How Norway’s sovereign wealth fund negative screening affects firms’ value and behaviour

• Date: 01 January 2021
• Published date: 01 January 2021
• DOI: http://doi.org/10.1111/beer.12314

Business Ethics, Env & Resp. 2021;30:19–37. wileyonlinelibrary.com/journal/beer  

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  19© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

In recent decad es, the world has w itnessed the r ise of a new cate-

gory of investor : sovereign wealth f unds (SWFs). The term “sove r-

eign wealth fund ” arrived recently in the ac ademic literature—it was

first mentio ned by Rozanov (2005)—bu t SWFs have existed for more

than 50 years. T hey became notor ious on the intern ational scene

during the fin ancial crisis of 2008 , when they invested bi llions of dol-

lars in Americ an and European ban ks (Wray, 2008). The Int ernational

Monetary Fu nd (IMF, 2008) present s SWFs as “special inve stment

funds created or ow ned by government to ho ld foreign asset s for

long-term purpos es.” In 2019, the number of SWFs g lobally reached

approximately 8 0 (Sovereign Wealth Fund Instit ute, n.d.), with more

than eight trill ion dollars of assets under m anagement. Even though

they may have differ ent objective s, SWF port folios include t radi-

tional investm ents, such as stocks, sove reign bonds, and private eq-

uity. However, we identify a n ew trend in their investme nts.

In the current cli mate, the traditional ec onomic model is facing a

major change, wit h the development of more respons ible and envi-

ronmental-fri endly businesses. It s eems that some SWFs have a new

interest in soci ally responsible invest ments (SRI), which could b e de-

fined as investm ents that integrate social, et hical, or environmental

issues into the inve stment process, along side the standard conc erns

of risk and return s (Von Wallis & Klein, 2015). In this pa per, we focus

on “socially responsible SWFs.”

We believe that respo nsible SWFs deser ve to be the objec t of

deep investiga tion. Indeed, few SWFs are conside red to be socially

responsible: examples include the Government Pension Fund Global

of Norway (GPFG), th e New Zealand Superannuat ion Fund, and the

French Pension Rese rve Fund. This st udy focuses on t he GPFG,

which was esta blished in 1990 as a savin gs fund designe d to accu-

mulate and save weal th for future gene rations. The fu nd is essen-

tially finance d by the exploitation of cr ude oil. Today, it is the largest

sovereign fund in t he world, by the size of its assets u nder manage-

ment. The GPFG cu rrently manage s more than one tri llion dollars’

worth of asset s and it controls mo re than 1.4% of the total m arket

capitalisation worldwide (Norges Bank Investment Management,

n.d.). The fund wa s the first SWF to take into con sideration environ-

mental, socia l, and governance (E SG) criteria in it s global strate gy

(Yin, 2017). In f act, the fund claims that i ts main objective is to con-

tribute to the ef ficiency of financial market s, as well as to promote

the developmen t of responsible investment s. Therefore, it is one of

the few SWFs to use an et hical guideline to conduct i ts investment

decision-maki ng process (Etikkradet , 2019).

Received: 11 Octo ber 2019 

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  Revised: 27 July 202 0 

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  Accepted: 31 July 202 0

DOI: 10 .1111/bee r.12314

ORIGINAL ARTICLE

How Norway’s sovereign wealth fund negative screening

affects firms’ value and behaviour

Khalil Al Ayoubi  | Geoffroy Enjolras

Centre d'Etudes et de Recherches

Appliquée s à la Gestion (CER AG), Université

Grenoble Alpes, Saint-Martin-d’Hères,

France

Correspondence

Khalil Al Ayoub i, Centre d'Etudes e t de

Recherches A ppliquées à la Ges tion

(CERAG), Unive rsité Grenoble A lpes, 150

rue de la Chimie, Saint-Martin-d’Hères,

3840 0, France.

Email: khalil.alayoubi@univ-grenoble-alpes.fr

Abstract

This paper examine s the impact of negat ive screening by respons ible sovereign

wealth funds on the va lue of excluded firms. We focus on the main soverei gn wealth

fund, the Governm ent Pension Fund Global of Nor way, which excluded 149 firms

from its port folio during the pe riod 2006–2018. Using an event study m ethodol-

ogy, we document a signific ant decrease in exclude d firms’ stock prices . Moreover,

we find that the nature of s creening matters: n orm-based exclusions suf fer from

a significant and pe rmanent decrease in t heir stock value, sug gesting that market

participant s reacted to the Government Pension Fund Glo bal of Norway exclusions.

Overall, it can be as serted that the Norwegian fund ha s a strong signalling effect on

financial market s, in terms of social and envir onmental informati on. We conclude

that sovereign wealth fu nds could be used by governments as investm ent vehicles in

order to promote respo nsible investments on a large scale.

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     AL AYOUBI And EnJOLRAS

SRIs can be emb edded through s everal methods , such as pos-

itive screening, a best-in-class approach, negative screening, or

shareholder a ctivism (Von Walli s & Klein, 2015). In this p aper, we

focus on one of the ma in SRI strategies implem ented by responsible

SWFs: the exclusio nary strategy, or nega tive screening, by which w e

mean disinvestm ents in specific stock s, rather than refusal to i nvest

in them. In fac t, responsible SWFs, and m ore specifically the GPFG ,

exclude firms f rom their portfo lio that violate predete rmined criteria

related to ESG issu es. Our objec tive, then, is to ana lyse the impact

of negative scree ning on the exclude d firms and, mor e specifical ly,

on their stock pr ice movements. We aim to examine how th e stock

price of an exclude d firm may change, taking into co nsideration that

this firm was excl uded from a respo nsible SWF por tfolio due to

their perfo rmance against ESG criteria . In other words, we observe

whether ther e is a market reacti on to the ESG-bas ed exclusions of

a SW F.

