Sony Kapoor on Norway’s Oil Fund and the epic battle for a fossil-free future

Sony Kapoor is the Managing Director of the Nordic Institute for Finance, Technology and Sustainability. He has spent a career working at the intersection of policy and finance, and has previously advised the Norwegian government on investment strategy and risk management.

We talked about Norway’s trillion dollar oil fund, which has become a flashpoint in the battle to define the country’s economic and environmental future. Norway is an unusual case study in the tough choices faced by oil producers everywhere – from Saudi Arabia to Nigeria – as they ponder the sell-by date of their number one revenue source.

Everyone assumes Norway is one of those model Nordic nations that is both green and progressive, but, surprisingly, it too, suffers from the so-called “oil curse”.

Sony Kapoor has a two-decade long track record of success in tackling public policy and business challenges through original research, strategic advice, targeted advocacy, launching new ventures and building coalitions. 

His leadership in tackling the Eurocrisis and promotion of financial reform has been widely recognised. The World Economic Forum and Friends of Europe honoured him as a Young Global Leader and a European Young Leader. He was also inducted as a fellow by the Royal Society of Arts Commerce and Manufactures (RSA) and awarded an honorary fellowship by George Soros, the Chairman of Open Society Foundations. 

As Managing Director of RE-DEFINE, an international think tank, Sony has advised key policymakers and businesses around the world on economic policy, finance, sustainability and development. He has also served as a strategy adviser and policy expert for several governments such as Norway, Germany and India and advised financial firms including asset managers, sovereign wealth funds, fintechs and banks on asset allocation, governance and strategy. 

An ex investment banker, Sony also ran a macroeconomic consultancy and was elected the first chairman of the European Banking Authority’s Banking Stakeholder Group. He has been a Visiting Scholar at the IMF twice, has had a number of multidisciplinary roles at the London School of Economics and has been an expert adviser to the European Parliament and the European Commission on the Eurocrisis and financial reform. He was also a Special Adviser to the UN on green finance and an expert adviser to the OECD on development finance. 

Sony is an alumnus of the Indian Institute of Technology and the London School of Economics and now lives in Oslo where he is Managing Director of NIFTYS, the Nordic Institute for Finance, Technology and Sustainability.


Today’s episode is about Norway’s oil fund. The story of the fund is the story of the battle for Norway’s economic future. Here’s a country that got incredibly rich from oil and gas. And a fund worth $1 trillion invested for future generations.

This is the New Climate Capitalism, a podcast about how activism and finance are changing the way we think about capitalism. What’s crazy about the oil fund is its investment strategy. Everyone knows the one golden rule for successful investment. Do not put all your eggs in the one basket.

Right? But it turns out that Norway has invested its wealth for future generations in – you guessed it – more fossil fuels.

Sony: When I arrived in Norway and I was an advisor to the government, it was quite a shock to my system to see a substantial amount of investments in fossil fuels, which made no financial sense. Because this was a country that was heavily dependent on oil and gas, which made absolutely no sense to double up that exposure by buying fossil fuel stocks.

But that was exactly the case. 

That’s Sony Kapoor. He heads an international think tank called Re-define based in Oslo, and he recently launched the Nordic Institute for Finance, Technology and Sustainability. Back in 2007 he was advisor to the Norwegian government on its oil fund investment strategy. 

Sony: My intellectual interests have always been finance and economics and my emotional interests have always been environment and development. Up until a few years back, I wore discreet hats in these roles. And I spoke slightly different languages and dressed differently. But I think starting in 2013 when I revisited the issue of the Norweigian Oil Fund reform, I have become increasingly convinced that it is impossible to think of maximizing return, minimizing risk in a traditional investment mindset, without taking into account climate change and the huge demographic shift that is happening in the world, away from the OECD towards developing countries. And my interests, emotional and intellectual, have become exactly aligned. 

Denise: Would you call yourself an activist? 

Sony: To the extent an activist means someone who tries to actively promote their research work and the intellectual convictions.

