Jane: Hello and welcome to the LSEG Sustainable Growth Podcast, where we talk to leading experts on topics right at the intersection of sustainability and finance. I'm Jane Goodland, and this week I'm talking to Carine Ihenacho, who is the Chief Governance and Compliance Officer at Norges Bank Investment Management and she leads the responsible investment strategy there. NBIM is the investment manager of Norges Bank, which is responsible for managing the assets of the one of the world's largest pension funds, and the single largest shareholder in the world. But before we hear from Carine, a quick reminder to follow us so you don't miss any future episodes. And also, don't forget to rate us on Spotify, Apple Podcasts or any other platform you use.
Jane: Hello, Carine. How are you? It's so good to have you here today with us on the Sustainable Growth Podcast. I'm really looking forward to getting into the conversation with you today.
Carine: Hi, Jane. It's very nice to be here.
Jane: Great. So without further ado, I think we need to understand a bit more about your organisation because it's not the most straightforward of organisations. Tell us about the Norges Bank, Norges Investment Management and the government pension fund and how it all fits together.
Carine: Yes, I mean it is a bit confusing. We do have many names. I think the best way to describe it is that we are the Norwegian sovereign wealth fund, and we are part of the central bank, and that's why we call sometimes Norges, as in Norges Bank, the central bank for Norway. But we are a separate entity within the Norwegian central bank, and we are a fund that's owned by the Norwegian government or sometimes we say owned by the 5 million Norwegian people. And our job, in what we call Norges Bank Investment Management, is to manage that fund.
Jane: Okay. And let's just get a sense of scale because the pension fund isn't any old pension fund, is it? It's one of the biggest in the world, right?
Carine: That is correct. We are actually huge. We are more than 17,000 billion Norwegian kroner. And maybe I should translate that into a language -
Jane: Yes, please.
Carine: Or currency that you know better. So we are around $1.7 trillion. So, yes, we are amongst the largest sovereign wealth fund in the world, and we are actually the largest single shareholder in the world because we are 70% invested in listed equities. And another characteristic just to say that we're large, but we're also long term, we are global.
Jane: Excellent. And sometimes we talk about funds of your size being a universal owner, right? So would you consider yourself to be that?
Carine: We are absolutely a universal owner. And with that we mean I mentioned that we are global and that means we invest in all of the world, actually, except Norway, from a sort of financial risk perspective, because that's where the money is coming from. And so we invested in more than 9000 companies around more than 70 countries. And what actually that means is that we own a small part of the world economy because we are so much, we spread our investment so much around the world, and that really makes us a universal owner. And in many ways, that makes us look at our investments slightly differently, let's say, than if you were just invested in a certain sector or certain assets.
Jane: And that kind of that, owning a slice of the global economy and being very long term presumably underpins your responsible investment philosophy. So tell us more about that.
Carine: Yeah, absolutely. And I think long term here is the key I think in many ways we are the ultimate long term fund. We are a fund for future generations of Norwegians. And let me just explain a little bit what that means. That means that we are here to generate funds for the future. But also every year the Norwegian government decides to spend a small part of the fund to really top up the national budget and fund the Norwegian welfare state. But we are supposed to be there hopefully for many, many generations to come. And that means when we invest in companies, how the companies are doing in the longer term really matters, because we are going to be an investor in the longer term. But also how the world economy is doing matters because we invest in the whole world economy. So, having a sustainable world economy means something to us, because that's actually going to safeguard the value of the fund for the longer term. And that's sort of how we approach responsible investment, sustainability.
Jane: And this is hardwired into your mandate from the Ministry of Finance, isn't it?
Carine: Absolutely. So we get our mandate from the Ministry of Finance. The main decision that's made in the mandate is around allocation. For any large fund, allocation is the main decision. What type of asset classes do you invest in? That's really set out in the mandate, which again is anchored by the parliament. So the main decisions regarding the fund is anchored by the parliament to make sure we have a political democratic anchoring. So yes. So the mandate decides that 70% is going to be invest in listed equities, around 25% in bonds, the rest in the real asset. It's unlisted real estate and renewable infrastructure. So yes. But also, a key part of the mandate is that we our job is to generate returns via financial investor. But part of the mandate is also that we should do this in a responsible way and in a transparent way. And in a responsible way, the mandate specifically states that they think long term returns is dependent upon a sustainable economy and sustainable investments. So it's very much the way we approach responsible investment. Sustainability is anchored in the mandate and has that sort of political democratic anchoring.
