The giant Norwegian sovereign wealth fund’s half-year report is a testament to its commitment to transparency, clearly outlining half-year results that were 0.04 percent below benchmark. While the fund benefited from a nearly 15 percent exposure to technology stocks, it was disappointed by returns from renewable energy infrastructure.
Norway’s $1.7 trillion Government Pension Fund Global returned 8.6 percent in the first half of 2024, equivalent to $138 billion, a result that was 0.04 percent below its benchmark. Its half-year report outlining the results is a testament to its commitment to transparency. One SWF investor commented: “It’s a gold standard for transparency and accuracy. No creative Mickey Mouse-style accounting to disguise the lack of actual performance.” (See also Why transparency is a strategic initiative for Norway’s SWF).
The fund’s returns were driven by strong equity markets, with equities accounting for around three-quarters of the fund’s value. Although the report also highlights the slight underweighting of equities compared to the benchmark, the fund lost 0.08 percent during this period.
Real estate and infrastructure for renewable energy slowed performance.
The fund’s equity investments returned 12.5 percent during this period, led by technology, financial and healthcare stocks. About 25 percent of the equity holdings are technology stocks, which returned 27.9 percent during this period.
Earnings from banks pushed up yields on the back of increased consumer credit, and healthcare stocks benefited from large clinical trials and increased demand for innovative treatments and technologies, said Nicolai Tangen, CEO of Norges Bank Investment Management, as he presented the results at Norway’s Arendalsuka democracy festival.
The investor’s largest bond holdings are US (29.1 percent), Japanese (5.6 percent) and German government bonds, while euro-denominated government bonds accounted for 12.3 percent of bonds. The fund’s bond holdings also include an allocation to emerging markets, which had a negative impact on relative returns during the reporting period.
The real estate portfolio is split roughly 50:50 between unlisted and listed real estate investments and is managed as part of a combined strategy. (See NBIM: Listed and Private Real Estate Are All the Same in the Long Run.)
The unlisted real estate investments are mainly office, retail and logistics properties. The recent negative return was due to investments in the US office sector, where values were negatively impacted by higher vacancy rates and a persistently high federal funds rate. In addition, there was little activity in the market during the period, making property valuation challenging, the fund explained.
The portfolio also suffered from weak returns in unlisted renewable energy infrastructure (-17.7 percent) due to weak net income from electricity sales and changes in the value of investments, with higher capital costs negatively impacting the value of investments during this period. In the first half of the year, NBIM made three investments in renewable energy infrastructure, with all of its investments listed on its website.
Obligation to vote
NBIM is an active owner and voting is one of the main tools it uses to exercise its ownership rights. In a further appeal for transparency, NBIM publishes its voting instructions five days before the shareholders’ meeting and provides an explanation in cases where it votes against the board’s recommendation.
In the first half of the year, the Supervisory Board voted on 90,449 proposals at 8,277 shareholders’ meetings.
The separation of CEO and chairman remains one of the most common reasons the bank votes against corporate boards. Although NBIM sees improvements in board independence globally, it remains concerned about the roles of chairman and CEO being filled by the same person, which is most common in companies in the United States and South Korea.
“We have long advocated the separation of chairman and CEO and believe that a non-executive chairman is in a stronger position to lead strategy, oversee management and promote shareholder interests,” the fund explains.
Another focus was CEO compensation. The bank voted against about one in ten CEO compensation packages, including in the US, where compensation structures are the most problematic and least focused on long-term value creation, according to NBIM.
The main concerns are the use of one-time awards such as “golden hellos”, awards paid over too short a period of time or cases where NBIM believes the board has not taken sufficient steps to address shareholder concerns about compensation in recent years.
The investor also held 1,175 meetings with companies during this period, addressing governance and sustainability issues in around two-thirds of them. These topics mainly concerned capital management, climate change and human capital.
“We believe that boards of directors, in their oversight role, have a responsibility to ensure that companies manage material sustainability risks in their business planning and do not contribute to unacceptable environmental or social outcomes,” it says.
In a new development, NBIM and UNICEF are working together on an initiative to highlight how companies impact children’s rights through their digital activities, in the hope of improving corporate reporting in this area.
“We hope this work will advance discussion and raise the bar for transparency by creating a comprehensive set of child rights-based disclosures related to digital technologies that companies can rely on in their reporting efforts,” said Carine Smith Ihenacho, Chief Governance and Compliance Officer at Norges Bank Investment Management.
To develop the disclosure requirements, NBIM and UNICEF will take a collaborative approach and consult with a wide range of stakeholders, including businesses, academia and civil society organizations, to understand current market practices and identify any gaps. The disclosure requirements are expected to be finalized and published in 2025.
“As a global investor in nearly 9,000 companies, corporate reporting on sustainability efforts is key to our ability to assess sustainability risks in our portfolio. This initiative will hopefully enable us as an investor to better understand companies’ efforts to respect children’s rights in the digital space and address negative impacts,” she concluded.
