One year into Strategy 25

Norges Bank Investment Management manages the Government Pension Fund Global on behalf of the Norwegian people. The investment strategy for the fund is laid down in the management mandate from the Ministry of Finance. We manage the fund within the limits of this mandate.

In December 2022, Norges Bank’s Executive Board adopted a strategy plan for the period 2023-2025. We continue to exploit the fund’s characteristics as a large and long-term investor to achieve the highest possible return in a responsible way. Our people, technology and processes are key to achieving our goal. The strategy plan is divided into five areas or pillars: Performance, Technology, Operational robustness, People and Communications. Our ambition is to be the leading large investment fund in the world.

Performance

The market value of the Government Pension Fund Global increased by 3,336 billion kroner during the year to 15,765 at the end of 2023. The fund is invested in equities, fixed income and real assets across the world. The fund returned 16.1 percent, or 2,222 billion kroner. The return in kroner was the largest in the fund’s history.

The Ministry of Finance decides the overall investment framework through our management mandate. The mandate specifies which asset classes we can invest in, defines the benchmark index and lays down certain constraints and requirements. We manage the fund with the objective of achieving the highest possible return after costs with acceptable risk. We place great emphasis on being a responsible investor.

The fund strategy has been developed gradually over time. We contribute to the development of the fund’s investment strategy through our role as an advisor to the Ministry of Finance. Proximity to the portfolio and our experience from the management of the fund provide good basis for strategic advice to the asset owner.

In its letter dated 27 March 2023, the Ministry of Finance asked Norges Bank to analyse various aspects of investing in unlisted equities and to consider whether such investments should be included in the fund’s mandate. As part of the assessment, we published a discussion note on private equity. In this note, we describe how the market has grown over time and review the academic literature. In addition, we hosted a seminar with external speakers and panel discussions.

In November, Norges Bank’s Executive Board submitted its recommendation to the Ministry of Finance to include unlisted equities in the investment universe of the Government Pension Fund Global. In addition, the bank submitted a letter on regulation of unlisted investments in the management mandate for the Government Pension Fund Global. Norges Bank organised a press seminar, where the Chair of Norges Bank’s Executive Board, the CEO and the deputy CEO of Norges Bank Investment Management presented the key points of the Executive Board’s advice to the Ministry of Finance.

Based on the advice from Norges Bank, The Ministry of Finance presented their view on these matters in the annual white paper to the Storting. The Standing Committee on Finance and Economic Affairs of the Storting will then discuss and assess the proposal from the Ministry of Finance and formulate their own view in a Parliamentary Hearing in June 2024.

Investment strategies

We use a range of investment strategies in our management of the fund. They are grouped into three main categories: market exposure, security selection and fund allocation. Our investment strategies are complementary and tailored to our characteristics – a large fund with a long horizon. We report risk and performance along these three main strategies. The three main strategies are pursued across equity, fixed income and real asset management.

