Norway's pension fund, the world's largest sovereign wealth fund, may sell off about $60 million worth of Russian companies due to a new ethical restriction related to coal.

The Finance and Economics Committee of the Norwegian Storting (parliament) on May 28 approved a law that obliges the sovereign wealth fund Government Pension Fund Global (GPFG) to divest from assets related to the mining or use of coal. The law still requires approval in a parliamentary vote, which will take place on June 5.

The purpose of the law is to reduce support for businesses associated with polluting fuels. “Investing in coal companies poses both climate risk [as burning coal releases greenhouse gases] and future economic risk,” the parliamentary factions said in a joint statement ( via the Guardian ).

Russian coal miners

Under the new rule, the fund must divest from companies that get more than 30% of their revenue from coal production or if coal accounts for more than 30% of their output. This includes energy generating companies that generate more than 30% of their energy from coal.

Four Russian enterprises whose shares are in the portfolio of the Norwegian fund (according to reporting for 2014) fall under these criteria. These are the Kuzbass Fuel Company (KTK), Enel Russia, OGK-2 and Evraz. At the end of 2014, the securities of these companies in the fund’s portfolio were valued at more than $57 million.

CPC is one of the largest producers of thermal coal in Russia, almost all of its revenue comes from coal sales. A company representative says that the shares will most likely be sold “not to the market, but as a whole package,” for example, to another individual investor - this will not lead to a collapse in quotes.

Enel Russia has only one coal-fired power plant, the Reftinskaya State District Power Plant in the Sverdlovsk region. But it accounts for the majority of the energy generated by the company - 19.3 thousand GWh in 2014, or 43% of the total output of Enel Russia stations.

OGK-2 also depends on coal by more than 30%. According to the company's website , coal accounts for 31.7% of its fuel balance.

The Norwegians own shares in Enel Russia worth $8.9 million and OGK-2 - worth $6.1 million. A representative of Enel Russia declined to comment, and a representative of OGK-2 told RBC that the shareholder has the right to dispose of his share as he wishes whatever you want without notifying the company.

It is not entirely clear whether steel producer Evraz, which is also one of Russia’s largest producers of coking coal, falls under the “coal” criterion. The share of coal in the company's revenue structure for 2014 was 10%, according to annual reports (. pdf ). But in terms of volume of production, coking coal ranks second after iron ore: in 2014, Evraz’s coal production amounted to more than 21 million tons. Coking coal is used as a raw material in steel production, and more than 70% of Evraz’s steel business needs for coal are met by its own raw materials .

Previously, Greenpeace highlighted (. pdf ) Evraz among the Russian “coal” assets of the Norwegian fund (along with E.ON Russia, Enel Russia, CPC, Mechel and Raspadskaya), which the fund should not have due to environmental reasons considerations.

The value of Evraz securities in the fund’s portfolio was estimated at almost $40 million at the end of 2014. Representatives of the Norwegian Parliament's Finance Committee did not respond to RBC's request to comment on whether the “30% rule” applies to investments in Evraz shares. A company representative declined to comment.

A source in one of the Russian companies whose shares may be sold due to the new “coal” restriction told RBC that although GPFG is one of the largest minority shareholders and one of the active portfolio investors on the Russian stock market, its shares are so small that they the sale is not capable of significantly affecting quotes.

In total, Russian shares in the portfolio of the Norwegian sovereign wealth fund at the end of 2014 were valued at $2.1 billion.

Ecology versus investment

Human rights organizations and Norwegian politicians have long called for the Norwegian fund to abandon investments in coal assets. True, the executive director of the fund, Yngve Slyngstad, stated back in January 2014 that the fund’s “coal” portfolio is not so large (according to him in 2013 it amounted to NOK 2.5 billion) and is constantly shrinking. And in May 2015, the fund’s management reported that only $65.8 million of such assets—investments in polluting coal mining enterprises—remained.

These data were criticized by Greenpeace, which noted that the fund's management only took into account coal mining companies directly, but forgot about generating enterprises, many of which use coal to produce energy - for example, the German RWE.

The new law is in line with one of Greenpeace's recommendations. The head of the organization's Norwegian division, Truls Grudovsen, told the Guardian that after its adoption, the fund will have to sell at least $5.5 billion worth of securities, including stakes in large European and American energy companies.

This would not be the first time a fund has sold assets for ethical reasons. For example, in 2009, the Norwegian pension fund sold the entire stake in Norilsk Nickel (0.4%), because the Norwegian Ministry of Finance considered that the activities of the plant in Taimyr pollute the environment of the peninsula and expose 200 thousand people to toxic substances every day. Such investments are contrary to the fund's code of ethics.

In addition to environmentally hazardous investments, the GPFG Code of Ethics prohibits investing in tobacco and certain weapons manufacturers, as well as in companies that violate human rights (for example, using slave labor). With regard to fixed income assets, the ban preventively applies to government bonds of North Korea, Syria and Iran.

With the participation of Ivan Tkachev, Anatoly Temkin, Roman Asankin

The largest sovereign wealth fund will get rid of Russian coal