Norway SWF told to invest in land as climate change hedge

Norway’s Government Pension Fund Global should invest in agricultural land and forests as a hedge against any climate change policies that governments around the world may introduce, according to a report specially prepared by investment consultant Mercer.

The Nkr3.3 trillion ($550bn) fund, the second-largest sovereign wealth fund in the world, according to the SWF Institute, should invest in these commodities “as a ‘hedge’ against climate policy measures that are not fully anticipated by the market”, Mercer’s report said.

The consultant analysed the links between four potential climate change scenarios – regional divergence, delayed action, “Stern action” and climate breakdown – and asset classes in which the fund does not currently invest. Agricultural land and forests were identified as highly sensitive to each one.

A regional divergence scenario, with disparate reactions from different governments, would lead to “opportunities to access climate-sensitive investments”, Mercer said.

A delayed reaction outcome, with business continuing as usual until 2020 when rapid policy measures would be introduced, would benefit forests. The report said policy shift would increase penalties for deforestation “dramatically, increasing the price of timber product prices”.

“Stern action” – a quick agreement to a global framework, as advocated by economist Nicholas Stern in 2007 – could see demand increase for forests that are harvested sustainably, with existing assets performing strongly.

A climate breakdown scenario, in which no new policy is introduced, would have a mixed effect on agricultural land. Mercer said it could reduce the availability of prime cropland, with huge losses in Africa and Latin America, leading to an “additional geopolitical risk premium for agriculture investments”.

The consultant produced the report for the fund, which is the country’s main investment vehicle for its oil revenues, in March. The recommendations echo former US Vice-President Al Gore’s calls for investors to quantify the risk of climate change.

In February, Gore told Financial News that assets were incorrectly priced, and largely overvalued, because the market was ignoring the impact of climate change.

He said: “Prices are based on the assumption that it is OK that there’s 90 million tonnes of carbon being pumped into the Earth’s atmosphere every day. It is not OK. We have trillions of dollars of assets that are flagrantly mispriced.”