Jane: Yeah, which presumably is quite helpful in many respects because there's no ambiguity about why you're doing it. It's very much part and parcel of the expectation of the government and the pension fund. So, good. Glad we've got that clear. Let's turn to kind of what this looks like in practice, because I know that you've got a few different tools in your investor toolbox. So tell us about that and how do you go about implementing your responsible investment approach.
Carine: Yes. And it's, in a way, it's a daunting task to have to say, you're going to be a responsible investor. How do you do that? It’s such a large fund invested in various asset classes and being so much invested in listed equities and companies around the world. So we have spent a lot a long time thinking around how to go about it and we found the way we do it is attacking it, let's say, from three different ways. We call it three pillars of responsible investment. And one is that we work a lot to help develop good standards and frameworks that can facilitate more sustainability thinking and acting from the companies. We invest in better frameworks, better regulations. So, we spend a lot of time working with standard setters, regulators and getting sort of good frameworks, good corporate governance codes around the various countries we're invested in. So we give consultation responses to a lot of new policies coming out for instance. We work directly with regulators, we give input. So that's one thing. And if you have a good laws, good regulations, efficient markets, that helps. It helps all companies. It hits a lot of the companies who are investing if you think the standard setting is good. Then the second way we work is to look at our portfolio, is our portfolio robust enough when it comes to long term sustainability? So that means we screen it regularly and we look at, is there some companies here that's just too much risk to be investing? And we may sell out of those, and we may also go the other way for companies we think are have a better long term prospects from a sustainability point of view. So that's looking at the portfolio. And the third thing we do is to work with individual companies, engage with individual companies. And we do that mainly in two ways. And that's by, we call it company dialogue, that's mainly been talking to companies, talking to board members, talking to management, and also through voting at the annual general meetings and make our views sort of heard through the vote.
Jane: So that's really interesting, I think. Can we go back to the middle pillar around the approach to the portfolio level because you talked about ESG risk. And I'm curious to know, is that something you think about on a sector and industry basis, or is that a geographical consideration, a mixture between the two? What sorts of issues do you consider to be kind of too much, too risky, as it were?
Carine: Yeah. And the answer is we sort of look at it on, all sorts of levels in the sense-
Jane: I thought you might say that.
Carine: And let me explain a bit further. We start with looking at themes. A theme could be climate, it could be human rights, it could be issues around corruption risk. It could be issues around bad corporate governance. So we take a theme and then we go and look through sectors that we think may be particularly exposed to that particular theme. And then we go, so we go theme by theme, sector by sector, and not so much geography by geography, but we also sometimes do deep dive into a certain market. And we do a deep dive of the whole portfolio four times a year. And out of that deep dive, we find companies that we think pose particular risk, let's say on climate. And we then have a choice. Let's take a single company and find out, gosh, this company is really exposed to climate risk. Then we have several ways we can then deal with that company. We can say, let's engage with the company. Let's talk to them, raise issues, see what can be done. Or we can say, this company we think has a business model that is probably not going to help to talk to the company because the business model is inherent in such that we don't think it's viable in the longer run.
Carine: Let's say the business depends on large scale deforestation. We may then decide if the company is small, we don't think engage is going to go anywhere, to just divest, and we call that risk based divestment. And just as an example, last year we probably did risk based divestment of around 80 plus companies. And since we started doing these type of divestment, screening divestment since 2012, we divested from sort of 500 plus companies. And in that way, we get a slight tilt on the portfolio where we’ve taken out the companies we think pose particular ESG risk. And so sort of the tail end of the portfolio in some ways, you can say is slightly cleaned up. And what's interesting, it's that we every year we report on have we made money or lost money by doing this? And over the years, we actually have made a bit of money on doing this. So we sort of say, so far it's been a win-win, gotten the worst companies out and also made money on it.
Jane: That's really fascinating. And it's quite interesting to sort of point to the part this is risk based divestment, not values based divestment. This is really about looking at the business model and making a judgement about its kind of long term potential, I suppose.
Carine: Absolutely. So we say this is financial decisions, risk based forward looking financial decisions.
Jane: Great. One of the issues you talked about, one of the themes was climate. So can we look at how you guys think about climate? And I know that you've got a climate action plan, which is kind of you're in the middle of. So tell me more about that. What's the plan all about? What are you trying to achieve?