• We have taken selective allocation positions to both manage the fund’s total risk profile and exploit variation in asset prices that we deemed excessive, in response to increased market concentration.
• We have initiated targeted investment mandates that explore contrarian investment opportunities, selectively build larger stakes in companies and take sector risk after identifying trends that make us expect higher long-term returns relative to the market.
• We are enhancing the portfolio managers’ long-term investment mindset and continue to reduce trading costs through various initiatives, new tools and increased collaboration across areas.
• The expansion of forensic accounting and behavioural analysis are allowing us to enhance investment returns by reducing exposure to companies that are unattractive.
• We continued to use proprietary data and analytics to support our active management practices through our investment simulator. This internal tool aims to improve investment decision making based on learning from historical strengths and weaknesses. Several portfolio managers report that they have adjusted their trading behaviour based on the signals and learning from the simulator.
• We increasingly utilise large language models (LLM/AI) and machine learning (ML) to improve investment process efficiencies and to enhance the quality of our investment decisions.
• We launched a new trading model using AI and ML to improve how we manage our equity transition portfolios. The aim is to prioritise trading where it benefits portfolios the most. An AI model gives us short-term return predictions for all stocks in the portfolio. This has reduced costs for handling inflows and resulted in higher internal netting of trades.
• We started an initiative on equity trading turnover and generated several proposals to reduce transaction costs in the equity portfolio. These proposals include increased internal crossing, which is internal trades between portfolios within the fund, closer collaboration on execution for the most challenging orders and increased transparency of trading costs to improve decision-making. The combination of new and existing efforts will strengthen our ability to keep trading costs low over time. In 2023, equity portfolio turnover was slightly lower, average execution costs fell and we crossed more internally than the year before.
• Our access to companies is a unique competitive advantage for the fund. During 2023, we had 3,298 company meetings, most of them held in-person. We organised the second Buy-Side Sustainability Summit at our London office and attended the Buy-Side CEO Conferences in Boston and London. We raised our profile with US based companies by hosting our first Investor Relations Seminar at the New York office, attended by 202 Investor Relations teams.
• We were named “Europe’s Top Management Firm” by Institutional Investor, “Best Investor Engagement” at the Investor Relations Society Best Practice Award 2023 and were awarded “2023 Fund of the Year” by Global SWF.
• We use external managers with deep understanding of companies and market dynamics where we believe they will enhance returns and reduce our exposure to companies with ESG issues. The fund had 742 billion kroner, or 4.7 percent of its capital, under external management at the end of 2023, compared to 569 billion kroner at the start of the year. A total of 111 mandates were managed externally by 103 external managers.
• We published three discussion notes on Macro Trends and long-horizon returns, Withdrawals from the Government Pension Fund Global and potential trade-offs and Drivers of listed and unlisted real estate returns analysis. The first two notes are aimed at shaping the discussion about spending from the fund. The last note argues that listed and unlisted real estate are similar at longer horizons and that they both hedge inflation, unlike many assets in the fund’s portfolio.
• We announced two new investments in renewable energy infrastructure. In January we signed an agreement to acquire a 49 percent interest in a portfolio of solar and onshore wind assets located in Spain. In March, we signed an agreement to purchase a 16.6 stake in He Dreiht, an offshore wind construction project in Germany.
• We announced one unlisted real estate acquisition. We signed agreements to acquire a 45 percent interest in two life sciences properties under development in the City of Cambridge in the Boston metropolitan area. We announced one unlisted real estate disposal. We signed an agreement to sell our 50 percent ownership interest in an office property in Paris.
• The holding of the continental European logistics portfolio was transferred from the Luxembourg platform at year end and is now held directly through a Norwegian holding company.

Responsible investment

The management mandate requires responsible investment to be an integral part of the management of the fund. Responsible investment and active ownership support long-term value creation and our goal of highest possible return. Managing climate-related risks and opportunities is a key priority. We have a financial interest in an energy transition in line with the Paris Agreement. We will drive the companies we invest in towards net zero emissions by 2050.

• We published new expectations to companies on how they should consider and manage consumer interests. We published our views on Responsible artificial intelligence and Corporate use of voluntary carbon credits. We published our first standalone voting review for the first half of 2023 and a full list of all company engagements on ESG. During New York Climate Week, we published sharpened expectations to companies on climate change, highlighting the need to move from target setting to transition planning. We also participated at the launch of the Taskforce on Nature-related Financial Disclosures for reporting on nature-related financial risks, where Norges Bank Investment Management had an active role as a member of the taskforce developing the framework.
• We continued our engagement with regulators and standard setters on ESG issues, responding to 27 public consultations. In collaboration with UNICEF, we published a guidance for food retailers on children’s rights to health and nutrition.
• In October, we organised a seminar on “Navigating Net Zero” to mark the first anniversary of our climate action plan. Our ambition is for our portfolio companies to reach net zero emissions by 2050. It is still early to evaluate the results; however, we are observing encouraging changes. According to our data tracker, 2,385 portfolio companies had set science-based net zero 2050 targets at the end of 2023, an increase of 790 since 2022. 68 percent of our financed emissions were covered by net zero 2050 targets, compared to 56 percent the year before. Financed emissions for the fund’s equity and corporate bonds portfolio decreased by 12 percent during the year.
• We voted at 11,468 shareholder meetings in 2023. We strengthened our voting guidelines for Japan to require at least one female director and at least on third of board members to be independent. We expanded our pre-disclosures to include rationales whenever we vote in line with the board’s recommendation, but against a sustainability-related shareholder proposal. We published a working paper documenting the results of a collaborative research project between École Polytechnique Fédérale de Lausanne and University of Lausanne, suggesting that our voting pre-disclosure influences other shareholder’s voting decisions. For the first time, we filed our own shareholder proposals on climate change.
• We divested from 86 companies during the year following assessments of ESG risks and re-included three companies into our investment universe. 54 of the divestment decisions involved companies that entered the fund’s benchmark index during 2023.

