India’s connect with the Norwegian pension fund’s $7.5 bn oil & gas divestment

Norway’s state pension fund – the $1 trillion Government Pension Fund Global (GPFG) – announced on March 8th that it will divest $7.5 billion of its stock holdings from global oil and gas firms.

The divestment will not be immediate – so as not to send their stocks plummeting – but certainly over a period of time. However, the firm will remain invested in giants like Shell and BP – only in their renewable energy divisions.

A full list of the firms to be affected is here.

How it affects India

The GPFG’s exposure to India’s five largest oil and gas firms (as on Dec. 31, 2018) is as follows:

Source: https://www.nbim.no/

Barring the privately-owned Reliance Industries Ltd., the GPFG’s exposure amounts to $181 million. Reliance Industries, on the other hand, stands to lose $485 million alone. It means that eventually, the amount will not be available to the firms for future exploration and extraction operations.

However, the real significance of the development lies in the fact that the GPFG’s decision is not influenced by the desire to isolate fossil fuels for their role in driving climate change.

Instead, it is based entirely on a recommendation by Norway’s central bank in 2017 to lessen the fund’s exposure to the (potentially) permanent decline in fossil fuel prices.

Industry impact

Thus it sends a strong signal that remaining invested in oil & gas is poor financial strategy. That the world’s largest and (arguably) the most successful pension fund is ditching fossil fuels clearly shows that the risk of poor returns on investment is only likely to rise as the world switches to zero-carbon alternatives.

As Tom Sanzillo, Director of Finance at IEEFA, states, “Norway’s fund managers have decided to divest from oil and gas exploration and production companies. The equities no longer possess the blue chip status of bygone years. Today they are too risky to be included in a well-managed portfolio.

This is long overdue and likely to improve the returns of Norway’s sovereign fund at a time when reliance on fossil fuels is financially unhealthy. The Fund will need a standard going forward to distinguish between those companies moving toward renewable energy and those wedded to new fossil fuel exploration and production.”

There is little doubt now that the GPFG’s decision could resonate with other institutional investors. Prominent lenders, such as Standard Chartered Bank, World Bank and Asian Development Bank (ADB) have already signalled an end to financing the other big fossil fuel – coal. That their focus may now move to oil & gas is not entirely impossible.

Odd Arild Grefstad, CEO, Storebrand Group (which manages assets worth $90 billion), echoes the sentiment: “This is a good day, Norway is taking another step in the right direction. The Government has made a reasonable and forward-looking decision, in line with our advice given through the public consultation response to the Government.

When the world’s biggest Sovereign Wealth Funds comes to the conclusion that they can achieve high returns on investments with moderate risk by reducing exposure to oil and gas, investors will take notice.”

Therefore, even though the CEO of Saudi Aramco has rubbished apprehensions over the future of the fuels – calling them a “crisis of perception” – it is the crisis of financial returns that is slowly but surely tilting the balance away from fossil fuels.

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