Responsible investment 2023

1. Introduction

2023 at a glance

Long-term ownership in a changing world

2023 was marked by war, the climate crisis and inflation. At same time, artificial intelligence became a part of our everyday life. The fund is a long-term, clear and predictable owner in a changing world.

As a global investor our fate is intrinsically linked with that of the world economy. Last year, the physical risks of climate change and the advancements in AI impacted people everywhere, which in turn affected the businesses we invest in and the management of the fund.

Climate risk is financial risk. The transition to net zero emissions is important both for society and for the economy. In July, we experienced the hottest day ever recorded, and 2023 turned out to be the warmest year on record. Millions of people around the world were hit by heatwaves, extreme weather and floods. Harvests were lost and people were unable to get to work due to submerged roads.

At the same, decarbonisation of energy and industries is well under way, offering business opportunities. In 2023, we set clearer expectations for how the companies we invest in should navigate the climate transition. Our expectations show how we as an investor support the companies as they transition their business models to net zero. Long-term targets are no longer sufficient, they must be underpinned by detailed transition plans with interim targets and updates on their progress.

Artificial intelligence is now part of daily life. This creates vast potential, but also poses risks for companies, consumers and society. In 2023, we focused on how artificial intelligence can benefit our fund management and the companies we invest in. However, it is equally important to manage the risks that come with artificial intelligence. In August, we published our view on responsible use of artificial intelligence. For the companies, this begins with board accountability. It also depends on transparency, explainability and robust risk management.

Changes happen quickly. As an investor, our job is to stay ahead of the curve, yet we remain a long-term owner. We want companies and fellow investors to understand our positions, and to be a transparent and predictable global shareholder.

Oslo, 7 February 2024

(sign.)

Nicolai Tangen
Chief Executive Officer

Increased transparency

Transparency is key for both building trust and achieving better outcomes. We are sharing more about our activities and the progress we are making.

In 2023, we increased our transparency by providing more information on our website, participating in more consultations, engaging in more dialogues with companies and stakeholders, and enhancing our external visibility.

For the first time, we published a voting report immediately after the voting season. Our aim was to provide fresh data and insights about shareholder voting trends and our own voting decisions. We took a firmer stance on crucial issues like board diversity and CEO remuneration, and we noted a continued rise in sustainability-related shareholder proposals. Also, for the first time, we filed our own climate-related proposals.

In October, we organised a seminar on “Navigating Net Zero”, to mark the first anniversary of our ambitious climate action plan. In the seminar we presented our work and the progress we are seeing among the more than 8,800 companies we invest in. An increasing number have targets and transition plans. However, there is still a way to go before we reach our goal of net targets and transition plans for all the companies in the portfolio.

In 2023, we were recognized as the world’s most transparent fund in the Global Pension Transparency Benchmark. We received the highest score in the category on Responsible Investing. We hope that this transparency and visibility can contribute to companies, investors and policy makers pulling in the same direction, and that, in this way, we can achieve more than we would on our own. But we also hope that our transparency in this report can increase the public’s understanding of and engagement with our work. Engagement, discussions and input help us to improve and to continue to be a leading responsible investor.

Oslo, 7 February 2024

(sign.)

Carine Smith Ihenacho
Chief Governance and Compliance Officer

How we work

We manage the fund according to a mandate from the Norwegian Ministry of Finance. The objective for the management of the fund is the highest possible return with acceptable risk. This management objective shall be met within some general management principles. These principles include provisions on transparency, exercise of ownership rights and responsible investment management in line with internationally recognised principles and standards. The mandate also establishes, as a long-term goal for responsible investment, that the companies in the investment portfolio have activities that are compatible with global net zero emissions, in accordance with the Paris Agreement.

The fund’s long-term return is dependent on sustainable economic, environmental and social development, as well as on well-functioning, legitimate and efficient markets. Through responsible investment, we seek to improve the long-term financial performance of our investments and to reduce the financial risks associated with the environmental and social practices of companies in our portfolio. In line with international standards, we also carry out environmental and social due diligence and use our leverage to promote responsible business conduct. Our responsible investment work is directed at the market, portfolio and company level.

Participation at the IFRS Sustainability Symposium in February.

2. Market

Expectations

We are transparent about our expectations of companies on governance and sustainability matters.

Starting from internationally agreed standards and informed by our dialogue with companies, academics and civil society, we set our own priorities as an investor. We formulate expectations of companies on sustainability matters, positions on governance issues, and guidelines for our voting. These public documents communicate our priorities to the wider market and ensure predictability for the companies we invest in.

In 2023, we introduced a new views series presenting our point-in-time opinions on topical issues that are relevant for us as a financial and responsible investor. We published two investor views during the year, on responsible artificial intelligence and the use of voluntary carbon credits.

Setting expectations of companies

Our expectations, which cover ten key sustainability topics, form the basis of our dialogue with companies. They are primarily directed at company boards. The board should take overall responsibility for company strategy and address challenges presented by environmental and social issues. The board should integrate material sustainability risks and opportunities into the company’s strategy, risk management and reporting. It must also understand how the company’s operations impact the environment and society, and address negative impacts.

Our expectations, as well as our responsible investment management policy, are based on standards such as the UN Global Compact, the OECD Guidelines for Multinational Enterprises, International Labour Organization (ILO) conventions and the UN Guiding Principles on Business and Human Rights. They also largely coincide with the UN Sustainable Development Goals.

In August, we published new expectations on consumer interests, which we have grouped into three broad categories: product safety and integrity, responsible commercial practices, and data governance, privacy and AI. We expect companies to integrate consumer interest issues into their business strategy and risk management, be transparent about material consumer concerns, and engage responsibly with stakeholders on these issues.

In September, we published sharpened expectations on climate change. We highlight the need for companies to move from target setting to transition plans, and present six core expectations that will drive our ownership activities. We provide further direction for our expectations within four categories, broadly the order in which a company might develop its work: foundations of corporate climate strategy, ambition and target setting, transition plans, and delivery and transparency.

We have updated our biodiversity and ecosystems expectations to refer to the newly established Kunming-Montreal Global Biodiversity Framework and the recommendations of the TNFD. We ask for more specific timelines for eliminating deforestation from companies’ business activities, and now make a direct reference to smallholder farmers as stakeholders who should be considered.

We have updated our expectations on tax and transparency to refer clearly to the GRI tax standard and to provide additional detail on the elements of country-by-country tax reporting. We ask companies to provide more information related to their tax disclosures and use of tax incentives.

Communicating our positions and voting guidelines

To support our ownership activities, we publish position papers that clarify our stance on corporate governance issues. These are based on the G20/OECD Principles of Corporate Governance and best practices. The position papers are reflected in our global voting guidelines and therefore affect how we vote at shareholder meetings. We expect companies to have effective governance, and our shareholder rights to be protected.

In 2023, we made changes to our voting practices in three areas: board independence, gender diversity and CEO remuneration. We strengthened our guidelines in Japan to require at least one female director and at least one third of directors to be independent. We also further strengthened our approach to CEO pay, focusing on cases where outcomes could be unusually costly and the incentive structure does not clearly align with shareholder interests.

Research

We aim to strengthen the scientific foundation of our responsible investment management by supporting innovative academic research. Academic research can help improve market standards, and inform our responsible investment with new insights.

We provide research funding in areas where we believe that more academic research is needed to shed light on how governance and sustainability may affect financial risks and returns. We also initiate collaborative research projects with academics to answer specific questions of relevance to our responsible investment management. We strive to make the findings publicly available, contributing to knowledge building.

Supporting academic research

In 2023, we started funding new research on CEO incentives and initiated a collaborative project on the economics of national resources. We continued to support two research projects on the effect of ownership structures on companies’ governance and a collaborative project on the effect of our vote pre-disclosure.

