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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, an S&P Global podcast, where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

On this podcast, we speak to stakeholders from all different parts of the sustainability value chain, banks and asset managers, scientists and academics, policymakers and standard setters. Well, today, we're speaking to the world's largest asset owner.

Esther Whieldon: Asset owners come in different forms such as pension funds, endowments and sovereign wealth funds. Today's guest is from Norway's $1.7 trillion sovereign wealth fund, Norges Bank Investment Management or NBIM. NBIM manages the Norwegian Government Pension Fund Global. And this fund, as Lindsey said, is the largest owner of the world's stock markets. It owns about 1.5% of all shares in the world's listed companies or about 9,000 of them. And that's a lot of influence.

Lindsey Hall: That's right. And as we'll hear from today's guests, NBIM engages with many companies directly on environmental, social and governance issues. I spoke to Carine Smith Ihenacho, NBIM's Chief Governance and Compliance Officer. She explains how the asset owner is approaching engagement and divestment, she tells us about the climate action plan she helped design and implement, and we'll hear how NBIM is leaning into its responsible investment ethos amid the ESG backlash occurring in some parts of the world.

Here's Carine, who starts off by explaining some of NBIM's background.

Carine Smith Ihenacho: So NBIM is a really big fund. And we were set up not that long ago, if you think about it. It was in the sort of 20-plus years ago. And the thought was that the country's revenues, that Norway's revenues from oil and gas should not only benefit the generation that found the oil and gas but also future generations of Norwegian. So it was set up so that all the revenues from the oil and gas activities that the government got was put into the fund to invest in financial assets abroad.

And every year, we take a little bit out of the fund to top up the national budget. So that money has grown over time. So now we are a really big fund, around $1.7 trillion, and we invest in listed companies around the world. So we own roughly a small part of around 9,000 companies in more than 70 markets. So that's around 70% of the fund. In addition, up to 30% of the fund can be invested in bonds, so fixed income. And then we have a small part of the fund that can be invested in real estate and also renewable energy infrastructure.

And in addition to the fact that we are very big, global, we're also a super long-term fund because the whole point of the fund is that we should be there for future generations. So in a sense, we should be there for eternity. I mean who knows how long we're going to exist? But the whole point is that we have to think very long-term with everything we do.

Lindsey Hall: Obviously, both sustainability and ESG are incredibly long term. What should our listeners know about NBIM's approach to sustainability and ESG?

Carine Smith Ihenacho: Absolutely. The way we work with ESG is very much linked to the fact that we are long-term because what we strongly believe is the way we engage and work with ESG issues really affects the fund's long-term returns. So for us, it's really about dealing with financial risk and opportunities.

And I'll give you an example. We own a small part of the world economy by holding roughly 1.5% of every listed company in the world. And so how the world economy is doing over time is directly going to influence the value of the fund. So if the economy is not dealing with systematic big challenges like climate change, that definitely will impact the world economy and also the fund. It will impact issues like inflation, the value of assets and then indirectly the value of the fund, but also how our individual companies deal with the sustainability challenges that are facing them, such as climate risk, such as human rights, such as pollution will also affect the company's long-term value creation. And that's where we get our money from. So it will also affect the value of the fund.

So both on a big-scale level, the world economy and the smaller-scale level, the individual companies we are investing, on both of those levels, it's important that we look at ESG issues that we look at the many sustainability challenges and opportunities facing the world and the fund and work as actively as we can with it.

Lindsey Hall: And you mentioned climate change is one of those big systematic challenges.

Carine Smith Ihenacho: Absolutely. I would say climate is at the heart of our responsible investment work because that is, as you say, a systematic challenge that's going to affect almost all asset classes and nearly all asset classes of the fund. And that's why we have been so clear in how we approach climate change as a fund that we have issued a climate action plan. We issued that in late 2022. It goes until 2025. And that spells out in detail the work we do on climate.

And the plan is in 2025, which is just around the corner, that we will do a big stock take, see where we are, see what the results are of the action we have taken and what's happened outside out there in the world and with the companies we are investing and then make a new action plan for the next five years. At the heart of our climate action plan is really that we will push for the companies we have invested in to reach net zero at the latest by 2050.

And then we spell out in quite some details how we're going to do that. And it sounds a bit daunting when you invest in 9,000 companies to think, how can you engage with 9,000 companies? So what we did was really to start to prioritize. And Lindsey, what's quite interesting, if you look at the emissions in our portfolio, 70% of the emissions are done by only 170 companies. So really, that's where we started with the large emitters. And we started dialogues with these companies with a view to not only have them set clear targets for climate -- for emission reductions but also concrete plans for how to get there.

