Norway is a tiny Scandinavian country with a population of 5.5 million, less than the 7 million in my home state of Massachusetts. The country is well known for its exemplary performance in the Winter Olympic Games. For the past 24 games it ranks first in medals with 405 (148 Gold) compared to second place United States with 330 medals (113 Gold).
But current conversations in the short summer with long days there shouldn’t be about the next Winter Olympics, but the fact that during 2022 and 2023, thanks to Russia’s invasion of Ukraine, Norway is earning more than $170 billion from oil revenues above pre-war estimates from the Ministry of Finance. If oil prices stay high due to sanctions on Russia and other reasons, Norway might continue to earn $50-100 billion extra per year for years to come. I have no inside connections in the Norwegian government, but I hope they are having discussions to figure out what to do with all this money. There are certainly pressures on them to be doing so. A September 8. 2022 The Economist article put it, “Norway is profiting embarrassingly from war in Europe” and said “It should think of ways to help the EU through the crisis.”
The organization getting this money is the Norwegian Government Pension Fund Global, commonly referred to as the “Oil Fund,” managed by Norges Bank Investment Management (NBIM). It has total assets of around $1.5 trillion, essentially the same size as Japan’s Government Pension Investment Fund. Where does all this money come from? It all started in 1969 when one of the world’s largest oil fields was discovered in the North Sea. The fund is for the citizens of Norway. “The aim of the fund is to ensure responsible and long-term management of revenue from Norway’s oil and gas resources, so that this wealth benefits both current and future generations.” Today the fund is worth nearly $275,000 for every citizen of Norway. Its citizens and future citizens look to be in pretty good financial shape, but like everyone else on the planet they will be exposed to the effects of climate change.
In light of this, earlier this year the fund, and there is some irony here, announced it would vote against directors in companies it feels aren’t doing enough to address the risk of climate change. NBIM is now very focused on excluding companies it believes are mismanaging climate risk and thus has a long list of exclusions, particularly of coal companies.
Voting against directors certainly sends a signal but it leaves the broader question of how developing countries are going to make the necessary energy transition. Towards that end, recognizing the $170 billion profit windfall, on April 24, 2023 a Norwegian independent expert group on climate financing issued the report “If Not Norway, Then Who?.” The report proposed that Norway should use some of this money to create a new Green Guarantee Scheme to mobilize more private investment into green technologies and renewable energy in emerging markets and developing countries.
The Chair of this group is Vidar Helgesen, the Executive Director of the Nobel Foundation and a former Minister of Climate and Environment in Norway. (Mr. Helgesen is a member of the Conservative Party of Norway which, in a U.S. context with our exciting “ESG Culture Wars,” probably makes him center left.) When I asked Mr. Helgesen how this group came about to write the report he explained, “The climate crisis is crying out for leadership. Much of the work can be done by private investment and innovation. But to trigger green investments on a large enough scale, political innovation is also needed. No country is better placed to do something about this than Norway.”
The premise of the report is that private capital has an essential role to play in the energy transition, particularly for developing countries. With increasing interest rates and international instability, capital is fleeing from risky areas to safe harbors, most often in rich western countries. However, by derisking such investments, and particularly risks that private companies cannot easily hedge against themselves (e.g. political risks or foreign exchange risk), Norway could effectively leverage and mobilize private capital. In fact, according to the OECD, guarantees is the most effective instrument for mobilizing private capital. Based on estimates from the Blended Finance Taskforce, it argues that with a subsidy of $1 billion (concessionary capital) and a guarantee exposure of $13 billion (a contingent liability financed by guarantee premiums), it could realistically be able to mobilize $30 billion of private investments.
There is some precedent for this idea. Sweden already has a guarantee facility (for all of the Sustainable Development Goals, not just renewable energy and other climate-related investments) and Denmark is in the process of setting up a similar facility. fOther countries may do the same and the expert group is recommending that Norway take a leadership position in assembling a coalition of countries to create a large fund for developing renewable energy in developing countries.
For it to make a difference, he scheme being envisaged in the report will have to be very large. The financing gap for developing countries to reach the goals of the Paris agreement is around $1 trillion per year. To manage this there’s the need for an ambitious international coalition and leadership, with real money on the table. I know from experience in lots of ways that fundraising is hard. Finding the first one in is critical, and even more critical is who it is and how much money they pony up. A Norwegian government guarantee will be very attractive because of its rare AAA rating, the highest possible credit rating (only 12 countries in the world have this, and the UK and U.S. are not in this group), contributing to reduced borrowing costs for the recipient.
The aforementioned report is not the only one in Norway to recommend a new Norwegian guarantee initiative. An expert group commissioned by the government itself made a similar recommendation in May this year, in its report “Investing in a common future.” And from what I understand, there’s ongoing discussions and significant support for this in parts of the Norwegian Government. The question then becomes how much money would or should Norway commit? Being deeply enmeshed in the U.S. “ESG Culture Wars” with both sides claiming they are protecting fiduciary duty, I couldn’t help but wonder about this when reading the report. After all, this money is for Norway’s citizens and NBIM is not a development bank or charity. Would it be legitimate to commit even one Norwegian Kroner to such a facility, particularly if it is a concessionary one, i.e., not expected to meet risk-adjusted market returns.
When I posed this question to Mr. Helgesen he replied, “It’s both necessary, urgent and also desirable to do something about this before it’s too late. Just look at the consequences the world is already seeing from the increasing frequency of heat waves and natural disasters. Also, although the size of the guarantees should be huge, the losses and costs to Norway would probably be very small, and insignificant compared to our extraordinary profits.”
Helgesen also says a large contribution from Norway has the potential to improve Norway’s declining reputation internationally because of its profits from the war, as pointed out by international media, government leaders, and the UN Secretary-General António Guterres. While I’m no expert in this domain, common sense says that if the Norwegian government commits only a relatively small amount, say a few billion dollars per year, the reaction will range from amusement to derision. In the best case it will be seen as a token gesture, kind of like voting against directors without supporting more aggressive actions like the Engine No. 1 campaign (which NBIM did not). In the middling case it will be seen as well-intentioned but lacking the courage to make monetary commitments assuage the somewhat guilt-ridden protestations out of Norway regarding the need to address climate change. In the worst case, it will be seen as political grandstanding and greenwashing at a level to match the country’s overwhelming performance in the Winter Olympics.
And in the best case? Norway will commit most, if not all, of that money, and any future excess revenues from oil revenues, to the global green guarantee initiative, or similar initiatives. It will give Norway the moral authority to ask other countries—especially those also profiting from increased oil and gas prices (such as Australia, Canada, the UAE, the U.S., etc.)—to make similar contributions based on their capacity and legal ability to do so. It will secure tiny Norway’s place in history as playing a critical (and ironic) role in the energy transition on which the world so urgently depends.
As soon as the Norwegian Government makes up its mind, we’ll know the decision. Will they take the moral responsibility they have? If they do, this could be a game-changer in the much-needed green transition for emerging markets and developing countries.
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