Projects we have supported.

Setting CEO incentives

We want to understand better what optimal executive incentives look like for a diversified investor seeking to promote long-term returns. We signed an agreement with the National Bureau of Economic Research (NBER) in the US to encourage further academic research by top scholars on CEO incentives. Over three years, the NBER will organise two research conferences and a junior researcher “boot camp”. NBER will select research papers based on a combination of intrinsic research contributions and topical relevance. Our expectation is that many of the papers presented at the conferences will eventually be published in leading journals. The first of these conferences was held in Cambridge, Massachusetts in December and streamed on NBER’s YouTube channel.

Ownership structure

We want to understand better how the rise in institutional shareholding and changing ownership structures can affect companies. In 2023, we continued to support two research projects looking at this trend in financial markets.

Researchers at the École Polytechnique Fédérale de Lausanne (EPFL) and University of Zurich organised a workshop for academics and practitioners on shareholder voting to disseminate findings from their work on investor proxy guidelines. We contributed to this workshop with a presentation on our approach to shareholder voting. Further data have been collected through a survey of institutional investors and issuers in Switzerland to study the effect of governance preferences on corporate decisions.

A project led by Professor Martin Schmalz at the University of Oxford is focusing on using laboratory experiments to examine the roles of company dialogue and executive compensation structures in driving corporate behaviour and portfolio performance. In the experiments, participants are assigned the role of either manager or shareholder in competing companies. Results published in a first working paper show that managers also consider the profits their shareholders can generate from their shareholdings in competing companies. The experiments revealed that managers take such a holistic view even in the absence of direct financial incentives in their remuneration packages. A conference organised at the university’s Saïd Business School provided a forum for academics to discuss emerging research on common ownership, experimental governance and industrial organisation.

Economics of natural resources

We want to better understand the relationship between climate change and natural resource availability. In 2023, we initiated a collaborative project led by Assistant Professor Justin Johnson and Professor Stephen Polasky at the University of Minnesota to estimate the future economic impact of changes to natural resources on countries and industry sectors. The aim of the research is to provide us with a more complete picture of how changes to natural resources might affect the fund’s investments, particularly in areas such as food production, infrastructure, and renewable energy, as well as in countries whose economies depend significantly on natural capital. The research will support our investment strategies and understanding of our exposure to long-term climate risk.

Collaborating with researchers

Effect of voting pre-disclosure

Since January 2021, we have disclosed how we intend to vote prior to annual shareholder meetings. To analyse whether our pre-disclosure transparency has any effect on other shareholders’ voting decisions, Alexis Wegerich, Head of ESG Analytics, has collaborated with Ruediger Fahlenbrach from EPFL and Nicolas Rudolf at HEC Lausanne looking at this question. The research is independent of Norges Bank Investment Management. In 2023, the researchers published a working paper “Leading by Example: Can One Universal Shareholder’s -Voting Pre-Disclosure Influence Corporate Outcomes?”, documenting the results of this research project.

The research study exploits the quasi-random implementation of our pre-disclosure to quantify its effect: Pre-disclosing voting intentions five days prior to meetings means that shareholders can consider our pre-disclosure for some meetings, while for others it comes too late and after the voting cut-off date.

The preliminary results suggest that voting pre-disclosure influences other shareholders’ voting decisions. For management proposals, against votes increase by an average of 3 percentage points where we pre-disclose our intention to vote against the proposal. The results also imply a greater impact from the voting pre-disclosure if the proposal is more controversial.

We find these preliminary results encouraging. Market participants seem to find our pre-disclosure valuable and, more generally, it shows how voting pre-disclosure can be an effective ownership tool for us.

Overall change in dissent levels for management proposals where we ­compare 2020 (before pre-disclosure) to the years 2021 and 2022 (with pre-disclosure). In percent. Estimated coefficients with confidence intervals. In percentage points.

Measuring our engagement results

Reporting on our engagement results is a core component of being a transparent fund. We want to improve the way we measure the impact of our ownership work. This will help us further develop our company engagements and prioritise our time and resources. It will also create a better basis for our reporting and accountability.

That said, results evaluation and impact attribution are not straightforward. We initiate dialogues with companies, set clear engagement goals and track progress towards these goals. We often engage with companies over a long period of time. During this time, other events occur in the market or at the company itself, and we may not be the only investor or stakeholder engaging on the topic. Even if our goals are achieved, it is therefore difficult to assess the causality between our engagement and outcomes.

In 2023, to help us overcome challenges in impact measurement, we started using a new system to improve the tracking of both engagement objectives and progress in our company interactions. The idea is that the data generated will help us understand our engagements better and, in time, report more extensively on their impact.

3. Portfolio

Investments

ESG considerations are integrated into our investment decision-making processes across all asset classes. We believe this improves returns and reduces risk.

Listed investments

Integrating ESG into investment processes

Our investment mandate has specific requirements for responsible investment. Material sustainability risks and opportunities faced by a company, as well as the quality of its corporate governance, are likely to have an impact on its ability to create long-term value. We are therefore increasingly integrating ESG data into our investment processes. The mandates for our portfolio managers require them to take ESG considerations into account in their analyses. They know well our expectations to companies on sustainability matters and our positions on governance matters and discuss them directly with companies. In 2023, they attended 2,100 meetings with companies where ESG topics were discussed. To ensure consistent ESG integration in line with our expectations, they also collaborate closely with our stewardship and sustainability experts. Having both investment decision makers and ESG subject matter experts present in meetings can increase the impact of our company dialogues. Hearing the views of the board or management also gives us a better insight into the company, improves the quality of our investment analysis and increases the relevance of our responsible investment work. Over time, we believe this contributes to our investment performance.

Portfolio managers also take part in important voting decisions. In 2023 they participated in voting decisions at 745 companies. These companies included our largest investments and together made up 62 percent of the equity portfolio’s market value. Collaboration on these decisions allows for incorporation of specific company and industry knowledge in the process. It also ensures that we present a united front when exercising our shareholder rights and communicating our ESG expectations to our portfolio companies and the market.

Building responsible investment knowledge

We aim to build a responsible investment mindset throughout the organisation. Giving employees the opportunity to learn more about ESG as part of their training and development is an important component of ESG integration. In 2023, we included climate risk in our Investment Academy training programme. We also teamed up with Rystad Energy Institute to provide extensive training for our employees on topics such as global energy systems, renewables, hydrogen and carbon capture. Our portfolio and stewardship managers took part in training on communication and company meetings.

To further support our knowledge building and integration of ESG considerations into the investment process, we hold open lectures and learning sessions for all our employees, inviting external speakers from academia and industry to talk to us about sustainability-related developments. We hosted a buy-side sustainability summit during the year with three of the world’s largest investors and some of the companies playing a key role in decarbonising high-emitting sectors. Our employees had the opportunity to follow the discussions between our portfolio managers and executives at nine companies in the auto and energy sectors on the topics of net zero in energy and the future of vehicles. We also leverage our internal expertise to inform our work on responsible investment. In 2023, we received extensive input from employees across the organisation when developing our view on responsible AI and our consumer interest expectations.

Enhancing data and tools in the investment process

We make a broad array of company specific ESG information available to the organisation in our research and portfolio management systems. In 2023, we developed a portfolio-specific governance dashboard which allows portfolio managers to see portfolio tilts along our internal governance score as well as the underlying data points.