Carine: Yeah. As a large fund, it is absolutely clear that climate risk will hit us. The question is, what do we do about it? And the government sector and expert group a couple of years ago gave some advice and how they really should think about the fund and climate risk. And they came up with quite a few recommendations. Can come back to that. But based on this expert group, we got some changes in our mandate. And the mandate specifically said that our responsible investment activities should have an aim that the companies in our portfolio should be aligned with the goals of the Paris Agreement, which basically is net zero by 2050. And the expert group very much said that for being such a large fund, it doesn't make sense to make big allocation decisions based on climate risk. It makes much more sense to try to work with the companies that we have invested in to get their emissions down and thereby the emissions of the fund down. Because if we were to just invest in green companies, let's say, our investment universe would be too small for such a big fund. We would just have too large ownership stake in many companies. So then we thought, okay, how are we going to work with this new mandate requirement? So we scratch our heads, did a lot of thinking, put down a working group with representatives of all parts of the fund, and said let's make a climate action plan that really spells out in details how we are going to take this mandate requirement and work with it. And then we came up with, okay, let's have a climate action plan for until 2025. We came out with this in 2022. Give us three years see how it goes, we will then reassess. And the climate action plan is quite long-
Jane: I can imagine.
Carine: But let me sort of try to give the gist of it. The Climate Action Plan follows the three pillars we talked about. So it has a bit about standard setting and mainly there, it's about working towards getting better disclosures from the companies when it comes to their climate, their carbon footprint. Really we need data in order to push the companies towards net zero. We need to know where the companies are, so better data, better disclosure. On the portfolio basis, it is really about taking climate consideration into account when we do investment decisions, because we are an index Nair fund that we have a big active department that do over and underweight decisions from the index, so the active portfolio managers, and they have in their mandate that they should take ESG risk into consideration. So, on a portfolio basis, it's about the portfolio managers having good information on climate risk, on the individual companies, sectors, geographies, and using that when they make investment decisions so that their overweight/underweight position they take will be informed by climate risk.
Jane: So that's not a divestment kind of thing, that's more a case of just a slight weighting position in the portfolio?
Carine: It's about taking into account climate risk when you invest in a company. Exactly. And then when it comes to working towards individual companies, we have what we call an engage to change approach-
Jane: Snappy!
Carine: and engage to change and really push the companies to reduce their emissions. And, so we have on the back of the Climate Action Plan, we have produced what we call climate expectations that apply to every single company we invest in, where we set out what we expect from them. And to say it short, we expect that they set short, medium, long term targets and have credible transition plans that spells out how they're going to reach those targets. And then the target should be net zero at latest by 2050.
Jane: And does this apply to all of the companies in the portfolio? I'm just thinking about the magnitude of this task, given that your holdings are quite plentiful.
Carine: You know, it's a daunting task. Yes, we say the expectations apply to all the companies in our portfolio. Of course, it doesn't mean that the companies need to follow them and listen to us. You know, we are a minority investor, but at least we have made it clear to the companies that this is what we expect as an investor in your company. This is what we're going to engage with you on when we meet with you as a company. And if you don't have targets today, we're not going to stop talking about it. This is what we're going to talk about next time we meet you.
Jane: I like that.
Carine: And by the way we are going to be a shareholder for the longer term. So sometimes we say, oh, we're going to be, what do you call it, a little stone in your shoe that you can feel the whole time, you know, reminding you.
Jane: You're not going away.
Carine: Yes exactly not going away. So, but of course, we approach this in a very structured way. Because what's interesting is that, yes, we’re a huge investor, 9000 companies. But if you look at 70% of our emissions, that's only done by 170 companies. So of course that's where we start, it's those 170 plus we added a handful of companies that's also important for the transition, typically banks that finance these companies.
Jane: Let's talk about the importance of transparency, because you've touched on it a couple of times. And in fact, I think you were voted the world's most transparent bank or something, is that right? No fund. So why is transparency so important to you guys?
Carine: Yeah, we were very proud of that because it is important. And there's a couple of reasons for that. First and foremost, you know, we are a sovereign fund. We are owned by the government or we say the Norwegian people. They need to know how we work, what we're doing, get some insights in it. And it's important for us that they have trust in what we do. And you don't have trust in what we do unless you know what we're doing. So transparency and trust sort of goes hand in hand. So that's why we really want the Norwegian people to know how we work. The other is around what we call legitimacy and that's more around being a good owner of the shareholder. It's for the companies to sort of know that we are consistent, principled, predictable, know what type of owner we are. So that's why we want to be open around how we work, what our expectations are, what our views are on corporate governance. And the third reason for it, it's really we think openness drives better performance and a couple of reasons for that. Well, first of all, if you're open, you get feedback. And we're not perfect. And some people might ask, why didn't you do this or why didn't you do that instead? And we can engage. But also if we are open and explain what we do, hopefully some other people or other funds, other shareholders may get inspired, and if more investor shareholders are working together, that can drive more change. And I'll give you an example. When it comes to voting, we disclose our votes five days before the actual shareholder meeting. And that's a way we can say to the world, okay, this is how we will vote. If you get inspired, that's great. Then actually, we've done some research on this. It shows that after we started disclosing our votes, more shareholders vote according to our votes, actually three percentage points. But if you think about it, we sort of roughly 1.5% are listed companies, suddenly we have 3% more voting in line with us. So that shows a bit of what openness can do.
