Published on 21 March 2019

SUSTAINABLE FINANCE

The day the Norwegian sovereign wealth weakened the oil sector’s financial stronghold

8 March 2019 may be remembered the day in which the largest shareholder in the world, Norway’s Sovereign Wealth Fund, announced that it is divesting from “oil exploration and production companies" due to financial reasons!

Baril petrole bourse risque prim91
Concerned about oil volatility, Norway’s sovereign wealth fund will begin to reduce its exposure in this sector.
@prim91

After two years of intense political debate surrounding the exclusion of fossil fuels by a country that derives 20% of its revenues from such activities, the Norwegian government arbitrated several scenarios before reaching a final decision. Norway has finally decided to sell $7.5 billion worth of FTSE Russel indexes from companies listed as oil producers. On the other hand, it retains its shares from more diversified major players, such as Total. At least for now!

The Norwegian government’s decision will weigh heavily on a major dimension of oil activity: its financial weight. Not only are big companies a crucial part of major stock indexes - Total holds the second largest value on CAC40 - but crude oil is also one of the most traded commodities in the world, and one that informs the entire financial trading system.

Stranded assets

Crude oil is also one of the most actively traded commodities in the world. The price of crude oil affects the price of many other assets, including stocks, bonds, currencies, and even other commodities. The reason? “Crude oil remains a major source of energy for the world, despite increased interest in the renewable energy sector," was a statement published in 2019 on a site dedicated to the fundamentals of stock trading.

With this decision, the Norwegian fund has just coined the concept of "stranded assets", meaning threats of massive depreciation of a company’s stock market value as it relates to fossil fuels. The idea of stranded assets, theorized in 2011 by the British think tank Carbon Tracker, has been taken seriously by the financial community since Mark Carney's founding speech at British insurer Lloyds in September 2015. The former chairman of the G20 Financial Stability Board stated that "the financial risks of an adjustment process to a less carbon-intensive economy could threaten overall financial stability".

Stock viability

The Norwegian government has not mentioned climate as the primary reason for its decision, but it is likely to spark "intense debate within the investor community about the financial viability of oil stocks". This debate is the key to reorienting financial flows towards a low-carbon economy and achieving a massive energy transition, which is essential in achieving the Paris Agreement objectives.

If the world uses all existing oil reserves, global warming could reach six degrees by the end of the century, without much difficulty. This is an impossible bet for the global economy, and one that it hopes international traders will stop making!

Anne-Catherine Husson-Traore, @AC_HT, CEO of Novethic


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