The Norwegian Government Pension Fund Global

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1 The Norwegian Government Pension Fund Global l Tore Eriksen Paris 1 June

2 Part I The Role of oil & gas in the Norwegian economy 2

3 Discovery of oil on December ; the Ekofisk oil field Foto: Kjetil Alsvik/Conoco Phillips 3

4 The petroleum sector s share of the Norwegian economy % 30% 26% 49% The petroleum sector s share of GDP The petroleum sector s share of state revenues The petroleum sector s share of total investment The petroleum sector s share of total exports Source: Statistics 4

5 Total government take in is dominated by petroleum taxes and SDFI Revenue (billion 2012-NOK) Taxes Duties SDFI Dividends Oil price (right axis) Oil price (2012-USD per barrel) Source: Ministry of Finance 5

6 Total government take in is dominated by petroleum taxes and SDFI Revenue (billion 2012-NOK) Taxes Duties SDFI Dividends Source: Ministry of Finance 6

7 Human capital is our most important resource National wealth per capita in % 84.4% 8.4% 2.8% Pension and tax reform must strengthen work incentives Welfare scheme reforms: More people at work - fewer on benefits Discounted petroleum rent Financial assets Real capital Discounted value of labour Good policy fundamentals - sustainable macroeconomic policy Source: Ministry of Finance, NB12. 7

8 A population of five million, and growing 8

9 Strong growth, also in Mainland GDP GDP Mainland OECD

10 Crude oil production in has already peaked 300 (Total petroleum production in, mill. Sm 3 o.e.) Crude oil 250 Gas NGL (included condensate) Source: Norwegian Petroleum Directorate (Apr 2012) and Revised National Budget 2012 (May 2012) 10

11 Ranking of oil & gas exporters Oil export in 2011 (mill b/d) Gas export in 2010 (mill. Sm3) 8,0 7, ,0 5,0 4, , , , ,0 0 11

12 Export of Norwegian gas to France (billion NOK)

13 Petroleum revenues are temporary and volatile Separate spending from current revenues: Pensions Extraction Path Transform windfall gain to permanent increase in consumption Necessitate saving a large part of petroleum revenues Consumption path after discovery Consumption path before petroleum discovery t 0 Time 13

14 The GPFG is fully integrated with fiscal policy Return on investments Petroleum revenues Bill NoK Bill NoK Structural deficit All revenues percent real return 150 Fund State Budget Transfer to finance nonoil deficit Expenditures Fiscal policy guideline Over time spend Fund real return (estimated at 4%) Source: Ministry of Finance, RNB

15 Petroleum revenues have been high (Percent of trend GDP for Mainland.) State s net cash flow Expected real return Source: Ministry of Finance, RNB12 15

16 Part II Management of the Government Pension Fund Global 16

17 GPFG is one of the largest Sovereign Wealth Funds in the world 500 Market value Billion EUR, year-end. 430bn

18 GPFG governance structure Stortinget - Norwegian Parliament Ultimate owners Government Pension Fund Act National Budget Annual Report on the management of the Fund Material changes to investment strategy presented before Parliament prior to implementation Norwegian Ministry of Finance Formal owner Mandate on the management of the GPFG Regulation on risk management and internal control Quarterly and annual report Investment strategy advice Norges Bank Norges Bank Investment Management Operational manager 18

19 GPFG Investment Strategy GPFG Benchmark Index Global Equities (60%) Global Fixed Income (35-40%) Global Real Estate ( 5%) Emerging 7 % Asia/ Oceania 15 % Emerging 12 % North- America 35 % Asia/ Oceania 11 % North- America 42 % Europe 38 % Europe 40 % 19

20 Financial return varies over time 40 Annualized return measured in currency basket. Percentages Real return on investments t in equities and bonds since Equities Bonds Financial crisis Stock market crash "IT bubble" & Oil price shock World war II World war I -20 Stock market crash

21 Number of years Ministry of Finance Large variations in equity returns since 1998 Annual real return in an equity portfolio similar to the Fund since Source: Ministry of Finance/Dimson, Marsh and Staunton Real return in per cent

22 GPFG investments in France (as of year-end 2011) Investments amounted to 37bn EUR about 9 percent of total fund assets Equity investments in 162 individual companies Investments in bonds from 72 individual issuers Largest Fund holdings in France: Bonds 50 % Real estate 2 % Equities 48 % Issuer Market value (million NOK) Asset class Government of France Bonds Total SA Equities 22

23 Real estate investments in UK and France First real estate investments in France July 2011 Partnership with AXA Group 50 percent stake in ten properties located in and around Paris (year-end 2011) 23

24 Responsible investment practices We shall safeguard value in a broad sense Ensure good financial return over the long run, to the benefit of future generations Safeguard values held by the owners of the Fund, the population of Exercise of ownership rights Ministry of Finance General framework Decides on exclusion/ observation Recommendations on exclusion/observation Norges Bank Council on Ethics A good long-term return depends on sustainable development in economic, environmental and social terms, and well-functioning financial markets 24

25 Exclusion and observation of companies Product-based d exclusion Produce weapons that violate fundamental humanitarian principles in their normal use Produce tobacco Sell weapons or military material to Burma Conduct-based exclusion Serious or systematic violations of fundamental ethical norms human rights including child labour individuals rights in situations of war or conflict gross corruption severe environmental damage other particularly serious violations of fundamental ethical norms The Ministry of Finance has excluded 55 companies and placed 2 under observation as of May

26 Exercise of ownership rights Exercise of ownership rights is based on international recognised principles Overall purpose of active ownership is to safeguard the Fund s financial values Focus areas 1. Equal treatment of shareholders 2. Shareholder influence and board accountability 3. Well-functioning, legitimate and efficient markets 4. Children s rights 5. Climate change 6. Water management Good corporate governance Environmental and social issues Norges Bank has made it a priority that the focus areas should be relevant to investors in general and the Fund s portfolio in particular 26

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