Jane: Yeah, it's a really good illustration. And it's. Yeah. So this is not just about telling the companies how you vote, it's telling the world how you're going to vote. And then other people kind of are following in your in your footsteps. So you're like a real life influencer there, I think. Can we finish on a topic which I think is almost in every single paper these days, and it's an emerging area for responsible investors, and that's AI. And I know that you guys have set out your view on what responsible AI looks like. So I'm really curious to know a little bit more about that and what you're looking from to your portfolio companies to be doing.
Carine: I mean, when AI exploded, everybody started using this, and we set out, and first, I must say for us as an investor, the whole AI has been great. You know, it's driven a lot of value in our portfolio, just to say by being invested in the Magnificent Seven, our portfolio in 2023, just from those investments increased by $80 billion. I mean, it's a has a large impact.
Jane: When you put it into real money terms, it sure does.
Carine: Yeah. But just to say that. But of course, AI comes with huge, huge risks and not just for the companies from sort of operational reputational perspective, but as we all know from the whole society, from human rights issues, misinformation, large scale deception, etc. and really, again, you know go to sort of the true democracy. So we thought as an investor, we should have a view on this. And we came very early out with what we call a view on ethical AI or responsible AI, what we think is important. And let me just say, it wasn't that what we said there was so ground breaking, I think the most important thing was that we came out early as an investor to say to the companies, even though we may make a lot of money of you companies taking the advantages of AI and processes, systems, automation, etc., and also development, of course, it needs to be done in a responsible way. Don't go wild here. And so if you basically have three points, it says first and foremost, proper use of AI is the responsibility of the board, board accountability here. And you know, if you think about it, AI has come so quickly. I think there's a lot of boards that don't really know how AI is being developed or used within a company. So there's a lot of capacity building that needs to be done. So this was like a heads up to the boards. Hello? Please, board can we talk to you? You should know how it's being used and the risks involved. The second one was about the transparency and explainability. We said to the companies, you know, if your company use AI in a way that meets the customer, the customer should actually or the person meeting, should actually know when the customer is meeting an AI or not, and how the AI has been developed, trained and tested. So if you go into your bank and you get a no from your loan application, and that was an AI sort of driven process, you should be able to go back and say, hello, what did that AI take into consideration? And the third was risk assessment. You know, have proper risk assessment when you use AI, not only risk assessment with regard to your company, but also the risk that can be posing some damage on society or people through breach of data privacy, etc. So it's really those three things, as I said, nothing sort of revolutionary but still we thought it was important that a large investor came out and said this to the companies.
Jane: You say it's not ground breaking, but it is really interesting. And I think it's a great illustration of the dynamic nature of sustainability issues, ESG issues that investors like yourselves need to be always thinking about kind of what's next and what's sensible and what do we need from the companies that we invest in. So I personally think it's a great illustration of you guys being at the forefront of sustainability, responsible investing and always looking to be transparent, like you say. So I suppose I'm going to ask, is it on the website? I'm assuming it will be somewhere on the website for people to go and take a look at, if they want to see what you've written about ethical AI, responsible AI.
Carine: Absolutely. It's all out there.
Jane: Great. Okay. Well, that's where we're going to have to wrap up today because we've run out of time. But hopefully you have given our listeners a wonderful insight into how an investor your size and how you go about kind of being a responsible investor. So I found it absolutely fascinating. And I just think that you're doing such an amazing job. So well done and carry on, and thank you so much for coming and sharing your experience and insights with us today.
Carine: Well, thank you for having me.
Jane: So that's it for this week's episode of the LSEG Sustainable Growth podcast. Pretty impressive stuff there.They do set a high bar indeed. And if you want more information about their approach, you can go to the website, which is nbim.io. If you've got questions, comments or someone you'd like us to talk to, then do get in touch by email at
[email protected] that's all from me, but watch out for another episode very soon.
