Norway’s sovereign wealth fund should be allowed to exclude any business that is “severely harmful” to the global climate, according to a new report, but should not categorically exclude fossil fuel companies.

The report, commissioned by the Ministry of Finance in April following pressure from the Norwegian Parliament, said the NOK6trn (€699bn) Government Pension Fund Global should not be viewed as an instrument of climate policy and rejected the concept of stranded assets as one that should guide investment policy.

It nevertheless recommended that the fund’s ownership strategy be enhanced, and that it engage with fossil fuel companies on matters of climate resilience and how they would transition to a low-carbon environment.

“By engaging on climate resilience and transition strategies for fossil fuel companies, the fund will be actively managing the climate change-related risk exposure to its portfolio and protecting the long-term value of its investments,” the report said.

The committee, chaired by economist Martin Skancke, chairman of the UN-backed Principles for Responsible Investment, urged NBIM to engage with regulators and standard-setters.

“In many cases, these efforts can be more effective if they target industry sector standards rather than individual company conduct,” it said.

“Clearly, climate change is such an issue.”

The report comes days after Yngve Slyngstad, chief executive of Norges Bank Investment Management (NBIM), called for more rationality in the sustainable investment debate.

Additionally, the report suggested the current guidelines over exclusion be amended to include consideration of climate change, allowing companies to be removed from NBIM’s investment universe on a case-by-case basis where there is “unacceptable” risk that a company’s actions are “severely harmful” to the climate.

It rejected the notion the stranded asset debate should guide investment strategy, and said the prevailing market price should be viewed as adequate compensation for investment risk.

“This is, however, not the same as stating that the issue of stranded assets is immaterial to investors or that one should be indifferent to the issue,” the report added.

At the end of September, three of the fund’s 10 largest equity holdings were oil companies.

NBIM’s stake in Shell was valued at NOK31.8bn, while it owned NOK20.3bn and NOK19.5bn worth of shares in BG Group and Total, respectively.

The oil and gas sector, which accounted for more than 8% of its equity holdings, was also its worst performer for that quarter, with a decline in oil prices leading to a 6.3% loss from its shares in the sector.

Norway’s minister for finance Siv Jensen said the expert group’s report offered a good platform for further debate in Parliament.

The government will comment further on the report in spring next year, when it publishes its annual White Paper assessing the fund’s performance.

The fund’s Strategy Council was yesterday asked to consider if unlisted infrastructure should be added to its investment portfolio.

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