If I find something in my research, if I believe something intellectually, I am going to try every single thing I can to make sure that actually leads to policy change. When I do research, I make sure that it enters the policy debates and leads to changes. So if that is what an activist is, then definitely, yes, I am an activist. 

Denise: Could you talk me through what a sovereign wealth fund is and how it’s different from a pension fund?

Sony: The most important kind of sovereign wealth fund, uh, which is also the Norwegian oil fund, is that the natural resource revenues generated from a one-off extraction of natural resources belong to several generations of citizens. So it’s supposed to be an inter-generational wealth sharing fund, where the benefits from this one-off drilling of oil and gas are to be shared across future generations.

There’s a second kind of fund which is linked to having excessive reserves of foreign exchange and how to manage them better. Uh, and that’s for countries with large export surpluses, and that’s sort of the Chinese sovereign wealth fund model. 

Denise: So if I’m a Norwegian citizen, some of my salary goes into a pension fund, however, that’s separate from the sovereign wealth fund, is that correct?

Sony: Yes. So pension funds normally have liabilities that there are for a particular purpose. You pay in, and then depending on how the money’s invested, uh, you get the payouts when you retire. In the case of the oil fund, the money is not meant for any particular purpose. It is a general purpose saving account for the whole country. 

Denise: So this, this fund, what’s special about it is that it’s worth, um, over $1 trillion and amazingly, it’s at the top of the league tables, of similar sovereign wealth funds from oil producing countries like Abu Dhabi, Kuwait, Saudi Arabia. So, what gives, why is Norway at the top of this table?

Sony: Well, I think it’s luck more than anything else. Norway happened to be a small country with a population, even now, barely above 5 million. And it struck gold with oil reserves in the North Sea. And unlike some other countries that were either poorer or had worse governance or were larger, that oil money could be saved across generations and didn’t have to be spent to fund immediate needs, or wasn’t, squirreled away by politicians in a corrupt country.

And because it wasn’t a large country, for example, like Russia, a large amount of oil revenue was distributed across a few citizens. So the sensible, prudent thing to do was to save the money. Norway was by no means the first country to have done that. And in fact, at the time, the finance ministry, the bureaucracy, actually opposed the idea of setting up a sovereign wealth fund.

They didn’t want anything to be off budget, and it was in fact, political leadership from across the political spectrum that said, “No”, we should treat this as an intergenerational resource. 

Denise: This intergenerational thing? How does it actually manifest in, in, in reality, if I, for example, went to a Friday’s for Future March in Oslo and I asked the people around me, what is the oil fund and, as owners of this fund, how do you get to have a say in its future? What would I learn? What would they tell me?

Sony: I think that, uh, you’re going to hear opinions that are diametrically opposite to what you would hear from the finance ministry. So the first thing the Friday’s for Future crowd will tell you is that we must immediately stop drilling for oil and gas. And in particular exploration, which should really be non-controversial but isn’t in Norway.

And second, to make sure that the money we have actually accumulated is in no way associated with any fossil fuel investments, which was the case until very recently, that a substantial part of the oil fund rather, counter-intuitively, continued to be invested in fossil fuels, but has recently divested.

And third, they would want a far more proactive role for the money that has been accumulated to actually help transition away from fossil fuels and help in the fight against climate change. 

Denise: Let’s talk about activism then. You mentioned divestment. When did that get started and what was driving it? 

Sony: So, my first association with the fund began in 2007, when I was an advisor to the government, and the then finance minister asked me to look at the oil fund and see how it can be run better. And it was quite a shock to my system as an ex-investment banker to see a substantial amount of investment in fossil fuels, which made no financial sense because this was a country that was heavily dependent on oil and gas. And of course, the oil fund itself was getting all of its future revenues from the sale of oil and gas.

So from a pure diversification perspective, it made absolutely no sense to double up that exposure. So in my recommendations to the finance ministry and to the fund, back in 2008, my first recommendation was an immediate divestment from all fossil fuels for pure risk management reasons, for pure diversification reasons.

It adopted a number of the recommendations that we had made back in 2008 and then again in 2013 into its governance program. 