We also expanded the use of our investment simulator, a decision-support framework which highlights strengths and weaknesses in our portfolio managers’ investment decisions. The simulator shows ESG data and insights based on external and internally developed analytics, such as ESG incidents in the news, and companies flagged by our forensic accounting and behavioural analytics teams. Our forensic accounting team has developed a screening tool looking at more than 100 accounting ratios, to help us identify companies where sources of revenue or cash flow may be unsustainable. Building on this accounting database, the team is developing an AI tool which seeks to identify companies which the fund should own less of.

Share of portfolio companies with net zero 2050 targets for scope 1 and 2 emissions in 2023 by region.

Improving climate-related data has long been important for us. Companies’ net zero targets are a key metric to evaluate their preparedness for the transition to a low carbon economy. We analyse net zero targets to better understand their quality. This provides us with valuable information for our ownership and investment decisions. In 2023, we launched a net zero target tracker with information on all corporate net zero targets published by our portfolio companies, including short- and medium-term targets.

Companies with science-based targets decrease their emissions, 2015-2023. Average change in company absolute scope 1 and 2 emissions.

We are seeing a positive trend in science-based net zero 2050 targets, with an increasing number of companies across Europe, the Americas and Pacific setting such targets. The highest increase in 2023 was in the Pacific region.

Our research indicates that targets matter for corporate emissions. We are seeing increased emissions in companies that have not set any targets, whereas companies with science-based targets have decreased their emissions since 2015.

Investing in the transition to a low-carbon economy

The energy transition and industrial decarbonisation are broad and complex challenges and the period following the Paris Agreement saw rapid adoption of net zero targets across the corporate world. As the execution phase accelerates, strategic divergence is appearing within industries and across regions. This is likely to create divergences in value creation over the long term for companies that are, or are not, able to capture the resulting financial opportunities. While some high-emitting companies may decline in value, others will transform their business models and play an important role in supporting an orderly transition. These developments also highlight the potential for long-term ownership engagement in support of a successful transition and sustainable returns.

Clean energy stocks performed poorly in 2023, with cost challenges encompassing raw material inflation, higher interest rates, and ongoing supply chain constraints. This is leading some companies to narrow their strategic focus to areas where they believe their existing businesses can drive competitive advantages. For traditional energy companies this means distinguishing between renewable electricity infrastructure or ‘electrons’ and opportunities overlapping with fossil fuel capabilities, or ‘molecules’. This is in turn leading to energy companies globally choosing different strategic directions. It sets the scene for a period when the fundamental drivers of share performance in the same industry, but different regions could diverge. Understanding which transition strategy is optimal for each company in turn becomes more important.

Industrial decarbonisation more broadly is moving from ‘hard to abate’ where the availability of low carbon technologies and processes to replace fossil fuel processes is the fundamental barrier, to ‘expensive to abate.’ Technology roadmaps exist for green hydrogen, carbon capture and industrial electrification, but financial barriers persist. In this phase, many governments are introducing policies aimed at supporting the development of low carbon technologies. Examples include steel and refinery projects in Europe, and the Inflation Reduction Act in the US. Governments are, furthermore, paying increasing attention to the geopolitical significance of creating low carbon value chains. Regional divergences are also emerging where an industry has multiple routes to decarbonisation. In mature markets, industries appear more likely to adopt novel low carbon processes, whereas in markets with a younger asset base, a preference for retrofit processes, such as carbon capture, utilisation and storage (CCUS) , is emerging.

Leading decarbonisation solutions.

Companies that enable decarbonisation exist across diverse sectors. Industrial gases, traditionally co-located with heavy industry are natural partners to provide low carbon feedstocks such as green hydrogen. The technology companies that operate hyperscale cloud businesses are driving the development of renewable electricity markets through the scale of their renewable power purchase agreements. Companies including Alphabet Inc, Amazon.com Inc, and Meta Platforms Inc have ambitious net zero targets that set the tone for followers, including in the challenging Scope 3 field. This is important, as the energy demand of data centres grows rapidly. Amazon’s commitment to decarbonise transport and delivery covers inbound road, rail, air and water freight. Their last mile commitment features the largest ever order of electric trucks, from Rivian Automotive Inc in 2019. Many technology companies also produce tools that are needed to enable decarbonisation. Semiconductors are needed in all modern electronics, but the specific power semiconductors from Infineon Technologies AG, STMicroelectronics NV and Wolfspeed Inc and other companies are integral to electrification of transport and renewable power generation. Technology companies are also providing the accounting systems or “environmental ledgers” needed for tracking and reducing carbon emissions. Companies involved in this include SAP SE, Oracle Corp and Salesforce Inc.

The fund has significant investments in companies supporting industrial decarbonisation, and in companies involved in the energy transition. At the end of 2023, 9 percent of our equity portfolio was invested in companies generating revenue from climate solutions, based on MSCI’s definition. We also monitor our investments included in the FTSE Environmental Opportunities index, which tracks companies that generate at least 20 percent of their revenues from environmental products and services. At the end of 2023, 14 percent of the fund’s equity investments were in companies included in this index. See our climate risk disclorues for more information.

Improving risk and return with external managers

We use external managers to manage parts of the fund’s equity investments, primarily in emerging markets and small-cap companies in developed markets. The fund had 743 billion kroner, or 4.7 percent of its capital, invested with external managers at the end of 2023.

External managers have played a role in the management of the fund since 1998. They reduce the risk of our investments by helping us avoid challenging business models, problematic company strategies and weak corporate governance. Our external managers contribute to improved investment decisions and excess return. Their proximity to the markets, and in-depth knowledge of developments in specific regions and sectors are key strengths.

Adani, a multinational conglomerate, is a concrete example of our external managers’ approach to avoiding companies with weak corporate governance. Early in 2023, Adani plummeted in value due to fraud allegations. Prior to these allegations and despite Adani’s significant weight in the benchmark, our external managers took the active decision to avoid investing in the Adani franchises. Their decision was based on investment and research processes that incorporate ESG information. This decision helped us avoid being significantly invested in the Adani conglomerate once the allegations became public.

Our external managers report annually whether they are PRI signatories, together with their consideration for signing or not signing the principles. In 2022, 60 percent of our external managers were signatories to the PRI.

Investing sustainably in fixed income

Portfolio managers investing in corporate fixed income also benefit from taking ESG considerations into account. ESG is a key component of our credit analysis. Poor corporate governance or high sustainability risks can become a significant credit risk and impact returns. We therefore seek to understand ESG risk factors for the industry and the company, based on our internal knowledge and external sources. These assessments are integrated into our research, both before investing and on an ongoing basis.

We invest in green, social and other labelled bonds, but do not have a specific mandate related to these instruments. This means that we assess all bonds, conventional or labelled, in the same manner.

As a long-term investor, we seek to contribute to the integrity of the labelled bond market. Our view is that labelled bonds should adhere, at a minimum, to the International Capital Market Association’s principles.

We own labelled bonds issued by public entities, including sovereign, supranational and agency issuers, and the private sector. Most of these bonds are green bonds, a type of fixed-income instrument that is specifically aimed at raising money for climate and environmental projects. These can include projects related to renewable energy, energy efficiency, green transport, biodiversity conservation, and other related sustainable and eco-friendly projects.

At the end of 2023, green bonds in the fixed-income portfolio amounted to 75 billion kroner, based on the definition for the Bloomberg Barclays MSCI Bloomberg Green Bond Index.

Unlisted real estate and infrastructure investments

Net zero transition in our real estate portfolio

Unlisted real estate investments amounted to 1.9 percent of the fund’s net asset value at the end of 2023. We invest in office and retail properties in selected cities around the world and in logistics properties that are part of global distribution networks.

