The $1 trillion fund, built from Norway’s own production of petroleum, shocked markets in November when it announced a proposal to dump oil and gas stocks. The rationale was that given Norway’s overall exposure to oil it didn’t make sense to also tie up financial assets in the petroleum sector, rather than a view on the future viability of the industry.
On Tuesday, Yngve Slyngstad, the fund’s chief executive officer, went a little further, acknowledging that the future of the business is very much up in the air, saying it’s “obvious” that there’s an energy transition happening.
“This energy transition will affect the consumption of oil and gas, and therefore, of course, could affect the profitability of oil and gas companies,” he said in an interview.
Read more on proposal to dump oil and gas stocks
But that risk is probably already priced into the market, meaning that oil stocks could from here on out deliver bigger returns than other stocks, according to Slyngstad.
“It’s quite possible to have a discussion about whether oil stocks, in isolation, could give a better return, or a higher risk premium, because the uncertainty is so great,” he said. “But that doesn’t necessarily mean that this is the type of equity risk premium that this fund should include.”
If the fund was viewed in isolation, removing an entire industry from the portfolio would reduce diversification and enhance risk, Slyngstad said. But given Norway’s exposure to oil prices through income from production taxes, state ownership of offshore fields and the government’s stake in Statoil ASA, shedding oil stocks will probably reduce risk for the country as a whole, he said.
“The issue with the concept of risk, is that it depends on who bears it,” Slyngstad said.
The fund on Tuesday, in its annual risk and return report, revealed that excluding certain companies had cost it about 6 basis points in return each year. The biggest negative impact on returns was 5 basis points a year from not investing in weapons and tobacco companies, while excluding companies that contribute to severe environmental damage had a positive impact of 4 basis points.
In fact, Slyngstad likened oil stocks to what happened with tobacco stocks, which the fund has been banned from investing in since 2009.
“It looks like tobacco stocks have had a better return over the last 30 years,” he said. “It was fair to ask for an extra risk premium because of the possibility that there would be regulations that would dramatically reduce tobacco consumption. That didn’t happen.”