Lindsey Hall: I want to dig in a little more on this topic of engagement versus divestment. I understand that the fund excluded investments in coal, for example, in 2016. What should our listeners know about that approach and how you're thinking about divestment versus engagement?

Carine Smith Ihenacho: Yes, a very interesting question because for a large responsible investor, one of the first things to be decided is really, what type of companies do you want to invest in, and what are the companies you want to exclude because you think you don't want to make money out of that, either for ethical reasons or also for financial risk reasons?

And it was quite early decided that there are a few products we should not be investing because the thought was that from a sort of ethical point of view, the Norwegian people should just not make money on that. And that's certain products like tobacco, cannabis for recreational purposes, certain weapons but also coal because the thinking was that it's just such a dirty producer of energy. Then we divested from -- we sort of excluded oil companies, divested from coal companies.

But we still invested in, for instance, other fossil fuel companies like oil and gas companies. And the thinking here is that it's better to be an owner and try to engage with the companies, try to push the companies to change because frankly, selling out the companies does not solve the climate crisis. So we've decided, okay, we have sold out of the absolutely worst companies when it comes to emissions like the coal companies. But for the rest, we have decided, let's try to have an impact as an owner, try to push the companies to change and reduce emissions. We are a very active owner.

And just as an example, last year, we had around 3,000 company meetings where we really go into depth with the company on their transition plans. So that's the strategy we have chosen, for the large part, being an owner and pushing for change rather than excluding companies that we think have the potential to move from, let's say, a more brown way of operating to a more greener way. And let's say, you can call them sort of being part of a greening journey.

Lindsey Hall: So beyond this question of engagement and divestment, what else should our listeners know about how NBIM incorporates climate and sustainability into its investment strategy?

Carine Smith Ihenacho: So we do that in several ways. First of all, we decided the sort of three big ways we can work with climate. One is what we call standard setting. It's really about trying to make the regulation and standards that can improve our companies and work with climate to improve those standards and regulations. Let's say, an example is, for instance, carbon pricing. Carbon pricing really can change companies' behavior. So it's all area around standard setting that has impact on many companies. So that's one way we can work.

The next way is to look at the whole portfolio from a sort of risk perspective. What is the risk and opportunities perspective? How is the whole portfolio come together? If you look at the total of the portfolio, where do we have the most climate risk, and where are the most climate opportunities? And that means invest more in climate -- in companies that can provide a solution to the climate issues and invest less in companies that we really think would more struggle to get to a net zero 2050 solution and really struggle to have a valid business proposition in a low-carbon society.

Some of the companies we also decided to divest from, not from a sort of ethical point of view but purely from a risk perspective because we think their business model, it's just not valid in a low-carbon society. So we have probably divested from around 150 companies based on that. So that's sort of a portfolio view.

And then we look at individual companies, how can we push them? And that goes back to what I talked about earlier about meeting with the companies, try to engage on target setting but also on their transition plans. So it's meeting the companies, but it's also voting on the companies' annual general meeting because what we can do is where we think the company has not taken the necessary action to deal with climate, it's also possible to vote against one or more of the company's board, which we have decided to do. So it's a sort of three-pronged way of tackling or working with the issue.

Lindsey Hall: You talked about risks and opportunities, so let me dig in some there. What are some of the biggest risks or challenges that you're facing in the current landscape as it relates to sustainability?

Carine Smith Ihenacho: I mean we talked about climate, and I say climate and obvious risk. We have looked at many scenarios of the value of the fund with an orderly transition in line with the goals of the Paris Agreement or more disorderly transition. And even with an orderly transition in line with the goals of the Paris Agreement, some scenarios is that we lose 10% of the value of the fund. So clearly, this is important.

In addition to climate, there's also a lot of other risks facing the fund, of course, and we work with various scenarios to look at that. You have the whole geopolitical risk spectrum that's out there now, clearly will impact or can have the potential to impact the value of the fund.

The issue that everybody loves to talk about these days, AI, that, of course, has impacted the value of some companies tremendously already. Just look at the big U.S. tech companies, the Magnificent Seven. But we believe AI will also impact maybe all the companies in our portfolio depending on how they start to work with AI and also the business models that may be threatened by AI.

And in addition, you have the challenges related to other sustainability issues such as nature, biodiversity, pollution environment outside of climate. And also a lot of the issues we look at are related to human rights and supply chain. So it's plenty to keep us occupied from a risk perspective. But I think, by the way, that's what makes finance so interesting, right? Like all of the world's issues are sort of taken -- you have to take all of the world's issues and sort of come together when you invest in the companies and the world economy.

