidies, which globally today total some 600 billion a year, (b) imposition of carbon taxes or other means to internalize the costs to the planet of burning fossil fuels, and (c) legislation to reduce carbon emissions to a level, globally, that will not harm the planet.
There may be other demands that investors want to make on fossil fuel companies, but these three are fundamental, fair and can be instituted immediately. Any company accepting them would change from being a global pariah that is increasingly viewed as such throughout the world to become a responsible corporate citizen whose securities need not be excluded from portfolios. Any company rejecting one or more of them would remain a pariah and be excluded.
By instituting these three policies, Statoil would establish itself (and vicariously the Government of Norway and its people) as first among those global leaders seeking to address the most existential threat the world has ever faced. Statoil would become the measure against which all other fossil fuel companies would be tested for inclusion or exclusion from portfolios everywhere.
Of course, this course of action could be costly to Statoil. That would depend on many factors, including the price of oil, the cost of exploration and development, the status of renewables and other alternative sources of energy and the uses to which funds earmarked for CAPEX were put. Measured against the vast positive impact such actions would have in propelling the solution to climate change forward, whatever net costs were incurred would be well worth bearing.