In our 2025 Climate action plan, we established a net zero 2050 target for our unlisted real estate portfolio as well as an interim target to reduce operational carbon emissions intensity by 40 percent by 2030. Our 2050 net zero target includes operational carbon emissions from when the building is in use, as well as the embodied carbon emitted to construct, renovate, and demolish the building. In 2023, we refined our interim operational carbon target to include all emissions from both tenant and landlord spaces. We also updated our net zero strategy for real estate to integrate our new targets into our acquisition and asset management practices.

Progress towards our targets

To measure progress towards our targets, we benchmark our unlisted real estate portfolio against 1.5°C decarbonisation pathways developed by Carbon Risk Real Estate Monitor (CRREM). CRREM evaluates the carbon risk associated with the building and assesses whether the building’s current and projected emissions align with the global climate targets in the Paris Agreement. This assessment helps us understand the potential financial and operational risks associated with the building’s emissions in a low-carbon future.

By the end of 2022, 41 percent of the unlisted real estate portfolio by value was aligned with the 2022 value of the CRREM decarbonisation pathway compared with 26 percent of the portfolio in 2021. This is partly due to refined local emissions factors for the US markets and improvements we have made to assets in the portfolio. As the CRREM decarbonisation pathway greenhouse gas values decline year-on-year, it will be increasingly difficult to conform to the pathway through to 2050. Without making improvements in the portfolio, by 2030, 18 percent of the portfolio is projected to be aligned with the pathway, but close to none of the portfolio currently meet the 2050 end requirements. We expect this to increase as we make interventions over time across the portfolio, and if the energy system itself changes more rapidly than projected by CRREM.

To measure alignment, full energy consumption data are required for each building. We are unable to benchmark the logistics joint venture with Prologis, and the Central London joint venture with the Crown Estate, due to insufficient energy consumption data coverage. We split out the parts of our portfolio where we do not have sufficient data to accurately measure alignment. Overall, we are unable to analyse 38 percent of the portfolio by value due to incomplete consumption data. We continue working with our partners to improve the quality of energy consumption data.

Our interim 2030 target measures reduction in greenhouse gas intensity of our unlisted real estate portfolio against a 2019 baseline. There are several factors that impact the greenhouse gas intensity of our portfolio, and the decarbonization trajectories can vary greatly between real estate sectors. To contribute actively to the energy transition, we see the need for long-term, sustainable solutions for the building sector, and we will not divest energy intensive assets solely to meet our greenhouse gas reduction targets. We break down the emission reductions per sector and disclose contribution by sector and geography to be transparent about our progress. See tabels 3 and 4 in Climate risk disclosures.

Unlisted real estate portfolio alignment (current and projected) with CRREM ­decarbonisation pathway. Measured in kroner. Percentage points.

We utilise estimates aligned with the PCAF recommendations where consumption data are not available and specify the percentage of estimates vs actual consumption data. From 2019 to 2022, greenhouse gas intensity for the real estate portfolio fell by 4 percent. The office sector decreased by 10 percent, this is partly due to lower utilisation due to delayed return to office, improvements we have made in the portfolio, and an increasingly cleaner energy grid across our markets. The retail sector decreased by 16 percent primarily driven by cleaner energy grids. For our logistics portfolio we use estimated data and there is no change in carbon intensity per square feet. Changes in the composition of the portfolio however resulted in one percent increase in greenhouse gas emissions intensity. Our logistics assets have 66 megawatts of solar generating capacity across the portfolio, of which 9 megawatts were added in 2023. As we further expand on this, our expectation is that this sector will contribute meaningfully to our reduction target. Similarly, if the composition of our portfolio were to be tilted towards more energy intensive assets or to geographies with less available renewable energy on the grid this could impact the overall greenhouse gas intensity of our portfolio.

To measure the overall responsible investment progress for the unlisted real estate portfolio, we have been report-ing data to the Global Real Estate Sustainability Benchmark (GRESB) since 2013. In 2023, we scored 83 out of 100, compared with 81 in 2022. We performed 7 percentage points better than comparable investment portfolios re-porting to GRESB. However, we have found that our new climate targets require a different approach to reporting which is more data-driven and focussed on actual energy consumption and carbon emissions for the real estate portfolio. From 2024, therefore, we will strengthen performance-based reporting towards our targets and use CRREM for benchmarking. This will replace the GRESB survey.

Progress towards 2030 interim target, greenhouse gas intensity by sector relative to 2019 baseline and 40% greenhouse gas reduction pathway, including estimates. Financed greenhouse gas emissions intensity per square meter in percent of 2019 baseline.

Decarbonising real estate – a case study in Paris

M | 17-23 boulevard de la Madeleine Paris

Problem statement

A building’s total carbon emission consists of embodied carbon and operational carbon, representing different stages of a building’s lifecycle. For new construction, embodied carbon contributes as much as 50 percent of total carbon emissions during a building’s lifecycle. This is equivalent to 30 years of operating the building.

Refurbishing existing assets, instead of building new ones, is an important way to reduce total carbon emissions of our portfolio.

Our approach

At the design phase we did a whole building lifecycle assessment to assess the carbon impact of each of the building’s lifecycle stages and to know where to focus our efforts.

We did a circular economy assessment and identified 220 tons of materials that could be reused. To minimize concrete waste, we kept original concrete slabs and added extra-slim fan coils to optimise floor- to- ceiling heights.

Where we needed new materials, we tried to source low-carbon and bio-sourced materials. The walls of the lift lobbies will be faced by a soil-based product from the Grand Paris works (a few kilometres away).

We are implementing innovative solutions for more efficient heating and cooling and better utilisation of indoor and outdoor space to reduce energy intensity and improve tenant wellbeing.

Property

• Built in 1930’s, last redeveloped in 1990-92
• Total area of 21,000 m² office
• 12,000 m² retail
• Nine floors and four basement levels.
• Office floors are vacant and under refurbishment.

After refurbishment

• Creation of 2,650 m² of outdoor spaces (rooftop and green spaces).
• Facade upgrade and large floorplates (> 3,500 m²).
• Creation of 560 m² of cycle facilities, including lockers rooms.

Results

• 5,000 tons of carbon emissions saved through reuse of materials, limited demolition and low carbon materials.
• Reducing energy intensity by 50 percent.
• Reducing carbon emissions by 50 percent over the building’s life cycle.
• Better utilisation of indoor and outdoor areas space. Improves well-being and use of total space.

Investing in unlisted renewable energy infrastructure

The fund’s management mandate was amended in 2020 to include infrastructure for renewable energy. Up to 2 percent of the fund can be invested in unlisted renewable energy infrastructure. These investments represented 0.1 percent of the fund at the end of 2023.

Meeting the goals of the Paris Agreement will require a fundamental transformation of the world’s energy use. The transition demands both a decrease in the use of fossil fuels and advances in the technology for renewable energy. By investing in unlisted renewable energy infrastructure, the fund can contribute to the low-carbon transition whilst further diversifying risk. These investments are subject to the same risk and return requirements as other investments in the fund.

We increased our investments in renewable infrastructure in 2023. In January, we acquired a 49 percent stake in a 1.3 GW portfolio of solar plans and onshore wind farms in Spain. The portfolio is a combination of operational projects and projects under development. In March, we bought a 16.6 percent stake in a 960 MW German offshore wind construction project. The wind farm will produce clean energy equivalent to the electricity demand of 1.1 million households, and the project is expected to be operational by the end of 2025.

Environmental, social and health and safety risks are an integral part of the review of these investment opportunities, and we use the GRESB benchmark for infrastructure assets to assess the sustainability performance of individual assets. In 2023, the wind farm Borssele 1 & 2, our first investment in renewable energy infrastructure, was again ranked first by GRESB among its peers in the European offshore wind power generators, maintenance and operations category.

Risk management

We systematically monitor ESG risks in the portfolio. We implement risk mitigation measures for companies with high risk, including information sharing, investment restrictions and ownership engagement.

