The CO2 emissions of the Swiss National Bank and the Norwegian Petroleum Fund

Public investors such as sovereign wealth funds, pension funds and central banks are playing an increasingly important role in the financial markets. The companies they invest in generate large amounts of CO2 emissions and play an important role in the transition to a greener economy.

We compare two opposing perspectives on how public investments deal with emissions. The first perspective assigns investors an “active” role, according to which a public investor, in addition to striving for the highest return, must also serve the public interest. The emblematic investor in this regard is the Norwegian sovereign wealth fund, Norges Bank Investment Management (NBIM). The figure below shows the variation of his investment in BHP, the largest mining company in the world. NBIM does not shy away from investing and disinvesting frequently. It is the largest public investor whose portfolio reflects a responsible attitude to issuance. While the main objective of NBIM remains to generate returns, the fund also promotes decarbonisation through its investment strategy.

The Swiss National Bank (SNB), meanwhile, is taking a “market neutral” approach, where public investors should follow the market and not try to have an environmental impact through their portfolio. This approach is underpinned by the idea that as a public actor it is bound by a requirement of neutrality and impartiality in its treatment of market participants. It also reflects democratic concerns that climate policy should be conducted through more traditional economic policy instruments, such as taxation and regulation, which are outside the remit of the central bank.

We compare the NBIM and the SNB based on their strategy and impact. We focus on three aspects: portfolio policy, shareholder engagement and moral leadership. The portfolio policy sets the criteria for the companies included in the fund’s portfolio. Shareholder engagement involves the use of voting rights and other resources available to asset owners to influence their issuer’s business strategy. Moral leadership refers to the different ways in which the fund’s investment policies, shareholder engagement, and broader communication efforts shape the investment and ownership policies of other investors.

NBIM is an active investor and uses shareholder involvement to drive companies to change, especially in the area of ​​transition. In 2020, NBIM had 2,877 meetings with the companies in which it invests and started voting at 11,871 shareholders’ meetings. One of the companies that she has a lot to do with is the aforementioned BHP. Part of the success of NBIM’s engagement strategy stems from a company’s willingness to divest if it does not follow its recommendations. While this has only a limited direct effect on prices because other investors will buy the stock, it works because it makes its commitment policy credible. As can be seen in the above figure, NBIM offers the largest standard deviation in its investment among the top 20 investors in BHP. This willingness to invest, divest and reinvest makes its engagement strategy more credible than that of other major investors, who have a much lower standard deviation and tend to hold stocks regardless of the behavior of the companies.

A thorough analysis of the impact of the three levers yields four important results. First, we show that the carbon footprint is an insufficient indicator of impact. In fact, the Norwegian institution underperforms the SNB on this measure, even taking into account the size of their respective portfolios. In other words, NBIM has a larger carbon footprint than SNB per dollar invested. Second, these paradoxical results reflect important interactions and potential conflicts between the use of the three levers. While divestment and shareholder engagement are usually incompatible, our framework allows us to emphasize a more nuanced set of interactions in the context of public investors’ strategic choices. Third, we show that if the investment strategy has a potential impact through portfolio conditions and shareholder engagement, this impact is limited, and not very proportional to the size of their portfolio: if decarbonizing a portfolio is easy, need real impact on climate change as an investor is more difficult. Finally, we suggest that the impact of public investment funds is potentially greater through moral leadership. Major public investors can change the morale slider by expressing their views on what is an acceptable investment and what is not. For example, by divesting themselves from carbon-intensive companies, public investors indicate that such investments are morally questionable. Despite its critical role, the nature of this channel makes its true impact elusive and difficult to quantify, and deserves much more attention from empirical researchers.

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