NBIM suggests long phase-out plan for energy stocks in GPFG

Norges Bank Investment Management, which looks after the investments of Norway’s Government Pension Fund Global (GPFG), has suggested to the government the need for a long phase-out plan for several energy stocks it plans to divest from.

In a letter to the Ministry of Finance published today, 2 October, but sent in September, the bank refers to the Ministry’s proposal to remove upstream companies from the benchmark index and the investment universe of the GPFG to reduce the total oil price risk for the Norwegian economy.

NBIM said that upstream companies are defined as all companies classified by the index provider FTSE Russell as belonging to the Exploration & Production subsector. However, the index provider has since altered to the sector classification.

NBIM highlighted that companies in FTSE Russell’s Exploration and Production subsector, now reclassified as Oil: Crude Producers, accounted for 0.8 per cent of the fund’s benchmark index in August 2019, equivalent to just over NOK 50bn.

“It is reasonable to assume that the market will know which stocks the bank will be selling as part of this phase-out. The risk of market impact is therefore considerable. A longer phase-out period will give the bank the necessary flexibility to divest cost-effectively,” the bank stated. However, information on the phase-out plan was not disclosed.

In addition, the bank noted that the classification of individual stocks can change over time as a result of both new information about a company’s operations and changes to those operations.

“Companies reclassified from Oil: Crude Producers to another subsector can then be included in both the benchmark index and the investment universe. Similarly, companies reclassified from another subsector to Oil: Crude Producers can be removed from the benchmark index,” the bank explained.

Therefore, it has suggested to the Ministry that to give the bank sufficient time to make these changes cost-effectively, these companies should not be removed from the investment universe until somewhat later. However, it expects the scope of such reclassifications to be limited.

“We will maintain a list of companies in the FTSE Global All Cap classified in the industry classification benchmark (ICB) under Oil: Crude Producers. These companies will not be part of the investment universe, and the list will be shared with our external managers.

“In addition, we will establish routines for identifying and selling any holdings in companies outside the FTSE classified under Oil: Crude Producers. The routines will help ensure that any holdings in such companies make up an insignificant part of the fund,” NBIM stated.

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