Q&A: What investors are looking for – from target setting to transition planning at Norges Bank Investment Management
Norges Bank Investment Management manages the Norwegian Government Pension Fund Global, which had a market value of kr15.8 trillion (US$1.5 trillion) at the end of 2023. Norges Bank’s stewardship of the fund is underpinned by a series of expectation documents it sets out to investee companies.
In late 2023, Norges Bank updated a document laying out its expectations related to climate change. The revised document emphasizes the need for companies to advance beyond setting long-term climate targets towards operationalizing them, by developing transition plans supported by interim targets.
We explored Norges Bank’s approach to stewardship, and what they think a transition plan should look like, in conversation with Eivind Fliflet, Head of the Environmental Team in Norges Bank’s Active Ownership Department.
Q. What is your approach to a net zero transition? Why is it important?
Our primary objective is to safeguard and build financial wealth for current and future generations of the Norwegian people. Responsible investment is fundamental to our approach, informing how we manage risks, make investment decisions and engage with investee companies.
We are managers of a long-term, intragenerational fund, closely tied to the global economy due to its size and diversification. So we have a strong interest in ensuring a sustainable economy into the future – if the world suffers, our fund will suffer too. We need to manage the risk presented by climate change and support a well-planned and orderly transition to net zero.
Q. What are your expectations around climate change for your investee companies?
We have six core climate-related expectations:
Board oversight – ensuring that climate is incorporated into governance structures, strategy and risk management
Climate risk disclosures – disclosing the impact of climate risks across the value chain
Greenhouse gas (GHG) reporting – reporting scope 1, 2 and 3 emissions
Net zero 2050 commitment – committing to reach net zero by 2050, in line with the Paris Agreement
Interim targets – setting interim, science-based, targets
Transition plans – outlining how the investee company will deliver its targets and net zero commitment
These are documented in our revised Climate Change: Expectations of Companies. This update was the first step in signalling to the market our intention to engage actively with companies on moving from disclosures and target setting to implementation. The document includes further guidance intended to help our investee companies put our expectations into practice – especially as we recognize that companies tend to be at a much earlier stage in relation to setting interim targets and producing transition plans.
The expectations document underpins all our engagement efforts with companies and directly informs our voting decisions.
Q. Why is your focus on transition plans so important?
Through our engagement with investee companies, we saw that although more companies were setting net zero goals, relatively few had developed clear and credible plans for how to get there. For us, though, transition plans are critical.
As an asset manager, we need to understand how a company plans to reduce its emissions, and then we can see its progress over time. A transition plan should make clear how a company will reach both its interim emission reduction targets and net zero commitment. The company can then report against its plan, showing whether it is on track to reach the targets.
Q. What is it that you want to see in a transition plan?
We want to understand each of the company’s main levers for reducing its emissions, and we want the company to explain how each tonne of carbon is going to be abated on the path to its emissions reduction targets.
One method we recommend for illustrating how abatement levers will contribute to emissions reductions is a waterfall chart. We include an example of a waterfall chart in our expectations document, split into periods:
The emissions baseline year to the current year
The current year to the interim target year or years
The interim target year to the year the company plans to achieve net zero
We haven’t been highly prescriptive about the content – how companies plan to reduce their emissions. All companies will have their own unique set of challenges and opportunities, and they won’t all move at the same pace. But we do expect them to be able to set out how they will achieve their climate commitments.
Q. How do transition plans, and your other climate expectations, feature in your engagement work?
Our expectations document is a starting point for our dialogue with companies. Very few meet all our expectations completely at the moment, but we do expect companies to take meaningful steps towards them. The most important thing for us, though, is the dialogue – we aim to be a constructive partner, supporting the companies we own to make progress.
We engage in dialogue with more than 250 of the highest emitters in our portfolio, representing about 70% of the financed emissions in our equity portfolio. Part of our engagement includes high-level strategic discussions with the CEO, CFO and the board of directors about the company’s long-term direction. We look at how the companies’ practices compare to our expectations and discuss how to close that gap over time. Continuing to have these discussions and build these relationships helps to keep transition plans on the agenda at the highest levels of governance.
We also have an anonymized ‘cheat sheet’ of good practices for transition plans that we share with the investee companies we’re in dialogue with, supplementing the guidance in our expectation document. The cheat sheet helps them to see what effective approaches to transition plans look like in practice and what their peers are doing well.
While dialogue is our main focus, we also have escalation mechanisms that we can use. These mechanisms include voting on shareholder proposals, voting against board member re-elections, filing our own shareholder proposals, or ultimately divesting from the company or recommending them for ethical exclusion. This includes 11 companies we divested from in 2023 in order to reduce our climate change risk. We take escalation actions when we believe that companies are materially mismanaging their climate risk, using our expectation document and market practice as the basis for how we determine that.
Q. What are your next steps in steering companies towards strong transition planning and measuring their progress?
It’s quite easy to identify which companies don’t have targets, and relatively easy – on a company-specific basis – to see whether they have comprehensive and quantified transition plans to reach those targets. We will continue pushing these companies to set targets and develop plans.
For the rest of the companies, we will also explore how best to measure the ambition level of targets, and how to identify those companies that are materially falling behind or backtracking on their targets. Often there are very good reasons for why a target is slightly different than peers, or why performance is lagging a little in a certain year. So the challenge for us is to identify the ‘bad faith’ actors and hold them accountable.
Q. Are there any top tips you can think of that would be helpful for our pension fund audience, thinking about how they can work with their own asset managers?
Ask your asset managers what their theory of change is. You should ideally be able to understand their objectives, how their objectives translate into an engagement approach and how they measure their impact. At a basic level, it will be useful to ask them how they drive change and how many companies they actively engage with.
You should also make clear that you expect investee companies to be actively managing their climate risks and opportunities. Provide guidance to your asset managers on what that means in practice, making sure that you are operating in line with existing frameworks, standards and market practice.
Find out more about Norges Bank’s Expectation documents here.
