Norway, which holds legislative elections on Monday, has the world’s largest sovereign wealth fund, a piggy bank of more than $1.4 trillion.
– How did a nation of 5.4 million people get so rich? –
The idea behind the fund is that oil is a fortuitous natural resource that belongs to all Norwegians, and should benefit both current and future generations by financing the expenses of the welfare state.
By setting aside oil revenue now, Norwegians will still be able to reap the benefits when the planet no longer uses fossil fuels.
The Government Pension Fund Global (GPFG), as it is officially known, was set up in 1990 but received its first deposit only in May 1996 with a modest cheque of less than two billion kroner (about $305 million).
Today, all of the state’s oil revenues are placed in the fund: taxes, profits from the state’s holdings in oil and gas fields, and dividends from oil firm Equinor, owned 67 percent by the state.
– Is it ‘open bar’ for politicians? –
Absolutely not. In 2001, Norway decided that governments could tap the fund to balance the budget, but within a strictly-defined framework. The government is only allowed to use the fund’s estimated returns, not the capital itself, to prevent the fund from being depleted.
The fund’s estimated return was originally set at four percent (after inflation and management costs), but was slashed in 2017 to three percent, a figure considered more realistic for the future performance of financial investments.
The fund has so far averaged an annual net return of 4.6 percent.
In 2016, the government began withdrawing more from the fund than it put in, as its oil revenues decline.
Even though this means Oslo has de facto stopped saving, the fund has continued to grow as the yield on investments exceeds the government withdrawals.
In exceptional times, such as this year due to the pandemic, the government is authorised to tap a little more money than usual. The government plans to tap 3.7 percent of the fund’s value, or some 39 billion euros, this year.
– How do you manage so much money? –
The Norwegian central bank manages the fund, which it mainly invests in stocks (accounting for 72.4 percent of the portfolio at the end of the second quarter). With stakes in nearly 9,000 companies, the fund owns almost 1.5 percent of the world’s market capitalisation.
It also invests in bonds (25.1 percent of its portfolio) and real estate holdings (2.4 percent). It has also recently begun investing in unlisted renewable energy projects.
All investments are made outside Norway to avoid destabilising the country’s economy.
The fund follows strict ethical guidelines set by the finance ministry.
It is for instance barred from investing in companies accused of serious violations of human rights, child labour or serious environmental damage, as well as manufacturers of “particularly inhumane” arms and tobacco firms, and companies which derive a large part of their activities from coal.
Dozens of groups, including giants like Airbus, Boeing, British American Tobacco and Walmart, have therefore been blacklisted by the fund.