We identify ESG risks across all companies in the portfolio and benchmark using a variety of risk monitoring processes. In broad terms, we consider ESG risk to be high if a company’s market valuation may be adversely affected by its management of ESG issues. A company may, for example, be associated with high risks if its operations, or those of major suppliers, contribute to significant human rights violations or environmental pollution, or if it has experienced ESG-related incidents and controversies that may affect its regulatory risk, sales growth or access to capital. In addition, our quarterly screening of the portfolio and benchmark also seeks to identify the potential and actual adverse impacts that companies may have on the environment and society.

Identifying and assessing companies with high ESG risks

We use a complementary set of tools and methods to monitor ESG risks as ESG data are often incomplete and fraught with uncertainty. We have processes for retrieving data from external sources and making information available across the organisation, such as our quality assurance process for corporate emissions data.

We draw on various data sources for our ESG risk monitoring processes, including information disclosed by companies. We purchase data from vendors that collect and consolidate corporate disclosures and use estimation models to fill gaps in data coverage or forecast risk trajectories. We source economic and societaldata on the markets in which we invest.

In 2023, we updated our model for assessing companies’ exposure to ESG risks based on their country- and sector classifications. The model covers all ESG topics addressed by our expectations documents. The risk metrics for each sector embedded in the model are aligned with the financial materiality framework of the SASB. We use the model as a first layer of analysis for ESG risk monitoring processes.

Quarterly pre-screening of companies entering the equity benchmark index

The fund’s investment strategy is based on spreading our investments globally in accordance with a global market-weighted index. The index is updated every quarter by FTSE, our index provider. We have developed an in-house process for assessing ESG risk across all companies selected by FTSE to enter its global index, so-called quarterly pre-screening.

In 2023, we screened 1,048 companies entering the fund’s equity benchmark index and identified 317 as having high exposure to ESG risks. Of those, 263 were placed on an internal monitoring list, while we decided to divest from, or abstain from investing, in the remaining 54 companies.

Quarterly screening of companies in the portfolio and equity benchmark index

We have developed a screening methodology for assessing ESG risks across all companies in the equity portfolio and benchmark index on a quarterly basis. The purpose is to assess the potential financial impact of ESG risks on companies, as well as the companies’ potential and actual adverse impacts on the environment and society. We also assess how companies manage risks based on our expectations on sustainability. The screening feeds into our sustainability due diligence processes.

In 2023, we identified 166 companies with heightened ESG risk through our screening method. Following additional analysis, we decided to monitor developments in 49 cases, initiate dialogue in 28 cases and divest in 4 cases. 85 companies assessed in 2022 were again identified this year, and actions previously taken have been continued.

Daily ESG risk monitoring

We systematically monitor news flows from public sources and stakeholders on ESG-related incidents and controversies related to companies in our equity portfolio and equity benchmark index. This provides insights into how companies’ practices impact society, how stakeholders react to or perceive corporate practices, and the potential financial impacts on the companies themselves.

In 2023, we identified 124 companies associated with severe ESG incidents or controversies.

Thematic assessments

We may conduct deeper research into particular themes or trends where we see heightened ESG risks. For example, we annually assess the risk of aggressive tax planning across companies in our portfolio using an internal model. In 2023, this assessment led to us to divest from one company.

Monitoring of portfolio movements and corporate events

We monitor movements in our portfolio and corporate events that may change our exposure to ESG risks. For example, we assess the ESG risk profile of all companies in which our ownership share exceeds 5 percent during the year and thereby makes the fund a more significant owner.

Approval of issuers of markets and government bonds

All the markets we invest in are approved by the Executive Board of Norges Bank. Investments in sovereign bonds issuers must similarly be approved by the board. The approval framework includes sustainability considerations such as water scarcity, biodiversity, child labour and corruption as part of the assessments of country risk.

Actions to address companies with high ESG risks

Our risk management framework includes several potential actions that can help reduce the fund’s exposure to ESG risks. The chosen action depends both on the level of ESG risks identified for each company and on other aspects of our investment, including size and relative risk.

Ongoing monitoring: Companies identified through our monitoring processes as being associated with either medium or high ESG risks may be placed on an ongoing monitoring list. This means that they are tracked more systematically and brought to the attention of our investment and ownership teams.

Initiate or continue dialogue: We may also initiate or continue dialogue with the companies identified through our ESG risk monitoring processes as having high exposure to ESG risks. We may be a significant owner in the company, or we may have an ongoing dialogue with it on ESG-related topics.

Share information with the Council on Ethics: We may also identify companies where the independent Council on Ethics has already identified a company for assessment against exclusion criteria, or which fall within a theme prioritised by the Council. In such cases, we share information on the companies with the Council on Ethics.

Risk-based divestment: In selected cases, companies identified as having high exposure to ESG risks may be considered for divestment. A divestment decision would include consideration of factors such as severity, whether the company has already taken remedial action, the size of our investment, portfolio managers’ familiarity with the company, and the fund’s risk limits.

Overview of our ESG risk monitoring processes.

Risk-based divestments

We may divest from companies to mitigate long-term risk for the fund.

Risk-based divestments are financial decisions and may be an appropriate risk mitigation measure following a broad evaluation of the impact on the fund. We may also reverse previous divestment decisions and re-include companies into our investment universe. Both divestment and re-inclusion decisions are made within the overall limit for deviation from the benchmark index. The use of this tool is typically chosen for selected small investments where we have uncovered systematic mis-management of ESG risks, and where engaging with the company has failed or is unlikely to succeed.

Risk-based divestments in 2023

We divested from 86 companies in 2023 following assessments of ESG risks, and re-included three companies into our investment universe. We identified companies with significantly heightened risks across a variety of ESG topics, including potential violations of human and labour rights, insufficient risk management related to corruption, and business models highly exposed to thermal coal. 54 of the divestment decisions involved companies that entered the fund’s benchmark index during 2023. Altogether, we have made 526 divestment decisions since 2012.

Risk-based divestments in 2023.

Impact on the fund’s equity returns

We measure the impact of our investment decisions, including risk-based divestments, on our returns. The impact on the equity portfolio from the risk-based divestments was 0.07 percentage point in 2023.

Since 2012, risk-based divestments have increased the cumulative return on equity management by 0.44 percentage point, or 0.02 percentage point annually. Risk-based divestments linked to climate change and human rights have increased the cumulative return on equity management by 0.23 and 0.09 percentage point respectively. Those linked to corruption have decreased the cumulative return on equity management by 0.03 percentage point.

Return impact of risk-based divestments on the equity reference portfolio, ­compared to a portfolio not adjusted for risk-based divestments. Measured in dollars. Percentage points.

Contribution to return impact of risk-based divestments on the equity reference portfolio as at 31 December 2023. Market value in billions of kroner. Contribution measured in dollars. Percentage points.

¹ Includes companies that are not in the reference portfolio.

4. Companies

Dialogue

As a long-term investor, we engage in regular dialogue with our portfolio companies to promote good corporate governance, sustainable business models and responsible business practices.

As a shareholder in 8,859 companies, we need to prioritise our company dialogues. We are in regular dialogue with our largest investments. In 2023, we held a total of 3,298 meetings with 1,358 companies. These meetings are conducted by employees from our investment and corporate governance teams. We discuss a broad range of strategic topics, such as performance, market developments, corporate governance and sustainability. The meetings can be with companies’ board and top management, business unit leaders, investor relations and/or sustainability experts.

Companies often reach out to us as part of their annual shareholder interaction, or ahead of their annual shareholder meeting, to discuss executive remuneration or other items submitted for shareholder approval.

Number of company meetings where ESG topics were discussed.

