Finance

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

The Norwegian government is resisting calls for its $873 billion sovereign wealth fund, the world's biggest, to add unlisted infrastructure projects to its portfolio of stocks, bonds and real estate. It should relent, recognizing both the financial and societal benefits from expanding the universe of potential investments available to the fund.

Last week, the Conservative-led government rebuffed a second attempt by opposition lawmakers and the fund itself to allocate 5 percent of the fund's capital, about $46 billion, to infrastructure. "There is a broad political consensus that the fund has a financial objective and should not be used as a tool for foreign or climate policy," Finance Minister Siv Jensen said in a statement on Friday.

The government is clearly concerned about mission creep. Activists are keen for the pool's managers to focus on private renewable-energy programs and not just projects such as airports. That would add to the almost 60 billion kroner ($7 billion) the fund has already spent buying shares in 226 listed companies that meet its its existing green investment criteria.

But what if Norway can use its billions to move the needle in private alternative-energy development and make better returns? A report by the Institute for Energy Economics and Financial Analysis presented to the country's lawmakers in February showed that the median internal rate of return on infrastructure investments is about 10 percent; that rises to as much as 15 percent in renewable energy.

Real Returns Retreat
Annual returns for Norway's sovereign wealth fund
Sources: Norges Bank; Statistics Norway
Note: Adjusted using annual consumer price inflation figures from Statistics Norway.Excludes impact of management fees

The fund could certainly use that extra juice; since 1998, its average return after fees and inflation has been 3.8 percent. Returns have declined in recent years.

The IEEFA recommended allocating 5 percent of the fund's portfolio to unlisted infrastructure, hiring additional staff familiar with those kinds of investments as well as forging partnerships with others already active in the field.

To be sure, the institute, based in Cleveland, Ohio, isn't exactly an impartial observer; its website proclaims that its "mission is to accelerate the transition to a diverse, sustainable and profitable energy economy."

Nevertheless, the numbers in its study are backed by the sovereign wealth fund's own experience even in listed environment-related companies, which it says delivered returns of 12.4 percent in 2016.

Increasing the amount of capital allocated to alternative energy sources would be a hedge against the reduced use of fossil fuels in the world. The fund has already seen its basic income dwindle in recent years as Norway's oil revenue has diminished.

In Decline
Norway's oil revenue has dropped in recent years
Source: Norway's Ministry of Finance

A move by the world's biggest sovereign wealth fund into unlisted renewable-energy infrastructure would mirror a shift in emphasis that's seeing private philanthropic institutions allocate capital to areas that align with their broader goals. The Ford Foundation, for example, announced this week that it will assign $1 billion of its $12 billion endowment to affordable housing projects and expanding financial services in developing countries.

A report last year from the Center for High Impact Philanthropy at the University of Pennsylvania estimated that less than 2 percent of private foundation capital is allocated to either so-called program-related or mission-related investment. By increasing that to 5 percent, "an additional $24 billion in capital could become available to enable improved sustainability of social enterprises and the recycling of philanthropic capital," the report said.

"We can’t just live as rentiers off the oil fund," Norwegian Prime Minister Erna Solberg told Bloomberg News last month. She's right; and freeing the wealth fund to make more speculative investments might pay off spectacularly by funding the garage-based experiments of the next Thomas Edison, Steve Jobs or Elon Musk that move the needle in energy technology.

--Gadfly's Elaine He contributed graphics.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net