And there were a number of sort of promises made, including improving the governance of the fund. They set up an expert committee to look at fossil fuel investments. Now, in a country where the fossil fuel lobby is as powerful as it is in Norway, there is no such thing as sort of an independent expert committee. And so the recommendations were rather mild and were fought tooth and nail by the fossil fuel lobby. And in the end, the only thing we managed to get was a commitment to divest out of coal. But the pressure from climate groups, the pressure from the international community and the pressure from researchers such as myself continued and we got a second opening when the oil fund changed its own investment guidelines to say that it would invest while taking into account the whole Norwegian wealth perspective.

Which meant that it would take into account – reading between the lines – that Norway was effectively an oil nation. And that gave another second wind in the sails of the divestment community. And this also happened in the context where there was a substantial fall in oil prices. Uh, there were about 50,000 people laid off in the oil industry in Norway, and for the first time, the senior leadership in Norway realized that oil actually had an insecure future, and all of these factors coming together then allowed the oil fund to actually ask for further divestment, including from oil and gas companies. And in the end, a compromise was struck where only some divestment was allowed to happen.

And. I think British petroleum shell and some of the oil majors continued to be investible assets because the powers that be argued that these are diversified energy companies and you know, maybe one of them because they’re expanding their renewables portfolio will become a renewable major. So that’s the present situation.

A mild degree of divestment has happened from oil and gas. And a slight expansion of the renewables portfolio has happened, but for the most part, the Norwegian oil fund and the Norwegian economy remain heavily overexposed to fossil fuels. 

Denise: Norway passed a law in 2016, right?  They’ve got one of the world’s most ambitious climate change targets, which is to become a net zero emissions by 2030, which is 10 years from today. What is the role of the oil fund in this transition? 

Sony: The oil fund is not supposed to be playing any major role in this transition. And the trick in this commitment is that very few of those emissions reductions are going to happen domestically. A number of these will be bought up carbon credits. And the second even more important thing is that this ignores Scope 3 emissions. So the emissions from the huge amounts of oil and gas that Norway exports are excluded from this calculation. So Norway’s export of emissions is significantly greater than, you know, what a tiny, small country of 5 million people, which is richly endowed with hydroelectric power and wind, will need to emit domestically.

And therein lies the trick in reconciling, you know, Norway’s continuation of being an oil and gas exporting country. And what on the surface is an ambitious climate target. 

Denise: Everything you’ve described seems to be full of contradiction and paradox, somehow. I guess it looks like the oil fund and Norway’s fossil fuel economy is entering a new phase of change and activism perhaps?

Sony: Well, um, everything changes and nothing changes. So on the surface and in terms of, you know, people’s expectation and rhetoric, everything does seem to have changed. And the fact of the matter is that, you know, if you are a person with some power in Norway and your child, along with the children of all your neighbours and colleagues, has gone to march with Greta and they look you in the eye and say, Hey! You are destroying our future! Obviously, something will change.

Now, is this large enough to have shifted the mindsets of the powers that be in Norway? And the answer is : not yet. Because it’s only this year, or late last year, uh, that the Johan Svedrup oil field, which is one of the largest discoveries, has started pumping oil and gas, and it’s expected to pump oil and gas for decades to come.

So there is a definite change in mindset. Now, all of this can, as has happened in the past, shift dramatically within the space of the next few months, uh, particularly as we, uh, you know, as the coronavirus epidemic spreads and we see what happens in oil markets.

But it’s hard to ignore empirical reality, uh, when messages are flashing red that the fossil fuel economy doesn’t have a promising future.

But I think we will continue to see Norway being dragged, kicking and screaming, towards a fossil fuel free future. There will be a huge amount of resistance because, you know, it’s tens of billions of dollars of money being made from the sale of oil and gas. 

Denise: What you’re saying is essentially that no way doesn’t have too much of a plan B for the post fossil fuel economy. Can we talk a little bit about the investment strategy of the fund compared to some of these other countries who also have sovereign wealth funds.

