The Norwegian sovereign fund – the Government Pension Fund Global (GPFG) with assets worth around $1.25trn – has criticized the United Nations’ Principles for Responsible Investment’s (UN PRI) emphasis on environmental, social, and corporate governance (ESG) investing for real-world outcomes as being a departure from the PRI’s mission and strategy.

The critique is plain wrong. The fund claims the PRI’s emphasis that investment strategy be directed to improving real-world environmental and social conditions – i.e. having a positive impact on the ground via investments – is a departure from the principles. 

However, as chair of the expert group that drafted the principles, I can assure the fund that the PRI’s mission and strategy has always been to improve conditions on the ground, not just to help investors make more money by taking ESG into account.

What’s the point of ESG? Is it just a ploy to increase assets under management and a tool for making more money? Why would the UN partner with the investment community if not for investors to align our investments with the UN’s mission concerning the environment and human rights (political, social and economic human rights)?

Unless investors walk the walk, it’s pretty clear they’ve signed up to UNPRI only because the ESG halo helps gather more assets and make more money rather than contribute to the UN’s mission.

The UNPRI is right to get real and dismiss those who sign up under false pretenses – good riddance to hypocrisy.

The preamble to the principles says: “As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that ESG issues can affect the performance of investment portfolios – to varying degrees across companies, sectors, regions, asset classes, and through time.”

Fiduciary duty in the 21st century, given the conditions we’ve created in the Anthropocene, means that the financial long-term interests of beneficiaries are inextricably intertwined with emerging climate catastrophe and its consequences.

The point of ESG is to improve environmental conditions on earth, social and economic conditions in society and governance justice in corporations, not just to be able to pose green and make more money by tilting portfolios with ESG-rated companies.

We are well past having to justify a decarbonization investment strategy solely on the grounds of “materiality”, i.e. if and only if doing so will improve or not negatively affect investment returns.

Institutional investment must align with the UN’s Sustainable Development Goals (SDGs) and the Paris Agreement if society is to make progress against man-made climate catastrophe and the socioeconomic and political polarization that is threatening democratic welfare states.

Alignment means, for instance, weeding from portfolios industries and companies that do not conform to the European Union’s green taxonomy. This will become increasingly possible as green legislation, regulations and fiscal policies take hold in the years ahead and the investment universe becomes increasingly populated with greener more sustainable companies. Competitive investment performance will follow.

What sense does it make for the Norwegian sovereign fund, an extension of the Norwegian state and its life insurance policy for future generations, to act in ways that do not recognize the spirit and letter of international treaties Norway is signatory to, the Paris Agreement in particular?

Norway has become rich and its fund huge from pumping oil and gas full steam ahead. It’s time to now get real and put their money where their mouth is, transitioning fast to a green economy and green finance.

As I’ve argued in an open letter to Norway’s Finance Minister, “unless Norway starts to get ready for the world of 2030 and 2050, if it keeps going for the short-term gains by investing in pumping all the oil and gas it can manage and exploring for more, it will end up a has-been rich country.”

Just as some courts of law today acknowledge that rivers and forests may have legal standing and be protected by law, with injunctions issued against polluters, and just as the tobacco industry has had to pay heavy fines for knowingly or negligently causing harm to the public, so might the fund and other big institutional investors become liable for pursuing investments in companies that are responsible for, contribute to and perpetuate climate catastrophe.

Failure to prevent further harm, given what we all know today, is fiduciary negligence. Failure to act on climate change because the fund prioritizes short term financial returns by tracking to an outdated index that reflects the status quo and is laden with stranded assets certainly compromises the wellbeing of future generations of Norwegians.

The fund should be pushing to accelerate sustainable finance in the service of the green economy and for the green energy transition rather than trying to slow things down.

The way to do this is by combining portfolio composition with real and robust engagement with company boards and management, and by encouraging sound government policy, as when the fund asked the Minister of Finance for permission to divest from oil companies.

Let’s be clear that what the fund mostly does, like all large institutional investors, is to shift money between investors on the secondary market. Only a minuscule proportion of its assets go towards initial public offerings of stocks and bonds or to private equity.

It buys stocks from other investors and sells stocks to other investors without directly “investing in” companies. If it is to be true to a responsible investment mission it must engage robustly with company managements and boards to incite them to align their business models with the UNSDGs and the Paris Agreement and become as vocal a pro-ESG activist as activist investors are when they seek to improve a company’s purely financial numbers.

Yes, it is “a challenging task”, as the fund says, but given its resources and influence, it should rise to the challenge and welcome it! Nicolai Tangen, its new CEO, wants to hire the best and the brightest. He should be looking for people who are not only technically smart but also have vocation for the public good, the will to lead, and the moral fiber to practice what they preach.

Carlos Joly, fellow of the Cambridge Institute for Sustainability Leadership (CISL) at Cambridge University and chair of the expert group that drafted UNPRI

Photo: Anna 7965