Norway’s Ethical Sovereign Wealth Fund and Externalities
Norway’s decision to prune oil and gas investments from the portfolio has opened up discussions about the nature of investments made by other sovereign funds across the world. The Norwegian fund has been ethical in cherry picking its sectors for investments since its inception. For instance, the fund has never invested in a tobacco company. Taking a cue from Norway, there has been a considerable decrease in the demand for tobacco shares from international fund managers. This has put enormous pressure on tobacco shares.
Almost all oil-rich countries across the world rely on oil funds to fuel the economy. The oil which is used to run the economy is indirectly creating pollution and health hazards. To completely change from oil to green energy is impossible within a short period of time. It needs huge amounts of investments in the green space along with good governance to change from high carbon to a low carbon economy.
When developed countries like Norway had already kick-started the implementation of alternative energy, poor countries like Afghanistan or South Sudan or Nepal are reeling under poverty and war. So governments of these countries will have to bear the double burden of war, fossil fuel emissions, and poverty. They not only face a huge shortage of funds but also face the risk of leakage of funds due to bad governance.
In such a situation, only developed countries can support the developing and underdeveloped countries to extricate from this vicious cycle of poverty, famine, and unemployment. By investing in poor countries especially in the green space, the countries can be transformed from highly polluted to sustainable economies within a short period of time. It also creates enormous job opportunities for the locals and revenue to the governments. All oil-rich countries that have made their fortunes from oil have an obligation towards other countries, as they were indirectly responsible for pollution and it’s after effects.
Weighing costs and benefits
According to the United Nations Environment Programme (UNEP): “Energy production and use is the single biggest contributor to global warming, accounting for roughly two-thirds of human-induced greenhouse gas emissions.”
The Oil industry has created irreparable damages for the world economy in terms of climate change, pollution, and health costs. If the damages are calculated in monetary terms and added to the price of oil, the price will shoot up denying the developing and underdeveloped economies of their energy pie.
The social cost (the cost that the companies in the oil industry and the societies have to bear. Society cost means health expenditure from pollution, climate changes and damage to crops, etc) far outweigh the social benefits (the benefits received by the companies and the societies from the oil industry). Rich oil resource countries like Norway have understood the collateral damages created by the oil industry and have metamorphosed to green energy.
Norway’s gas and oil industry have contributed enormous employment opportunities and a rich lifestyle to its citizens. According to Norwegian Petroleum, 170 200 people in Norway were directly or indirectly employed in the petroleum sector in 2017. From chart-1, it is clear that the number of people employed in 2017 was a tad lower than in the previous years. There was a steady increase in the number of people employed till 2014 but afterwards, there was a steady decline.
Chart -1 Number of employees in the Norwegian petroleum sector, 1970-2017
The falling unemployment can be explained from the chart-2, which clearly shows that there was a dip in oil prices from 2014-15. Global oversupply, weaker global economy, Brexit issues, China-US trade war, sanctions in Venezuela and Iran are putting downward pressure on oil since 2014. Reduced economic activities from the world over will decrease the demand for oil in the coming years.
Chart – 2 The long history of oil prices
In addition, the International Monetary fund’s report shows that global growth is likely to slow down in the coming years 2019 (3.5) and 2020 (3.6).
Considering the bleak prospects in the oil industry, diversification was inevitable for a country which depended solely on oil resources. It is no more viable to invest in oil companies when the world over is transforming from fossil fuels to renewable energy. Putting all eggs in one oil basket can be fatal.
Taking the objective of reducing emissions forward, Norway has started investing in certified carbon credits in West Africa (A carbon credit is an investment in green energy to decrease greenhouse gas emissions). According to the United Nations Climate Change Report: “About 330,000 tons of CO2 emissions will be avoided from these solar plants during a three-year period ending 2020.”
Norway’s ethical decision-making system has always thrown light for governments and fund managers alike in the past and the forthcoming policies too will influence them in taking the right decisions in the future.
This article is written by our regular guest writer Rajesh Trichur Venkiteswaran.
Rajesh is a freelance journalist. He can be reached at firstname.lastname@example.org
© Rajesh Trichur Venkiteswaran / #Norway Today