Sony: We, together with the rest of the Nordics, are constantly ranked in the top two or three of most desirable categories, whether it’s governance or wellbeing, and so on and so forth. So their self-image and self-perception is rather high and would not take kindly to being compared unfavorably with the Saudis and the Kuwaitis and the others. 

That having been said, the fact of the matter is that, uh, you know, I mean, Norway is a small, tiny economy, a rich one. Saudi Arabia is not so rich, much larger economy. Of course, Norway has fantastic hydroelectric resources. Starting from that point, I think Norway has not done much to build on that fantastic potential it has. But it is a Northern European country, so on most parameters it is doing significantly better than, oil-rich States in the Middle East.

But from the oil fund perspective, the appropriate funds to compare its investment strategy, are those in similar rich, well-governed economies. And that is where Norway falls dramatically short. So the Norwegian oil fund significantly underperforms its peer group such as the Canadian pension funds, Ontario teachers, the Singaporean sovereign wealth fund, New Zealand Super and the others. And that’s because it does not have a sophisticated investment strategy. Now what do I mean by that? So the law says that the Norwegian oil fund cannot spend more than the expected long term return. So the government can only use 3% of the present size of the fund, which is the long term expected return.

And that goes back to it being an intergenerational wealth sharing fund, right? So no one generation, no one year, no one government should use a disproportionate share of the revenue. Which means the fund can lock in money for up to a hundred years and it never needs to touch the principals. 

So the Norwegian Oil Fund does not need liquidity. There is no solvency to or any of the other regulations that significantly constrain what pension funds can do. So Norway effectively has ended up being a passive index tracker fund. That does not utilize the fact that it doesn’t need liquidity, that it has a long term investment horizon. And consequently, it underperforms investors that are significantly far more constrained. whereas financial theory says that it should outperform all of them. 

And according to our calculations, the oil fund, today is about $200 billion smaller than it could have been had it invested in a more sophisticated manner in line with its peer group. 

Denise: It just strikes me that, you know, these countries like New Zealand, which have zero resources, and if you compare with Australia, there’s always the ones that don’t have the resources, tend to have a slightly different mindset, when it comes to, you know, deciding how they invest. What is the secret? 

Sony: I think this is part of the reason behind the so-called oil curse. If there is easy money to be had, you can get away with second best and third best policy. There is so much money sloshing around. I think on paper Norway’s the richest or the second richest country in terms of, you know, GDP per capita in the world today, that it’s very, very hard not to be lazy.

It’s very, very hard not to let the oil money distort the economy as it has been. And given all of those challenges, and Norway’s done a relatively good job, but it does mean that we lag behind the non-resource rich peers, which have had to work harder, which have better governance, which have had to be more creative.

Denise: The Labour politician whose name I can’t pronounce. 

Sony: Jonas Gahr Støre.

Denise: Thank you. Him. He said that the oil fund, it should be a machine for change. What do you think the risks are of a disorderly transition if he comes into power and actually acts on this? 

Sony: The biggest risks are from doing nothing and from the present sort of strategy of, you know, maintaining course when the world around you is changing. The exact context for those remarks was as follows. There’s been this discussion at the oil fund, to all intents and purposes, is run by the Norwegian bureaucracy, which has an incentive structure that is hear no evil, see no evil, speak no evil. The last thing they want to do. Is to stand out. It’s better to fail in numbers than succeed alone. And when the world around you is changing as dramatically as it is, that is perhaps the worst possible strategy. So they had always sort of propagated this myth that the fund cannot be political too.

Now the decision to invest passively, those are active decisions taken by the finance ministry. You know, one could say that those were political. So all that Jonas Gahr Støre said was that whatever we do as a trillion dollar fund, will be seen to be political. 

And I think that Jonas has his head screwed on his shoulders. What he does see, being from the Labor party, coming from, you know, unions who are seeing the frontline of the changes to the fossil fuel industry. He sees the need for a move to the green transition. If anything, I think given the glacial change of pace in Norway, the risk is that change will not happen fast enough.

I do not think there is any risk that too much will change all at once in a country such as Norway.

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