OSLO: Finance has emerged as one of the sectors around which climate risk is least well understood, according to a review intended to set a new investing mandate for the world’s biggest wealth fund.

       Norges Bank Investment Management, which oversees US$1.4 trillion (RM5.91 trillion) in assets, should be handed a new mandate to ensure the risks posed by global warming are properly reflected in its portfolio, the government-commissioned report found.

       The fund should also pursue investment strategies that are in line with the Paris Agreement’s goal of achieving net-zero carbon emissions by 2050, it said. But to do that, it needs to identify the biggest climate risks.

       Martin Skancke, the report’s lead author, said the fallout of climate change was still poorly understood for industries other than oil. “It’s hard to imagine that the market hasn’t already taken all the information on climate risks facing oil companies into account,” Skancke said in an interview. “But in other sectors, it can be hard to assess.”

       In its report, the expert group that Skancke led singled out the financial industry. It said banks’ exposure lay in their loan books, which condensed the climate risk represented by multiple sectors. Skancke said there was also reason to believe that markets were mispricing risks facing the real estate sector as receding shore lines and floods made some areas uninhabitable.

       Then there’s the insurance industry, which will face an increasingly unpredictable world of vast claims stemming from ever more devastating weather events. He also said risks remained poorly understood in the transport industry.

       “Risk is about the unexpected,” Skancke said. “I think one needs to be very careful in assuming that the risks are greatest where they’re most obvious.”

       To lay bare these hidden risks, Norway’s wealth fund should start requiring portfolio companies to subject themselves to climate stress tests, the expert group said. What’s more, the investor itself should be subjected to climate stress tests, it said.

       The fund is also being urged not to treat risk as a sector-wide phenomenon, but as something that’s specific to individual companies. Even if the oil industry as a whole represented a big climate risk, “it’s conceivable that a given oil company will manage a transition and become a leader in renewable energy,” Skancke said.

       Norway, western Europe’s biggest oil exporter, is under growing pressure to set more ambitious climate goals for its wealth fund amid clear evidence that the planet is overheating at an increasingly dangerous pace. But for now, the principal concern for the wealth fund and other investors remained how best to guard against portfolio losses that stemmed from global warming. That was as the financial industry at large embraced environmental, social and governance (ESG) strategies.

       Jan Tore Sanner, Norway’s finance minister, has already indicated he viewed the expert group’s recommendations favourably. Parliament still needs to give its go-ahead for the formal proposal, and a final decision won’t be reached until well after September elections, in which the Conservative-led coalition is likely to be replaced by a more left-leaning bloc.

       But Sanner said the fund shouldn’t stray from its ultimate goal of putting financial returns first. The group worked within the wealth fund’s framework, he said, which was “to aim for the highest possible financial returns given an acceptable risk.” ― Bloomberg