To the best of our knowle dge, our study is on e of the first to

explore this are a of research. Little is known a bout the respon sible

behaviour of SWFs an d their impact on the ir portfolio str ucture. The

negative scree ning strategy and its i mplications have been anal ysed

in previous research related to sustainable indexes and socially re-

sponsible pri vate funds (Endrikat , 2016), but not in the case of SWFs.

We contribute to the lit erature on SRIs and th e exclusionary st rategy

by considering on e of the main respons ible SWFs: the GPFG . We

focus on the impli cations that th is strategy has o n the share value

of excluded firm s, rather than on t he perform ance of the fund it-

self. One of the novel cont ributions of the study is to use an eve nt

study approa ch to analyse the effect of GPFG’s ne gative screenin g

on the stock pri ce reaction of the af fected fir ms, while previo us

studies have use d a portfolio -based approac h. Since the GPFG is a

major actor on th e financial scene and a pion eer of SRI, its decisions

influence othe r economical ac tors. Based on t he existing lite rature

(Dimson, K arakaş, & Li , 2015; Vasudeva, Nachum, & Say, 2018), we

hypothesise th at the fund has a signa lling effect , in the sense tha t

other investor s that valorise ES G values would refer to the GPFG’s

negative screening decision in order to choose which firms should be

excluded from th eir own portfolios. In other wo rds, the GPFG may

be considered as a sustainability index, providing information about

the ESG polic y and score of thous ands of firms. To bette r capture

this impact , we examine, thro ugh event studies , whether the st ock

price and liquid ity of excluded fi rms are affec ted in the short t erm

only, or whether a mor e permanent chan ge takes place. We thus

capture whet her there is a change in the fun damental value of firms

excluded from th e GPFG portfolio.

Considering t he GPFG and, in a more gl obal view, all respo nsi-

ble SWFs is relevant b ecause these instit utions could be considered

as investment vehi cles that ser ve the best intere sts of their hom e

countries. It se ems that some countries, suc h as Norway, use SWFs

to promote social a nd environmental values i nside and outside their

borders.

This paper is org anised as follows . Section 2 provi des an over-

view of the literat ure regarding respon sible SWFs and the exclusio n-

ary strateg y, and presents the hypot heses being tested in the p aper.

Section 3 intr oduces the data a nd methodolo gy used in this pa per.

Section 4 presents the empirical results. Section 5 concludes.

2 | LITERATURE BACKGROUND

In this sectio n, we review how the lite rature has treat ed negative

screening and i ts implicatio ns at the firm and f und levels. We then

outline the ca se for examining the GPFG as a prom oter of SRI strat-

egy impleme ntation and fin ally present our hy potheses, lay ing a

“foundation s tone” for SWF liter ature focusing on t he implication s

of implementing SRI strategies, such as negative screening.

2.1 | Imple mentation of socially responsible

investments

SRIs refers not on ly to all investmen ts that seek prof it maximisa-

tion, but also have e xtra financ ial objectives , for ethical, s ocial,

or environmenta l purp oses (Sa ndberg, Juravle, Hedes ström, &

Hamilton, 20 09). We identify six st rategies that ar e used by inves-

tors to impleme nt SRI in practi ce: inclusion or pos itive screening ;

the best-in-class screening approach; exclusion or negative screen-

ing; shareholder activism; engagement; and dialogue. One of the

most common st rategies used is exc lusion or negati ve screening.

This method cons ists of avoiding inve sting in, or exclu ding, firms

that do not respe ct environment al, governance, o r social criteria

(Renneboog, Ter Hors t, & Zhang, 2008). Two main streams exi st in

the literature when it comes to negative screenings.

The first st ream analyses t he impact of exclu ding firms from a

portfolio, by comparing the financial performance of screened and

unscreened po rtfolios. Hong and Kacp erczyk (2009) were pione ers

in the domain of mea suring the per formance eff ect of exclusion-

ary screeni ng and they found t hat “sin stocks”1 generate positive

abnormal retu rns. In the same s tream, Trinks and Sc holtens (2015)

showed that negat ive screening has a n impact on the inve stment

universe bec ause it diminishes available st ocks (Kolstad, 2016), and

unscreened portfolios outperform screened portfolios.

The second str eam of the literatu re considers the i mpact of

negative scree ning on the finan cial perform ance of excluded fi rms,

rather than on t he performa nce of screened po rtfolios of th e in-

vestors who app lied this strat egy. Generally, the li terature has fo-

cused on firm excl usions from sust ainable indexe s. For instance ,

Consolandi, Jaiswal-Dale, Poggiani, a nd Vercelli (2009) analysed

the market reaction to exclu sions (and inclusion s) in the Dow Jone s

Sustainabi lity STOXX Index (DJSS I). They found that deleted com -

panies suffe r from a decrease in t heir stock price s, suggesting that

market parti cipants tend to “punish” a dele tion, and therefore, val ue

ESG engageme nts as a useful crit erion for asset all ocation. Oth er

academics have focused on DJSSI exclusio n and they found that ex-

cluded firms e xperience a temporary de crease in their stock return

(Cheung, 2011; Robinson, Kleffner, & Bertels, 2011). Other sustain-

able indexes have al so been taken into consideration . For instance,