What is and What Should Never Be

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The Norwegian oil fund is a tool for securing pensions for future generations and should never be a tool for environmentalists.

A wake-up call
After I handed in my master’s thesis, I have gradually gotten more time on my hands. Even though I go to work every week, I have gotten more time to do things I want to do. Time to relax, time to exercise more and time to read more about things that I’m passionate about. It’s been lovely (and a necessary break). However, I received a wake-up call on Friday. I took a day off and it turned out to be wise to take a day of that day. Why? Well, as I went grocery shopping, I received a text message from work saying that people were demonstrating outside of the building. I admit that my first reaction was resignation. I thought to myself “Of course, and what are they demonstrating against now, then?” I searched google for the answer. And when seeing that answer, I understood that there might just be something worth demonstrating for. The Extinction Rebellion was demonstrating against the Norwegian oil fund. The group wants the oil fund to withdraw from environmentally-unfriendly investments and, in particular, investments in coal. I’m not sure that I agree with these rebellions, but I definitely sympathize!

What kind of reward do you want?
The Norwegian petroleum fund is the largest sovereign fund in the world, owning about 1.5% of the global stock market. If you are one to emphasize integrity in financial markets, then you should try to influence those managing this fund! Over the last twenty years, the fund has yielded a breath-taking rate of return. Oil revenues has been a pillar of the fund, but where are we headed? Should we continue to rely heavily on fossil fuels for our financial wealth? Or should we try to steer in another direction? As of now, withdrawing from some of these environmentally-unfriendly investments might mean incurring a significant cost in terms of returns. However, doing so could yield a different type of reward: a better environment (at least in the long run). There is no such thing as a free lunch, and we have got to choose! Should we emphasize short-run profits or investing (with integrity) in more environmentally-friendly projects around the world? You never know – such projects might prove to be a wonderful investment in the long-run. The size and long-term investment profile of the sovereign wealth fund should be an ideal match for such investments. That is something to think about.

And the price goes to…
Let’s consider a scenario in which the oil fund is withdrawn from all of those “black” investments in order to throw the money at “green” projects. Who must bear the main risk? Who stands to win (or lose) largely from this turnaround? We are talking about a group of people who can’t be heard. They don’t even have voting rights (at least not yet). Many wants to make life as good as possible for these people, but myopic behaviour causes us to down-prioritize them. Those who are not yet born, our children and grandchildren, bears the burden. Why do they have to carry the load? Well, let me illustrate the point: We adjust the oil fund’s portfolio today. We deviate a bit from the present composition of the portfolio. The changes today might not even be that dramatic. But as we keep heading in this new direction we will increase the distance to the old portfolio as time keeps going. If you need a mental picture of this: Picture you and I walking in the same direction. In fact, we are walking next to each other. Then you turn 5 degrees to the east. This is not very dramatic here and now. We are headed in different directions, but we are not that far away from each other still. However, as we keep walking and walking for hours and hours on end, the distance between us will increase. Right now, you are walking into the great unknown. It could be that you are walking right into a gold mine. In that case, the distance between us is a win for you. And the farther away I am from the gold mine, the more of the gold mine you get to keep. Hence, your winnings keeps increasing as time goes on. But what if I am the one to walk into the gold mine? Well, then you lose! You should not have deviated from my trail. The point is that you do not know until one of us is standing inside a gold mine! You don’t know how you are going to fare at the moment you are departing from me and when one of us is inside the gold mine, it is too late to change your mind.

But what does it mean?
Now, let’s turn back to the Norwegian oil fund. Our children and grandchildren are not born until we get closer to the gold mine, but it is our generation who gets to choose if we should deviate or not. Doesn’t that seem a tad unfair? Of course, you could argue that we could change our mind if we get the feeling that we are walking in the wrong direction. But we are incurring some cost if we keep on changing our mind all of the time. It would have been better to stick to the right path all the way. Besides, Exctinction Rebellion is not talking about changing our mind back and forth. They are not saying that “we may invest in oil and coal some of the time if that seems right from an economic perspective”. Rather, they are arguing that we should deviate. The Norwegian oil fund is a fund whose primary intention is to secure pensions for future generations. It is not a political tool for environmentalists and it should never be used as such. I am all for environmental policies which take aim to prepare us for a new, green, workday. However, I don’t think we should deviate from our trail just because we feel like it. Especially not when we feel so for other reasons than those who channel the intention of the fund. If Extinction Rebellion can provide credible evidence for why it makes economic sense to withdraw from oil and coal investments, then I am happy to support them. But until that is the case, I want the Norwegian oil fund to follow the path we are on.

Sondre Elstad

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