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Climate Change and the World's Biggest Investment Fund

03/04/2014 12:53 BST | Updated 02/06/2014 10:59 BST

Lots of people may not have even heard of Norway's sovereign wealth fund - but it has the potential right now to have a major impact on climate change.

I had better explain.

The Norwegian sovereign wealth fund - also known as the Government Pension Fund Global or the Oil Fund - is an investment fund into which the country has for years put most of the income that Norway gets from oil and gas production.

State-owned investment funds like this, known as sovereign wealth funds, invest globally in financial assets like stocks, bonds and real estate - and Norway's is the largest in the world, valued at over $800 billion USD. This means that decisions on how and where the fund is allowed to invest can have global implications, both because of the sheer size of the fund and its respected reputation.

Inevitably too, when you have a pot of money this big, issues related to the fund are subject to passionate political debate within Norway - should the money be used for other things, should the fund invest in volatile stock markets, what ethical principles should apply to investments, and so on.

On this last point, the realisation previously that the fund was investing in companies involved in industries like the arms trade and tobacco companies prompted the government to set up an ethical investment council for the fund, which now sets guidelines about where the fund cannot invest money.

Campaigners have pushed investors for years now to clean up their investments, to stop putting money into 'bad' sectors and recently the focus has swung onto divestment from fossil fuels too. The thinking behind this is simple: climate change poses a massive threat to the world, and is mainly driven by emissions of greenhouse gases from the burning of fossil fuels, as recent reports by the Intergovernmental Panel on Climate Change (IPCC) have shown.

The most important way that we can tackle climate change, therefore, is by rapidly switching from dirty and polluting fossil fuels to clean renewable energy paired with strong energy efficiency. And this constitutes a massive investment challenge, to shift investment away from fossil fuels into renewables.

The scale of the challenge is frightening: the sustainable investment organisation Ceres recently calculated that $36 trillion in global investment in clean energy will be required by 2050 to keep global temperatures rises below 2°C, or the so-called 'maximum' level of global warming to which governments around the world have already committed. This means that globally we need to invest an average of $1 trillion per year in clean energy for the next 36 years to avoid experiencing dangerous levels of climate change. They say portfolios can do this by aligning 5% of their portfolios to investing in renewable energy.

This is why WWF is running a global campaign, Seize Your Power, calling on financial institutions including major sovereign wealth funds, pension funds, multilateral development banks and governments to significantly increase their funding of renewable energy and cut funding to fossil fuels as a key means of tackling climate change.

Which brings me back to Norway's sovereign wealth fund. The Government in Norway has been under pressure recently from a range of groups, including civil society groups such as WWF, to instruct the fund to both divest from the most polluting forms of fossil fuels, like coal, and to substantially increase investments in renewable energy.

The pressure on the government is clearly motivated in our case by concerns over climate change, but also by growing concerns that fossil fuel companies are overvalued and therefore the fund should diversify for purely business reasons. As Michael Liebreich, founder of Bloomberg New Energy Finance, said recently, "The reason Norway should divest from fossil investment is diversification. If you live off pig farms, don't put your money into sausages."

On the divestment side, the Norwegian Parliament recently postponed a proposal to divest the fund immediately from coal, and instead set up a formal review of the fund's investments in all fossil fuels - coal, oil and gas. . But the news on investment in clean renewable energy could potentially be more positive: this Friday, 4 April, the Government of Norway will announce a mandate for the sovereign wealth fund to invest in renewable energy.

This could be fantastic news if it is done right. If 5% of the fund was invested today into renewable energy infrastructure, that would constitute $42 billion, a scale large enough to cause ripple effects on renewable energy investment around the world. But the devil is in the details. The key issues for Friday are how big the mandate will be, over what timescale and - critically - whether the fund will be allowed to invest in renewable energy infrastructure, such as wind farms. Currently, the fund only invests in renewable energy to a very small extent via stocks - a far less effective way to enable renewable energy. (Watch a video here that explains why.)

The proposal to invest in renewable energy infrastructure is supported by not just green groups, but also by the fund's manager, the Norwegian Bank Investment Management (NBIM). Support for infrastructure investments, including renewable energy, comes also from Norwegian fund management company KLP. The pension fund of Denmark, PensionDanmark, already invests over 5% of its assets directly into renewable energy infrastructure and is looking to double this amount in the coming year.

Here's WWF's view. If the fund continues investing with its current portfolio, it is destined to fail - environmentally and economically. The fund as is supports a world reaching 4 degrees or global warming - a real risk clearly outlined in this week's IPCC report if the world continues with business as usual energy investment. We need to see a fund that is destined to succeed.

So we're calling on the Prime Minister of Norway, Erna Solberg to do the right thing - to safeguard the Norwegian fund for future generations and to make a serious commitment to tackling climate change. Because as we heard this week, we're facing a dangerous climate future and time is running out.

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