Lindsey Hall: Absolutely. And if you don't mind, I'll ask a sort of U.S.-centric question. There has been in the U.S. some backlash against ESG. And NBIM's CEO spoke to CNBC in April 2024, and he reiterated the fact that while some people are pulling away, that actually gives NBIM a better opportunity to phase in or lean in. Can you talk to me about how NBIM is leaning in, in the face of backlash in some parts of the world?

Carine Smith Ihenacho: Absolutely. And we are concerned with this backlash because we do see other asset owner managers sort of taking a step back. And that can also mean that the companies do not feel the sort of pressure to really work on emission reduction targets. Yes, so we are concerned.

But as you say, we think that it's even then more important that we lean in on the issue and have a clear voice and say, for us, ESG is not about politics. I know it has, to a certain extent, become a political discussion in the U.S., but we don't look at this from a political perspective. We look at it from an investor perspective and from a long-term value creation perspective.

So for us, it's really about risk and opportunities. So we really want to emphasize the link between ESG and long-term financial returns. We are a financial investor. We want to make long-term returns to benefit future generation of Norwegians. And we believe absolutely to do that, we have to consider ESG issues. And I know ESG has a sort of -- different people put different meanings into ESG. But for us, it's really sort of a common term for many sustainable risk and opportunities we have to tackle and deal with as an investor.

Lindsey Hall: Thank you for clarifying that approach. On this topic of risks and opportunities, you talked a little bit about how NBIM is looking to invest more in those companies that provide solutions. Can you say a little bit more about where you've seen opportunity?

Carine Smith Ihenacho: Yes. First of all, we have a separate mandate for renewable infrastructure investments. We got that a few years ago, and we are stepping slowly up the investments we're doing there. It's mainly been in wind and solar up until now in Europe, but we are now also looking at other places. So that is definitely an area where we're looking to invest more in the opportunities in the wind and solar space. Of course, the returns have been somewhat more challenging the last few years, but definitely, that's an area where we'll be more active in the years going forward.

Then we have a -- specific within our active equity management side, we have a specific mandate that looks at investments in the energy transition. So that also includes company providing solutions for a lower carbon future, such as more from the technical perspective but also looking at alternative forms of energy. So we certainly look at it from a whole host of different areas.

Lindsey Hall: Okay. Thank you. I know we're just about out of time, but one last question I had was, you spoke to my podcast cohost at Climate Week NYC in 2023 just about a year ago. And in that interview, you highlighted the sense of urgency around climate and decarbonization. Climate Week 2024 is just about to kick off in New York City, and I wanted to ask you how you're thinking about that sense of urgency. And by the way, I'll mention that the theme of this year's Climate Week is It's Time, so very much focused on that same idea.

Carine Smith Ihenacho: Yes. I'm very much looking forward to the Climate Week actually, so I hope to see you there. But yes, this sense of urgency has become no less this year than last. The climate is just getting worse. Emissions are not getting down. So the urgency to do something should be even more during this Climate Week.

And of course, in the meantime, the world has not gotten any less complicated. And there's a lot of issues companies and politicians have to deal with. It's a sort of geopolitical difficult world. But we have to make sure we don't lose sight of climate issues and the importance to really act to do something to get emissions down.

I mean we've seen every year is a record of heat, many places in the world. And we're starting to see really how climate affects the real economy. We have inflation caused by climate issues such as price of olive oil going up. It's to walk to go to work or it's flooding that's preventing people from going to work. So we really see the impact of climate on the economy and the physical impact on climate. So hopefully, this Climate Week will make climate sort of center of investors and companies should think about and push everyone to take the actions needed.

I think at the same time, it's important to say, single companies, single investors like us cannot solve the climate crisis alone. I think everybody needs to think about, what can they do? What are the steps they can take to get emissions down, to do something to help the climate? But in the end, of course, more holistic solutions are required for a systematic challenge like this. Politicians need to step up. But until we've gotten that sorted, I think we all have responsibility to do what we can even though we alone, investors alone, companies alone cannot solve the issue.

Lindsey Hall: So we heard today how the world's largest asset owner is approaching big issues like climate change by taking the long view. Carine described how NBIM is exerting its influence by engaging with companies in its portfolio, and she said that for NBIM, ESG is about long-term value creation, not politics.

On the climate side, we heard that NBIM is prioritizing its engagement with companies by really focusing on working with a small subset of highest emitters in its portfolio. And Carine said that the asset owner is investing in companies that can provide solutions to climate change.

Esther Whieldon: We also heard what Carine is expecting from Climate Week NYC, which kicks off this Sunday, September 22. Lindsey and I will be back next week with special episodes from our on-the-ground coverage of Climate Week NYC. So please stay tuned.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcast.

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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