The Norwegian government is resisting calls for its $873 billion sovereign wealth fund, the world’s biggest, to add unlisted infrastructure projects to its portfolio of stocks, bonds and real estate. It should relent, recognizing both the financial and societal benefits from expanding the universe of potential investments available to the fund.
But what if Norway can use its billions to move the needle in private alternative-energy development and make better returns? A report by the Institute for Energy Economics and Financial Analysis presented to the country’s lawmakers in February showed that the median internal rate of return on infrastructure investments is about 10 percent; that rises to as much as 15 percent in renewable energy.
The fund could certainly use that extra juice; since 1998, its average return after fees and inflation has been 3.8 percent. Returns have declined in recent years.
The IEEFA recommended allocating 5 percent of the fund’s portfolio to unlisted infrastructure, hiring additional staff familiar with those kinds of investments as well as forging partnerships with others already active in the field.
To be sure, the institute, based in Cleveland, Ohio, isn’t exactly an impartial observer; its website proclaims that its “mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.”
Nevertheless, the numbers in its study are backed by the sovereign wealth fund’s own experience even in listed environment-related companies, which it says delivered returns of 12.4 percent in 2016.Increasing the amount of capital allocated to alternative energy sources would be a hedge against the reduced use of fossil fuels in the world. The fund has already seen its basic income dwindle in recent years as Norway’s oil revenue has diminished.
“We can’t just live as rentiers off the oil fund,” Norwegian Prime Minister Erna Solberg told Bloomberg News last month. She’s right; and freeing the wealth fund to make more speculative investments might pay off spectacularly by funding the garage-based experiments of the next Thomas Edison, Steve Jobs or Elon Musk that move the needle in energy technology.
Norway Misses a (Green) Trick