Technology

Technology is key to fulfilling our management assignment in a secure and robust way. Our IT infrastructure is based on a cloud platform, which ensures flexibility and scalability. We focus on innovation and building our own solutions with our own people. To succeed, we need to attract, develop and retain the best people.

• We have enhanced and extended the use of our in-house developed order management and trading solutions that improve user interactions for portfolio managers. This includes speed, simplicity, stability and extensibility.
• We have modernised and strengthened transaction processing ensuring a more stable solution.
• We have improved the process of upgrading our core systems enabling an updated and modern technology stack. Our end-users will have the newest functionality available in a more efficient and robust way. This has in turn reduced operational risk, improved stability and enabled change.
• We implemented a new enterprise architecture tool and related processes, which provide a better overview of our application portfolio, interdependencies, costs and impact of our architecture decisions.
• We have improved our infrastructure and systems and strengthened cyber security capabilities.
• The introduction of modern monitoring tools has significantly enhanced our ability to detect vulnerabilities in our cyber defences and to generate cyber incidents alerts. We have established a machine learning and artificial intelligence team with the purpose of enabling ML and AI capabilities. We have implemented Copilot throughout the organisation, developed an ML data pipeline and launched initiatives on generative AI.
• We have improved data management and accessibility by implementing a data catalogue solution to make all data visible across the organisation in a user-friendly way.
• We have extended and modernised our data platform to enable better data-driven decision making. In addition, we have improved the quality of fund accounting, valuation and benchmark data.
• We initiated a project to replace an internally developed (legacy) tool for simulating forward benchmarks with an up-to-date and more robust internally developed solution, which can be used by a broader stakeholder group to reduce investment and operational risk.
• We started implementing an internal developer portal with guidance and standardisation for coding and IT development and a platform for easy deployment and managing for Application Programming Interfaces (APIs). Both enable developers to spend more time on delivering actual business value instead of implementing infrastructure or doing repetitive tasks.
• We have significantly advanced and modernised our technology ecosystem by streamlining deployment, enhancing user experience and strengthening security in our digital workplace.

Operational Robustness

Operational robustness is essential to achieving our goal of highest possible return in a secure and cost-efficient way. We have comprehensive compliance and risk management frameworks where risks are identified, assessed and integrated in our decision processes. A strong compliance and risk management culture is critical for an effective control environment. We will safeguard Norges Bank’s legal, tax, commercial and operational interests through use of appropriate legal means.

• The fund’s core machinery runs in a stable and low risk fashion. As part of this, we have settled 434,000 transactions and participated in 57,000 corporate actions, restructurings and related activities.
• We implemented new enterprise risk management and architecture tools to facilitate efficient management and documentation of operational risk and internal control to allow improved overview of our application portfolio, interdependencies, costs and impact of our architecture decisions. Collaboration is facilitated across areas to provide transparent discussion and decision making on how governance and technology supports our processes.
• We have strengthened the procedures for revision of governing documents to improve internal anchoring and involvement and provided updated information to the organisation about Norges Bank Investment Management’s governance framework.
• To support innovation through use of artificial intelligence, we have developed a governance framework and processes for risk awareness and responsible use of AI in Norges Bank Investment Management, taking the relevant risks into account.
• We have improved our resilience and ability to recover our IT infrastructure and systems from severe disruptive events. We have further developed our business continuity and crisis management framework. We have identified critical processes and systems and set clear expectations for IT disaster recovery exercises and how to perform them. Technology and data management processes and guidelines have been updated to ensure a more robust and efficient use.
• We have started to produce threat intelligence deliverables to improve our organisation’s understanding of potential threats, to strengthen risk assessments and to improve control mechanisms.
• We continuously monitor geopolitical risks using scenario analysis. Geopolitical scenarios have been included in Norges Bank Investment Management’s stress test reports, and we have launched several initiatives to raise employees’ awareness of these issues. Additionally, we have elevated the scenario analysis concerning geopolitical risks to Norges Bank’s Executive Board, ensuring that board members are promptly informed of relevant developments without undue delay.
• We continue to improve the awareness and training program for our employees ensuring they are interactive and provide practical examples of the rules and best practices we should follow regarding conduct, security, privacy and market regulations.
• We initiated the process to close our representative office in Shanghai. The Singapore office has been built up gradually to take care of all operating functions, including investments in China. The Shanghai office was officially closed in January 2024.

