Norway’s huge sovereign wealth fund could influence global sustainability practices with its new investment guidelines

For all the raised awareness of global warming, are companies really paying attention to their carbon emissions and, if so, are they doing anything meaningful? Without mandatory disclosure regulations it is sometimes hard to tell, and yet according to a recent study by Eiris, the socially responsible investment research authority, roughly a third of the world’s largest high-carbon-emitting companies are failing to mitigate their climate change risk.

That message seems to have got through to managers of the Norwegian government’s vast $380 billion sovereign wealth fund, which owns about 1% of all European equities. Revised ethical guidelines for the fund will soon extend its influence over climate change management to companies in the chemicals, metals, cement, oil and gas, power generation and transport sectors.

This covers every major carbon-intensive industry. And because the guidelines come with new corporate governance and transparency requirements – in both direct operations and supply chains – some observers predict a sea-change in the way companies gather, report and act on global warming risk factors.

Anne Kvam, head of corporate governance at the fund, says companies will be assessed systematically and individually against criteria specified in the fund’s expectations document. Based on these assessments, companies will then receive individual scorecards that will be compiled into a sector-based compliance report during the first quarter of 2010, which will be published by the fund.

The fund will not set targets and neither will it be instructing companies on preferred footprinting methods or governance standards. It recommends data collection in line with the Carbon Disclosure Project or the Greenhouse Gas Protocol.

What leverage the fund will then wield remains to be seen. The climate change guidelines do not give an exit option, though the fund has in the past employed divestment. In 2006 it sold its holdings in Wal-Mart for labour and human rights violations. And in 2008 the fund sold an $850m stake in Rio Tinto because of environmental damage in Indonesia.

“[Divestment] is not a tool that has to be used,” says Steve Lydenberg, chief investment officer at New York-based Domini Social Investments, which has more than $930m under management. Lydenberg predicts that how the fund uses the information will catch the attention of companies, and will help the debate over when governments should intervene and to what extent.

Water resources

An entirely new area for the fund is water management, linked to population pressure and economic growth. Water risk affects roughly 1,100 of the 7,000-plus companies in the fund portfolio, representing a combined $43bn, Kvam says.

The guidelines relating to water do not specify high-risk sectors, reflecting the inherent difficulties in considering a resource whose risk value greatly varies according to factors such as geographic region and timing. Companies will be assessed systematically and individually against criteria specified in the fund’s expectations document on water management. Based on these assessments, companies will then receive individual scorecards which will subsequently be compiled into a sector-based compliance report during the first quarter of 2010.

Companies are beginning to analyse their water resources more closely but most have not yet quantified the risk to the extent of what is being proposed in the fund’s new water guidelines, says Marc-Olivier Buffle, a senior water analyst at Sustainable Asset Management, which has $12.4bn under management and also provides sustainability research. “What’s important is to check that the processes are in place so you can assess the risks and opportunities,” Buffle says.

And this is something that many companies will be addressing, thanks to Norway’s sovereign fund guidelines.

Please note that in an earlier version of this story we incorrectly reported the size of Sustainable Asset Management's funds under management.