In 2023, we held 1,611 meetings with 805 companies where governance topics were discussed, and 1,589 meetings with 822 companies where sustainability topics were discussed. In all, we raised ESG topics at 64 percent of our meetings with companies, covering 62 percent of the value of the equity portfolio.

When we want to discuss specific issues with companies, our dialogues take a targeted form where we follow up governance and strategy through:

Strategic board dialogues, where we meet the company boards of our largest holdings with the aim of enhancing our understanding of the company, building influence as a present and long-term owner, and improving our investment performance.

Net zero dialogues, where we engage with the highest emitters in our portfolio and support and challenge them on their pathway to net zero emissions.

Thematic dialogues, where we engage with companies on specific sustainability matters and over a specific period of time.

Incident-based dialogues, where we engage with companies because of specific incidents or our own assessments indicating poor risk management.

Dialogues about ethical criteria, where engagements follow specific decisions by the Executive Board based on recommendations from the independent Council on Ethics.

These dialogues come in addition to our management-level dialogues to monitor corporate governance and discuss the companies’ handling of current governance issues. This is the largest category of our company meetings. In addition to meetings, we communicate with companies in writing. We distribute our expectation documents and position papers to companies to inform them of our priorities, and respond to enquiries from companies.

Strategic board dialogues

These stewardship dialogues are directed at our largest holdings. In 2023, we had 221 meetings at board level, with 174 companies. These companies accounted for 23 percent of the equity portfolio by value. With these types of meetings, we seek to understand the company and board better, support the role of the board by conveying our views directly, and letting our investment perspectives be heard over time. The meetings are held with the chair or another leading board member and attended on our side by portfolio managers and stewardship managers. We see great benefits in having our investment decision makers present at these meetings. Hearing the views of the board, together with the information we get from management at other meetings, gives us a better insight into the company and can improve the quality of our investment decisions.

The meeting agenda is company and context-specific, but typically includes conversations about corporate strategy, capital allocation, management and risks, as well as discussion on board composition and dynamics, management incentives and succession, and material sustainability issues.

Examples of strategic board dialogues in 2023 and some of the topics we discussed.

Number of meetings held with company boards by sector in 2022 and 2023.

Net zero dialogues

A core part of our 2025 Climate action plan is to engage with the highest emitters in our portfolio on how they can achieve net zero emissions by 2050. We want to support and challenge our portfolio companies in delivering long-term financial value, adapting their business models, and achieving net zero emissions.

We have put these high-emitting companies on a focus list. The list includes 70 percent of financed scope 1 and scope 2 emissions from the companies in the equity portfolio, our largest investments in sectors with significant indirect exposure to climate risk, and additional companies with elevated climate risk based on proprietary assessments. Climate considerations are integrated into all relevant engagements we have with these companies.

We conduct detailed dialogues per sector with companies on the focus list, discussing the companies’ climate targets, transition plans and emission reductions. We set and track specific objectives for each dialogue and company, based on their plans and progress versus peers. Dialogues often start with us establishing deeper relationships with the companies, understanding nuances in their decarbonisation efforts and conveying our general expectations. Where relevant, we can then set impact objectives for specific and value-enhancing changes we want to see at the companies. These objectives may for instance relate to the companies’ targets, strategies, governance framework or disclosures.

Number of objectives and progress status in percent for our net zero ­dialogues by end of 2023. ­

We have in 2023 initiated most of the sector-specific dialogues, and are increasingly identifying and seeking to affect change in how companies approach their journey to net zero emissions. We also communicated our sharpened climate expectations to the boards of all companies on the focus list.

Overview of our net zero dialogues in 2023.

Thematic dialogues

For our thematic dialogues, we engage with companies on material sustainability issues based on our public expectation documents. We prioritise issues that may affect the companies’ ability to create long-term value. Typically, we select groups of companies in industries exposed to specific sustainability risks or opportunities. We also contact companies with significant shortcomings in their sustainability disclosures. Our engagement approach is informed by the nature and severity of the issue as well as an assessment of our ability to influence the company, including the size of our investment and previous dialogue with the company. Once we have completed each dialogue, we evaluate the outcomes and progress against key performance indicators, and continue to discuss the topics in our regular dialogues where appropriate.

Engaging for improved corporate sustainability reporting

We want companies to disclose their management of, and performance on, material sustainability risks. We need this information to understand material risks, in engagement and voting processes, and to evaluate the results of our work. Improving corporate sustainability disclosures has been a consistent engagement theme for us for more than a decade.

Each year we contact companies with inadequate disclosures and encourage them to improve these. To inform which companies we contact, we conduct annual sustainability assessments where we collect and analyse publicly available data on companies’ exposure to sustainability risks, how these risks are managed, and their sustainability performance. We focus on companies in sectors with material risks and look for the weakest performers against our expectations. The goal of this process is for the companies to improve their reporting in accordance with our expectation documents.

In 2022, we began using machine learning methods to collect higher quality data and to run the assessments across more companies. The new approach also allows us to collect sustainability data points for more than 6,000 portfolio companies. Our goal is for these assessments to cover most of our portfolio, use transparent criteria and be consistent over time. We are continuously improving our understanding of the types of questions that machine learning models are best suited to answer. We see improvements in the data quality used in our assessments from 2022 to 2023 as machine learning models become more advanced. There is nevertheless still a way to go before we have consistent data at scale across all our expectations.

Driving improved sustainability reporting.

We track all answers, meetings and other activities, and evaluate the companies’ response, or lack thereof, to measure the impact of our engagement efforts. Over the past seven years, we have engaged with 787 companies on their sustainability reporting.

In 2023, we contacted 88 companies with significant shortcomings in their sustainability disclosures. We focused on weak disclosure on climate change, human rights, children’s rights, taxation, anti-corruption and human capital management, and added our latest expectation document on consumer interest to the screening process. Of the companies contacted in 2022, 57 percent responded to our letters and 44 percent improved their reporting in line with our expectations during 2023. We also followed up with companies contacted in previous years. When we compare the disclosures of companies over time, we find greater improvements in disclosure for companies we engaged with compared to companies that were not contacted.

Incident-based dialogues

An incident-based dialogue is a reactive form of engagement where we follow up unwanted incidents that could indicate weak corporate governance or poor management of environmental and social risks. It also includes engagement with companies that were flagged as “high risk” in our quarterly portfolio screening for ESG risks. In 2023, we had 29 incident-based dialogues.

Examples of incident-based dialogues in 2023.

Dialogues about ethical criteria

The ethical guidelines issued by the Norwegian Ministry of Finance state that, before making a decision on observation or exclusion, Norges Bank should consider whether other measures, including the exercise of ownership rights, may be appropriate. On this basis, the Executive Board may decide that we should engage with companies to seek to reduce the risk of norm violation that gave the Council on Ethics cause for concern.

Gross corruption

Our three-year ownership dialogue with PetroChina Co Ltd was concluded in 2023. The aim of the dialogue with PetroChina was to follow up how the board and management ensure effective anti-corruption systems and mechanisms. Issues raised with the company during the engagement include the procedures in place for identifying and assessing corruption risks, procedures for monitoring risk and investigating incidents, risk mitigation measures, and board competency and oversight of the compliance programme. We also raised questions focusing on training, company culture, and the specific issue of third-party corruption risk. Our engagement indicates that the company has strengthened its due diligence and its monitoring processes.

Our interactions with PetroChina during this period have included video conferences and written exchanges. For most of the ownership period, it was not possible to meet in-person due to Covid-19 travel restrictions. In light of concrete actions taken by the company, the Executive Board found that the risk of future norm violations appears to be sufficiently reduced. The period of active ownership under the ethical criteria therefore came to an end. Since the companies’ industry and operations are still considered to be at a relatively high risk of corruption, we will continue to engage with the company as part of our regular ownership activities.

