The number of companies in the world's largest sovereign wealth fund's equities universe should be reduced by 25% to 30%, the country's Ministry of Finance said.
In its annual recommendation to Norway's Parliament, the ministry said it wants to simplify the Government Pension Fund Global, Oslo's equity index since a high number of companies can contribute to increased management complexity and costs.
The fund's equity index included about 8,800 companies at the end of 2020. In 2007, the ministry decided to include small companies in the fund's benchmark index, which saw the number of stocks increase to about 7,000 from 2,400.
A report of its recommendations said shares in the smallest companies are often the least tradeable and can therefore increase expenses. These smaller companies also make up a small part of the total market value of the index, with 25% of the number of companies in the benchmark index accounting for 2% of the total market value. "The diversification gains from including the smallest companies are thus limited," a translation of the report said. Reducing the number of companies by 25% to 30% would bring the index down to about 6,600 constituents.
The reduction in small companies, in particular, is also in line with the fund's Council on Ethics' comments that this change would also have a positive effect on its own ethical investment efforts.
The ministry also proposed that no further markets be added to GPFG's sub-index for emerging market equities. "Emerging markets are a complex group of markets, but are often characterized by weaker institutions, less openness and weaker protection of the interests of minority shareholders," the report said.
Twenty-two of the 46 markets included in the equities benchmark index are classified as emerging markets. "We assume that including more and often small markets now will not provide a better ratio between return and risk," the report said, meaning that Saudi Arabia and Romania continue to be outside the fund's investment universe.
On climate change, the ministry has initiated work to further increase knowledge on how climate change, climate policy and "the green shift" can impact on investors such as GPFG. It appointed an expert group to consider the importance of financial climate risk and climate-related investment opportunities, as well as to discuss alternative ways of dealing with climate change in management of the assets.
The ministry has also asked Norges Bank — the in-house manager of the fund — to analyse and assess the fund's exposure to climate risk and investment opportunities that may be provided by the low-carbon transition. Findings will be presented in the 2022 report.
Further developments to the fund's ethical framework were also proposed. A government-appointed committee has already made recommendations regarding observation and exclusions of companies. The ministry said the proposals should be mainly followed up, including a new exclusion criterion for the sale of weapons where such weapons are used to commit serious and systematic violations of humanitarian law.
The nuclear weapons criteria should be expanded, with certain types of delivery platforms that are only used for nuclear weapons included, while the corruption criteria should be expanded to include "other serious economic crime." The ministry also wants to add an exclusion criteria for companies that produce cannabis for drug purposes.
The proposals will be presented in the Norwegian Parliament on May 3 at a committee hearing, with a Standing Committee on Finance and Economic Affairs set to present recommendations later that month, a spokesman for the ministry said.
GPFG had 10.91 trillion Norwegian kroner ($1.27 trillion) in assets as of Dec. 31.