Norway’s NOK8.7trn (€890bn) sovereign wealth fund should remain invested in energy stocks, a government-tasked expert commission has concluded, even though the managers of the fund believe the shares should be sold off.

Øystein Thøgersen, chair of a commission created in February by Norway’s finance ministry, said: “Divestment of the energy stocks in the Government Pension Fund Global [GPFG] is not an effective insurance against a permanent decline in oil prices.

“The energy stocks only contribute marginally to Norway’s oil price risk.”

The commission had been asked to assess whether the GPFG should continue to invest in stocks listed in the energy sector as classified by FTSE Russell.

It was appointed following advice from the fund’s manager Norges Bank Investment Management (NBIM) that Norway’s state assets would be less vulnerable to a permanent reduction in oil and gas prices if the GPFG were not invested in energy stocks.

Energy stocks currently amount to some 4% of the total value of the fund, or about NOK315bn at the end of 2017, according to the finance ministry.

Siv Jensen, Norway’s minister of finance, said: “Together with the advice from Norges Bank and the public consultation of the bank’s advice, this report will constitute a solid foundation for decision-making. The government aims to conclude on this matter later this fall.”

Although the commission agreed with Norges Bank that the value of energy stocks was linked to the oil price – especially in the short term – it had been asked to take a number of other considerations into account.

One of these was the need for an insurance against a permanent decline in the value of Norway’s oil and gas resources, the ministry said.

Divestment dismissed

However, the commission contended that divestment of the fund’s energy stocks was not an effective insurance against lower oil revenues in the future.

In a scenario with sustained lower oil prices, the loss in the government’s net cash flow from petroleum activities would be substantial, the experts said, but pointed out that only around 1% of such a loss would be covered if the GPFG were not invested in energy stocks.

“The estimate is uncertain, but the contribution will in any event be insubstantial,” the commission said.

Selling off its energy stocks would challenge the current investment strategy of the fund, with broad diversification of the investments and a high threshold for exclusion, it added.

The expert group also said the need to insure Norway’s wealth against a permanent reduction in the oil price was historically low.

Instead, it suggested reducing the Norwegian state’s equity stake in directly-held energy companies such as Equinor, in which the energy ministry held a 67% stake in 2014, according to its latest available report. Norway’s government also owns oil and gas companies including Gassnova, Gassco and Petoro.

If the state wanted to reduce the climate risk in the GPFG, the experts suggested doing more work on individual companies with the largest exposure to climate risk.

Equity strategy shift

Separately, NBIM has written to the finance ministry recommending that the process of benchmark index rebalancing should happen more gradually.

It argued that the logistics of switching holdings had changed over the years now that the fund had grown so large. Since 2013, the fund has grown by two thirds from NOK5trn to NOK8.3trn as of 30 June.

“The equity share in the benchmark index should be adjusted back to the target level more gradually than at present,” Norges Bank said. “The width of the no-trade band within which the equity share may move without triggering rebalancing should be narrower than today, and could be set at +/- 2 percentage points.”

As of 30 June, the fund had NOK5.6trn, or 66.8% of its portfolio, invested in listed equities. Since last year the fund’s benchmark allocation targeted a 70% weighting to listed equities.

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