We continued our dialogue with ThyssenKrupp AG in 2023, meeting the compliance function and the chair of the supervisory board. Our dialogue aimed to maintain a good understanding of corporate governance at the company in the context of ongoing restructuring and the recent leadership transition, and to explore the company’s continued efforts to strengthen its anti-corruption programme and build a culture of integrity. Conversations focused particularly on the company’s risk assessment process and overall corruption risk exposure, improvements to company policies and processes regarding the use of third-party agents, and board oversight of anti-corruption risks and mitigation efforts. The company continues to take concrete steps to mitigate its exposure to corruption risks, and it is our impression that the company’s systems and processes, as well as overall compliance culture, have improved during the period of the ownership dialogue.

Severe environmental damage

In 2013, the Ministry of Finance asked Norges Bank to include oil spills and environmental conditions in the Niger Delta in our ownership work with the oil and gas companies Eni SpA and Shell PLC for a period of five to ten years. We followed this up at four meetings with the companies in 2023.

The objectives for our dialogues were for the companies to reduce the number and volume of oil spills and ensure effective remediation of spills. We have observed the companies making significant efforts to prevent and clean up oil spills over the last ten years. Both Shell and Eni have implemented multifaceted strategies, including technical solutions, government advocacy, and community engagement. However, although both companies have reduced the number of operational spills, neither of the companies has been able to meaningfully reduce the number or volume of oil spills occurring due to theft and sabotage. Shell has also had significant delays in cleaning up affected sites. The companies report that the operational and security context in the Niger Delta has been very challenging, with an increase in organised oil theft. We acknowledge that the lack of progress towards our objectives can be partially attributed to external factors outside the companies’ control. Both have now agreed to sell their onshore businesses in Nigeria.

In 2023, the Executive Board of Norges Bank decided to extend the dialogues with the two companies until the end of 2025. During this period, we will continue to follow up the companies’ oil spill management efforts, and seek to contribute to the companies exiting the Niger Delta in a responsible and orderly fashion.

Voting

We voted at 11,468 shareholder meetings in 2023 to express our views as an investor, promote long-term value creation by companies and safeguard the fund’s assets. We also produced our first standalone voting review.

Shareholders have the right to elect a company’s board and approve fundamental changes to the company, such as amendments to governing documents, issuance of shares, and mergers and acquisitions. We also vote on proposals from other shareholders. The rules for shareholder proposals differ between markets. When voting at shareholder meetings, we consider whether the board operates effectively and whether our shareholder rights are adequately protected.

Voting guidelines and transparency

We aim to be transparent, consistent and predictable in our approach to voting. To support this, we publish our global voting guidelines on our website. Since 2021, we have also published our voting decisions five days before the shareholder meeting. We provide an explanation whenever we vote against proposals supported by the board. In 2023, we extended this pre-disclosure. We now also explain our decision when we oppose shareholder proposals, and vote in-line with the company’s recommendation.

We also produced our first standalone voting review, providing a detailed overview of our voting activities. The report will be updated in the third quarter each year, after most of the companies in the portfolio have held their annual meetings. Some of the key topics in the 2023 report are also discussed below in the sections on:

• effective, diverse and accountable boards
• shareholder approval of climate and executive pay plans
• shareholder proposals

Voting in 2023

We aim to vote at all shareholder meetings at companies in our portfolio. In 2023, we voted on 115,266 resolutions at 11,468 shareholder meetings, representing 98 percent of our portfolio and 98 percent of shareholder meetings. When we do not vote, it is generally because voting would lead to share blocking, thereby restricting our ability to trade, or because other rules make it difficult to exercise our voting rights. Given the high number of shareholder meetings, we use the services of custodians and proxy advisors to exercise our rights. These intermediaries form a chain through which investors pass their voting instructions and receive information on corporate events.

Institutional Shareholder Services (ISS) is our proxy advisor. It provides us with voting-related research, but the voting decision is always ours. We instruct ISS on how to vote based on our own voting guidelines and internal decision making in specific cases. We continue to support management and vote in line with the board’s recommendations in most cases, but we voted against management on at least one proposal at around a third of all meetings in 2023, in view of our position papers and voting guidelines.

We voted in line with the board’s recommendation

in 95% of all resolutions

for all agenda items in 69% of the shareholder meetings

Effective, diverse and accountable boards

We expect board members to act independently and without conflicts of interest, to have the right balance of experience and skills to carry out their duties, and to be accountable for their decisions. Director elections account for nearly 40 percent of the resolutions we vote on. We voted on 45,844 board candidates in 2023. We voted in line with the board’s recommendation in 94 percent of director elections, a similar level to 2022. Our votes against largely follow from our positions on board independence, effective boards and board diversity.

In Sweden, we participate in the nomination process for the boards of some of our largest investments. In 2023, we continued our work on the nomination committees at Viaplay Group AB, Essity AB, Svenska Cellulosa AB SCA and Holmen AB and were re-appointed to serve on the last three of these ahead of the 2024 shareholder meeting.

Improving gender diversity

Our view is that having sufficient representation of each gender is an important indicator of board quality. Our position is that each gender should make up at least 30 percent of the board.

We are seeing an upward trend at a global level in the average representation of women on company boards, but they continue to be under-represented in many countries.

Average percentage of women on boards across our portfolio. Source: BoardEx.

Countries with highest and lowest levels of female representation of women on boards.

Country level percentage is calculated for countries with at least 15 companies in our dataset.

We are gradually implementing our board diversity position into our voting guidelines. The current guideline is at least two board members of each gender in developed markets.

We make exceptions to this general guideline in certain markets, recognising the local dynamics that influence the representation of women on boards. In 2023, we strengthened the guideline for Japan, requiring companies to have at least one woman on the board. Levels of gender diversity in that market have long lagged other developed markets, but are improving. This nevertheless led to an overall increase in votes against management on gender diversity grounds in 2023.

Holding boards to account

We may vote against individual directors to hold them to account for a company’s conduct, which we did for 161 companies in 2023. In the majority of cases, this is related to governance concerns, such as problematic executive pay, or where the external auditor has found problems with the annual financial statements.

In recent years, we have expanded our voting against board directors to include considerations of material failures in the oversight, management or disclosure of climate risks. We now also look systematically at social risks and other sustainability risks. A decision to vote against directors typically follows engagement with the company where we are not satisfied with the company’s response.

Companies where we voted against board members for climate, social and ­environmental reasons in 2023.

Shareholder approval of climate and executive compensation plans

“Say on climate”

Many companies ask their shareholders to approve their climate plans. In most cases, these “say on climate” votes are non-binding and advisory. This is still a relatively new field, and good practice for what climate transition plans should contain is still under development.

When voting on climate plans, we consider elements such as the ambition level of targets set, the robustness of the plans, and the detail of related disclosures. Where we do not believe plans to be sufficiently developed or coherent, we will not support them, as was the case with four of the 31 proposals we voted on in 2023.

Support for ”say on climate” proposals.

US CEO pay

We advocate for simpler pay structures based on CEOs building up and holding shares for the long-term.

The percentage of companies we have voted against on ’say-on-pay’ in the US,relative to median and the 80th percentile US CEO pay for our portfolio companies in S&P500.*

To inform our voting on US packages, we have introduced a stricter framework for evaluating the largest of these. Although we do not vote against pay packages based on size alone, we assess the largest to identify the structures we view as most problematic and misaligned with long-term value. For 2023, we applied this assessment to packages worth 20 million dollars or more, leading us to vote against approximately 50 percent of packages above this level. Overall, we voted against CEO pay for 10 percent of all companies we owned in the US in 2023.

