The most powerful woman in the ESG world
A conversation with Carine Smith Ihenacho
Carine Smith Ihenacho is Chief Governance and Compliance Officer at Norges Bank Investment Management, the Norwegian wealth fund. It’s the largest single equity owner in the world and sets out to be the most transparent. She is therefore likely the most powerful person in the world of ESG.
In our podcast episode, Huw van Steenis and I discussed
How you can combine sustainability with the pursuit of returns
The difference between the US and Europe when it comes to the energy transition
How the fund takes action to divest and exclude companies on climate, enviromental and even tax grounds
How NBIM conduct their reviews
Issues with ESG ratings and how they can be improved
Why companies pushing back targets paradoxically may be a sign of progress
Carine is uniquely placed to comment on the energy transition and all things relating to governance and this really was a fascinating conversation, and I have tried to summarise the main points below.
Sustainability is a Return Criterion
Norges see sustainability as not simply about risk mitigation, but also value creation. It’s truly a long-term fund for future generations. They are thinking in centuries, not just decades. And therefore the value of the fund is dependent on the long-term value of the companies. And they think companies can only generate long-term values if they really think about the sustainability of their business model.
Within climate, they look at the value of the fund on a scenario basis to 2050 and they believe that an orderly transition to net zero 2050 will safeguard the value of the fund, with a loss of up to 2% of the fund due to climate risk. In any other transition, they will lose a lot more. Climate risk is a systematic risk which as a universal owner may affect almost all asset classes.
US vs Europe
Carine is spending a year in New York, looking at the world from a different vantage point. She sees differences between Europe and the US in how well the companies are preparing for a low carbon economy. Many more companies in their portfolio in Europe have set clear targets and have credible transition plans. But she says that it’s amazing to see some of the innovation taking place in US-based companies and their thinking through the value chain and decarbonizing and investing in climate solutions. From a portfolio perspective, Europe is ahead, but on the innovation side, the US is taking the lead, although ESG is more politicised there. That perhaps gives US corporates the ability to be less ambitious when it comes to setting emission reduction targets. But Carine explains that when NBIM talk to US companies, it's impressive.
Share of portfolio companies with net zero 2050 targets for scope 1 and 2 emissions
Europe 49%; America 23%; Pacific 21%
Source: NBIM Responsible Investment Report 2023
Exclusion vs Divestment
The fund is mandated by the Norwegian Parliament and it is not allowed to invest in creatin sectors, for example the manufacture of certain weapons. This is non-discretionary and the fund reports on the cost each year – this has impaired performance, as defence stocks have obviously performed well, recently, particularly since the Russian invasion of Ukraine.
Carine’s team is involved in divestments or excluding permitted stocks from their investable universe, and this has actually benefited the fund to the tune of $6bn. Their starting point is that they want to be an owner, because that's how they make money and also how they can influence the companies. When they decide to divest, it's because they think the risk involved in being invested in this company in the longer term is risky because of its business model is risky. From a sustainability perspective, they decide that they don't think they can influence this company through being an owner, so they might as well just sell out.
They term these risk-based divestments, and they are quite different from the ethical exclusions. They do these to reduce risk, and have divested from some 500 companies since they started this process. But they see this as their last resort, because it's much better if they can be an investor, change the company, and make money.
Quarterly Reviews
They look at companies to follow up because of heightened risk by screening the portfolio quarterly for various indicators, according to different sustainability issues - on climate, on human rights, on tax, on water management etc. And they have certain criteria that together make a screen, and certain companies have red flags.
They then look more closely into their practices. For most companies, they do nothing, they decide that the risk is manageable and they want to continue to be invested. Some companies they decide to follow up from an ownership perspective. They have meetings with the company, may start to vote against the boards if they think that's a good way of following up. Or Carine’s team can simply give the information to the portfolio managers who take active positions and let them decide on the appropriate action. There is quite a lot of work involved in companies coming into the index.
They do not report on any divestments because they are conscious that a lot of investors follow NBIM when it comes to ethical exclusions and they don't think it's fair on the company – for example, sometimes a decision to exclude a company can be made when it enters an index and there is limited time available and inadequate information.
Last year, NBIM reviewed and screened 1,048 companies entering the benchmark, and 317 were considered high ESG risk. 263 were put on an internal monitoring list while they decided to divest from or not invest in 54.
ISSB
Carine is the vice chair of the investor advisory group for the International Standards Boards. The ISSB has developed a global baseline for company sustainability reporting in a very short time. And they're now trying to implement the standard of development in various jurisdictions. Investors want a global framework - companies to report the same way, whether they're incorporated in Indonesia or in the US or in Denmark. There continues to be debate about how detailed reporting should be and whether there is too great a reporting burden on companies, but within the investor group, there seems to be a lot of consensus around the global standard.
Ratings and Data
Ratings are a problem because there are so many different ratings. People hear that it's an ESG fund, they think it's doing some good and they invest in it. But because it can be rated in multiple ways, it’s not clear what it means to be an ESG fund.
Norges buy data from various data providers and value the data. They don't put much value on the ESG ratings because they prefer to take the data and do their own evaluations. They feel the rating agencies should be more open about their methodology and the rationale behind the rating. Some base the rating on financial materiality for the company when it comes to sustainability issues, whereas other base the rating on how the company impacts their environment.
They would like the agencies to be open about why they rate, what's their motivation for rating, how they rate and the data input they have. Then it's much easier for investors to make their own evaluation of the ratings.
Norges have a team of 30 people in the active ownership department which also covers 100k votes p.a.
Targets
Companies that didn't have net zero targets saw a 7% rise in their emissions between 2015 and 2023. And companies which had set a net zero target saw a 2% reduction in their emissions. So obviously, when companies publish targets, they do a lot better. Although we have seen some companies revising their targets and pushing back dates, Carine isn’t overly concerned. Rather she sees this as companies generally becoming more realistic and paradoxically, the later dates may reflect a more granular assessment and this may reflect real progress.
2015-23 emissions change
No net 0 targets 7%
SBTi net 0 targets -2%
Source: NBIM Responsible Investment Report 2023
"As a leading responsible investor in more than 9,000 companies across the globe, we relentlessly continue our work on climate. This includes the publication of a new and sharpened set of climate change expectations aimed at our portfolio companies. Central to the new expectations are transition plans. There is now a shift from talking about reporting and net-zero goals to discussing transition plans that spell out how these goals will be achieved. The expectations highlight what companies in various sectors should do step by step."
About Carine Smith Ihenacho
Carine started out as a corporate lawyer doing M&A work, moved in-house to be a corporate lawyer, and then moved to Norges Bank Investment Management to be Global Head of Ownership Strategies.
She is responsible for the governance and compliance area, which includes ownership and responsible investment activities, control and operational risk, compliance and legal services.
Carine Smith Ihenacho was appointed Chief Governance and Compliance Officer 6 October 2020. She joined Norges Bank Investment Management in August 2017 as Global Head of Ownership Strategies and was promoted to Chief Corporate Governance Officer on 1 January 2018.
Prior to joining Norges Bank Investment Management, Ms Ihenacho was Vice President Legal and Chief Compliance Officer in Statoil ASA. She has more than 20 years’ experience as a lawyer, working in both financials and the oil and gas industry, as well as in law firms. She also has extensive board experience.
Ihenacho holds a law degree from the University of Oslo, a Master of Law from Harvard Law School and a Master of Economics from the Norwegian School of Economics (NHH)S.
Great article congrats
Great podcast again guys.. thank you