Norway’s parliament (Storting) has voted to temporarily suspend the ethical guidelines of the Government Pension Fund Global (GPFG) until they can be replaced with an updated framework, so the fund can remain a “broad, global index fund”.

The Labour Party's proposal was passed by 85 to 17 votes earlier this week. It had been proposed that the government facilitate the suspension of the Council on Ethics’s recommendations on observation and exclusion, and that Norges Bank should not continue to follow the guidelines until a new ethical framework has been decided.

Instead, it proposed that the follow-up of companies should take place through Norges Bank's ordinary exercise of ownership, within the mandate from the Ministry of Finance.

“Pending a new framework, the government is requested to ensure increased vigilance and faster reaction in situations where the conditions for the fund's investments in a country change significantly within a short period of time, for example, as a result of war,” it stated.

It follows events in the summer when the Norwegian government ordered Norges Bank to review its Israeli investments due to the situation in Gaza at the time.

Subsequently, Norges Bank Investment Management (NBIM) divested the GPFG’s holdings in 11 Israeli companies, including Bet Shemesh Engines Holdings, which NBIM CEO, Nicolai Tangen, admitted should have been classified as high-risk and excluded. Since then, it has made further exclusions from Israeli-linked investments.

In a speech made to parliament in support of the proposal, Minister of Finance, Jens Stoltenberg, said it is becoming “difficult to draw a clear line as to when companies contribute to gross violations of ethical norms”.

“Various lists and reports point to some of the world's largest companies as being involved in Israel's illegal occupation and warfare in Gaza. There is also increasing concentration of assets in international stock markets. The seven most valuable companies alone account for 16 per cent of the fund's equity holdings,” he said.

“With today's exclusion guidelines, we must be prepared that we can no longer be invested in the largest companies in the world. We will then not remain a broad, global index fund. This could increase risk or reduce expected returns.”

In addition, he argued that the current framework could make it difficult for the Council on Ethics and Norges Bank to act as “quickly as the situation dictates” when conflict changes the conditions for the fund's investments.

“The time has come for the ethical framework and its practice to be reviewed to ensure a good balance between important considerations. At the same time, I have emphasised several times that temporary measures are necessary pending a new framework. This is also about protecting the fund,” he stated.

In response to the decision, Scientific Beta director of research, Felix Goltz, said that Norway has “identified a major problem” when it comes to environmental, social and governance (ESG) exclusions.

“The risk of missing out on a few stocks that may end up driving most of the performance – also known as ‘FOMO risk’. This isn’t just a response to current market conditions – this risk is well-documented in academic work.

“New methods to build ESG portfolios can immunise investors against this problem. The key is to employ dynamic risk management that controls deviations from the full index universe and thus avoids performance drag."

---