Voting on shareholder proposals

We view shareholder proposals as an important tool for shareholders to signal views about the strategic direction of a company, or concerns about potential company mismanagement. While our general position is to vote with the board, we may vote for shareholder proposals opposing the board when they raise concerns that are material and reasonable, and where company practices run contrary to our interests as a long-term owner.

The majority of shareholder proposals relate to governance topics, making up about 81 percent of proposals in 2023. These address a variety of topics, including an independent chair, compensation and the right to call special meetings. We evaluate these individually based on their merit and in accordance with our positions and views.

Over recent years, we have seen an increased number of shareholder resolutions on topics relating to companies’ management of environmental and social issues. We voted on 421 shareholder resolutions on environmental and social topics in 2023, compared to 407 in 2022. A large part of this increase can be explained by a greater number of proposals relating to climate change, and more specifically proposals asking companies to report on their transition plans and progress. For these proposals, we assess the companies’ transition plans against our climate expectations and vote accordingly.

Our experience is that sustainability shareholder proposals are becoming more complex and addressing a wider range of topics. They also receive more media attention, in some cases against, an increasingly politicised backdrop in some markets.

Increase in shareholder proposals on environmental and social topics.

Shareholder proposals on climate change increased more than any other topic.

Our level of support for sustainability-related shareholder proposals.

Reasons for voting on sustainability-related shareholder proposals.

Votes against board recommendations among the fund’s top 50 holdings in 2023.

Securities lending and voting

Securities lending is an integrated part of our asset management strategies and plays an important role in well-functioning markets by increasing the liquidity and contributing to more efficient price discovery. The fund is an active participant in this market, and lending equities brings us a material return on our securities inventory. In 2023, such lending increased the return on the equity portfolio by 0.05 percentage point, or around 4.1 billion kroner. The fund is unable to vote for shares that are out on loan. Therefore, as per our internal guidelines on securities lending, we generally exclude significant parts of our largest holdings from our lending programme, as well as companies where we are amongst the largest owners of voting rights. We also do not lend our shares in specific cases when we are engaged in an intensive company dialogue, and we never lend our entire holding in a company. The latter ensures that we can vote at every shareholder meeting. Furthermore, we do not vote for shares that we receive as collateral, and we have procedures in place for limiting the risk of lent securities being used for tax avoidance. We have an absolute lending limit of 20 percent of the investment portfolio.

Ethical exclusions

We exclude companies whose products or conduct violate fundamental ethical norms. By not investing in these companies, we reduce the fund’s exposure to unacceptable risks.

The Ministry of Finance has issued ethically motivated Guidelines for Observation and Exclusion from the fund and has set up an independent Council on Ethics with the responsibility for making ethical assessments of companies. It has five members and a secretariat. Based on the guidelines, the Council can recommend that companies should be excluded from the fund or placed under observation. Norges Bank is also able to exclude companies or place them under observation on its own initiative under the coal product criterion and the conduct-based greenhouse gas criterion.

Norges Bank’s Executive Board makes the final decision on exclusion, observation or active ownership. Norges Bank and the Council on Ethics exchange information regularly throughout the process and coordinate contact with companies as relevant. In 2023, Norges Bank announced the exclusion of six companies and placed five new companies under observation, while reversing the exclusion of two companies and removing two from observation. Norges Bank also extended the current observation period for one company. All recommendations made by the Council are available to the public after the implementation of the Executive Board’s decision.

Excluding companies based on their products

According to the guidelines, the fund must not invest in companies which themselves, or through entities they control, manufacture weapons that violate fundamental humanitarian principles through their normal use, or sell weapons or military material to certain countries. Nor may the fund invest in companies that produce tobacco or cannabis. There is also a product-based coal criterion that applies to companies in two categories: mining companies that derive 30 percent or more of their revenue from the production of thermal coal, and power companies that derive 30 percent or more of their revenue from coal-based power production. The coal criterion also includes mining and power companies that produce more than 20 million tonnes of thermal coal per year or have coal-based power generation capacity of more than 10,000 MW, regardless of total revenue or total power output.

No further companies were excluded under the product-based criteria in 2023. A total of 107 companies that produce certain types of weapons, tobacco, cannabis or coal, or use coal for power production, are currently excluded from the fund.

Excluding companies based on their conduct

According to the guidelines, companies can be excluded from the fund where there is an unacceptable risk that their conduct contributes to violations of fundamental ethical norms, including acts or omissions that, on an aggregate company level, lead to unacceptable greenhouse gas emissions. Norges Bank’s Executive Board bases its decisions on an assessment of the probability of future norm violations, the severity and extent of the violations, and the connection between the violation and the company in which the fund is invested.

Norges Bank may also consider the breadth of the company’s operations and governance, including whether the company is doing what can reasonably be expected to reduce the risk of future norm violations within a reasonable time frame. Before Norges Bank takes a decision to exclude a company, it must consider whether other measures, such as active ownership, might be better suited to reduce the risk of continued norm violations, or whether such alternative measures may be more appropriate for other reasons.

In 2023, we announced the exclusion of six companies on the grounds of conduct considered to constitute a particularly serious violation of ethical norms, while two exclusions were reversed. A total of 57 companies are currently excluded because of their conduct. The observation of two companies came to and end in 2023.

Ethical exclusions and observations in 2023.

Impact on the fund’s equity returns

Product-based exclusions have reduced the cumulative return on the equity benchmark index by around 2.5 percentage points, or 0.05 percentage point annually. It is first and foremost the exclusion of weapons manufacturers that has reduced returns, but the absence of tobacco companies has also played a role. Conduct-based exclusions have increased the cumulative return on the equity benchmark index by around 0.8 percentage point, or 0.02 percentage point annually. The exclusion of companies due to severe environmental damage has contributed particularly positively.

Since 2006 the equity benchmark index has returned 1.7 percentage points less than it would have done without any ethical exclusions. On an annualised basis, the return has been 0.03 percentage points lower.

Return impact of equity benchmark index exclusions relative to an unadjusted index. Measured in dollars. Percentage points.

Contribution to return impact of equity benchmark index exclusions, by exclusion criterion, as at 31 December 2023.

Market value in billions of kroner. Contributions measured in dollars. Percentage points.

¹ Market value and return impact include only companies that were part of the FTSE Global All Cap Index as of 31.12.2023.

Further reading

Climate risk disclosures

The management mandate for the fund, given to Norges Bank by the Ministry of Finance, includes requirements in the areas of responsible investment and climate risk. The mandate makes it clear that Norges Bank’s responsible investment efforts are to be based on a long-term goal that portfolio companies align their operations with global net zero emissions in line with the Paris Agreement. It also has requirements for managing and reporting on financial climate risks in line with international standards. Our 2023 climate risk disclosures according to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), are available on our website: nbim.no.

Nature risk disclosures

In 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) launched a set of disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks and opportunities. We use the framework as a tool to better understand the nature-related dependencies and impacts of our portfolio companies. Our pilot review represents an initial set of disclosures, drawing on the recommendations from the TNFD. While it is not a complete TNFD report, it is a first step towards our adoption of the framework. Our 2023 nature risk disclosures are available on our website: nbim.no.

Sustainability due diligence

Conducting ongoing due diligence on environmental and social topics is integral to our work as a responsible investor. We seek to identify and assess potential and actual adverse impacts which our portfolio companies may cause, contribute to, or be directly linked to. As a minority investor, we cannot direct companies to take action, but we seek to use our influence to encourage them to take steps to prevent and mitigate these impacts. Our sustainability due diligence process is described on our website: nbim.no.

Thematic dialogues in 2023

Abbreviations