People

People are the driving force behind our success and our most important resource. We will grow the organisation in prioritised areas to ensure capacity, quality and robustness. However, we will remain lean, flexible and cost-efficient. To succeed in a challenging, fast-paced working environment, we believe it is important to have fun at work.

• At the end of 2023, we had 654 employees across our offices in Oslo, London, New York and Singapore and 23 employees in wholly-owned management companies.
• We launched our improved performance management process for all employees. The aim is to promote professional development and increase interaction between managers, teams and individuals. We also developed a new lifelong learning hub for all employees and new employee expectations.
• We launched an introduction programme for new managers and improved training for experienced leaders.
• We launched our own Investment Academy during the year to boost investment skills, value chain understanding and collaboration across the organisation through sessions with internal experts. We also teamed up with Rystad Energy Institute and arranged a lecture series on the energy transition and renewable energy for the entire organisation.
• We entered a research collaboration with Stockholm School of Economics to explore the significance of psychological safety and resilience among investment employees. The aim of the research project is to better understand the mechanisms behind psychological safety and resilience among employees and how sports psychology can contribute to strengthening the fund’s performance culture.
• We had a significant increase in the number of applicants for our vacant positions from 2022 to 2023. This included record high numbers of applicants for our graduate and summer internship programmes, with 1,006 and 2,503 applications respectively.

Communications

Managing the fund on behalf of the Norwegian people requires transparency. Transparency builds trust and knowledge about the fund, both in Norway and internationally. Our main target group is our owners – the Norwegian people. We will place particular emphasis on reaching younger target groups where the knowledge about the fund is lower. As the world’s largest public investment fund, international target groups are also important for the fund.

• We were named the world’s most transparent fund in the Global Pension Transparency Benchmark developed by CEM Benchmarking and Top1000funds.com. It ranks 75 funds from 15 countries on performance, governance costs and responsible investing. The Government Pension Fund Global was ranked number one in both performance and responsible investing.
• During the year, representatives from Norges Bank Investment Management engaged in approximately 340 external events. We intensified our work with our NBIM Teach initiative by offering guest lectures at 19 Norwegian and international universities. The aim is to give students a more practical insight into investment management, increase knowledge about the fund and share our expertise with a younger target group so that more people apply to work for us.
• We hosted our first Investment Conference where some of the world’s leading experts gave presentations and participated in discussions on relevant topics. The conference has replaced the former Norwegian Financial Research Conference with the aim of creating the number one meeting point for the Norwegian asset management community. The topic for the 2023 conference was geopolitical tensions and implications for investors. We also organised an AI focused conference for the “Ung i Finans” network in Norway and an event for young women who have been through a leadership programme to celebrate female leadership, connect and learn from each other.
• We had editorial meetings with Norwegian and international media to build knowledge and understanding of the fund. We received a lot of domestic and international media coverage and wrote several opinion pieces on various ownership issues. We also participated at the World Economic Forum for the first time. Our main message was that companies’ boards must become increasingly effective in overseeing business strategy and management in a complex business environment. We communicated this in meetings with other large investors, companies the fund is invested in and to the media.
• We released 30 episodes of our podcast ‘In Good Company’, covering companies such as OpenAI, Iberdrola and Novo Nordisk. The aim of the podcast is to give the audience a deeper insight into the companies the fund is invested in, their leaders and our role as an owner.
• We increased our presence in social media, revised our social media strategy and launched an Instagram page to build knowledge and trust about the fund among younger target groups.
• We revamped our visual profile to adapt it to digital communications and new opportunities for use of digital tools.
• We developed a new web-based reporting solution to increase the accessibility, readability and searchability of our publications. We also launched new responsible investment pages on nbim.no to highlight our work in this area.