Life is about to get a lot harder for companies that don't meet institutional investors' environmental, social and governance tests, according to the chief executive of the world's largest stock owner.
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Nicolai Tangen, who runs Norges Bank Investment Management from Oslo, says that the degree to which ESG dictates a company's prospects is starting to hit now. He said that firms that don't adapt face a world in which financing will dry up, insurance companies will walk away, social-media shaming will intensify and customers will disappear.
The CEO of Norway's wealth fund, Tangen oversees approximately $1 trillion worth of stocks, which is roughly 72% of the total portfolio. The rest is in bonds, real estate and renewable energy infrastructure. The 55-year-old former hedge-fund boss has been looking after Norwegians' collective savings since late 2020. He promised Norway's government that he will turn the fund, built from the country's fossil fuel riches, into a global leader in responsible investing.
It is a strategy that aims to make money, based on a view that ESG duds will become uninvestable. According to Carine Smith Ihenacho, the fund's chief corporate governance officer, Carine Smith Ihenacho, the next step is to speed up the pace of divestments based on ESG risks. Companies are dumped if the fund decides engagement isn't worth it, a tactic that is mostly applied to smaller stocks.
For larger companies with low ESG scores, the investor says it is about to apply more pressure. Companies are sent so-called expectation documents which cover everything from water use to biodiversity to children's rights. Firms that don't score well against those requirements can expect to be grilled by the fund with a view to a change of strategy. An aggressive cycle of shareholder voting awaits if that doesn't work.
Ihenacho said that if companies don't manage their ESG challenges well, they won't be profitable in the long run. If they don't improve, the fund can start to vote against, for example, a director who is responsible for climate or a board committee chair, or chair of the board, she said.
Norway s wealth fund did not back Exxon Corp. CEO Darren Woods continuing as chairman this year and demanded that the oil giant be transparent around political contributions in an effort to stop corporate lobbying that leads to dubious climate policies.
The investor backed a successful proposal that Chevron Corp.'s emissions targets include Scope 3, which is the broadest definition and covers the carbon footprint of its customers. Ihenacho says the fund is stepping up pressure on companies that can't explain their taxation models.
It is a strategy that the fund says is more powerful than outright divestment. If we sold out right away, it wouldn't solve the problem of 1.5 degrees, Ihenacho said, referring to the critical planetary warming limit identified by scientists.
The governance structure of the fund means that it is guided by recommendations from a Council on Ethics regarding companies that are not included in the blacklist, regardless of financial considerations. The investor has excluded scores of companies, such as Canadian Natural Resources Ltd. because of its unacceptable greenhouse gas emissions, BAE Systems Plc because of its involvement in the production of nuclear weapons, and Vale SA because of the severe environmental damage caused by the company.
Tangen characterizes divestment as a cop-out. He said there were two camps. One sees a problem and runs away. We think that approach doesn't make sense, because you don't solve any problems. Somebody needs to own these companies. We think it is better to try to move them in the right direction. Academic research is increasingly attracting academics to the debate around ESG divestment versus engagement. A study earlier this year showed that funding costs for companies that pollute hardly change when they are divested, indicating that portfolio allocation doesn't do much to correct unethical behavior in the corporate world.
With the current levels of socially conscious capital, a more effective strategy to put it to use is to follow a policy of engagement, according to authors Jonathan Berk Stanford Graduate School of Business and Jules Van Binsbergen Wharton School. Both strategies can go hand in hand with other strategies, according to other studies. According to Jonathan Harris, director of Total Portfolio Project and an associate researcher at EDHEC-Risk, divestment as well as thematic and integrated strategies have potential to help in their own way.
Tangen says engagement works most of the time. He said there are very few companies that don't respond. He said that those who resist change face a bleak future.
You re not going to get any financing because the banks are under increasing pressure to be very careful, and you re not going to get any insurance because insurance companies are under pressure as well, Tangen said. Nobody is going to work for you because it's really important for young people to align their values with their values. He said that social media has the power to influence customer behavior, which has the power to sway customer behavior. None of the Fall of a Russian Cyberexecutive Who Went Against the Kremlin