World’s largest SWF says AI will reduce shareholder engagement
The CEO of Norges Bank Investment Management (NBIM), Norway’s $1.6 trillion sovereign wealth fund (SWF), predicts that artificial intelligence (AI) will automate more investment mandates, concentrating shareholder power in the hands of fewer, more active owners.
Nicolai Tangen, CEO of the SWF which has $240 billion invested in Asia, believes that AI will increase the size of the passive, rules-based investment universe, leaving a smaller group of engaged investors to influence corporate behaviour.
“You’ll have a big part of the [investment] universe that will be automated and using machine learning … The capital pool [allocated] to [this] passive investing won’t use its vote. So, the responsible investing pool will be even more important in setting the debate,” said Tangen, speaking at the annual conference of Norfund, Norway’s $4 billion development finance fund, in Oslo on May 23.
GROWING ENGAGEMENT
Norges Bank has increased its engagement efforts in recent years to advance its ESG objectives, voting against many of the companies that it owns, including the major technology companies, last year.
NBIM
In the first half of 2023, it voted against CEO pay packages at more than 1 in 10 companies in which it held shares, part of engagement efforts that included 3,000 meetings with companies it owned, voted at 100,000 proposals at 10,000 annual general meetings (AGMs).
Tangen said the SWF had an outsized influence in corporate behaviour, compared to the size of its shareholdings, thanks to the influence of its voting on other shareholders, and its other lobbying efforts.
“We have roughly 1.5% of all the votes in the world, and the work we put in and because [our votes] are not pre-announced, it means another 3% of votes [follow]. 5% is a lot since shareholder structures are so fragmented,” he said.
But he was at pains to distance the fund’s engagement strategy with efforts of activists, who, as owners or as campaigners, focus on raising public awareness to force corporate change.
“There’s a big difference between active and activist investing. Being active means dialogue with companies, all the time,” he said, adding that the fund’s biggest successes in changing the behaviour of companies it owned happened behind closed doors and so were hidden from public view.
Tangen said the AI-driven growth of passive rule-based investment strategies would also increase the profits available from active long-term strategies.
“You’ll have the long-term fundamental [investment] projects where [investors] will make a lot of money,” he said, adding that he hoped that Norges would be among them.
DISSAPPOINTED
Tangen pointed to recent failures by the fund to influence executive pay and efforts to separate the roles of CEO and chairperson of companies.
“We have not been successful on executive pay. But who are we, sitting in Oslo, to decide executive pay in the US? We have to be humble,” he said, adding that efforts had to focus on the structure of pay, for example by binding it to long-term company performance, rather than absolute levels of pay.
And he vowed to continue the fund’s efforts, saying “When we are not successful, we continue."
Tangen also pointed to successes, including progress around board diversity, where he singled out Japan, saying the fund’s efforts had contributed to the shift.
Between 2020 and 2023 the proportion of Japanese company boards on which at least one woman sits increased from 71% to 92%, according to the Global Board Diversity Tracker produced by EgonZender, a global executive search company.
POLITICS, POLARISATION AND TECHNOLOGY
Growing political polarisation within and between leading economies, including the US and China, is set to become a major force shaping investment, in particular in the technology sector, in the coming years, according to Tangen.
Asked whether the trend would change the fund’s approach to which asset classes or geography it invested in, he replied “It’s hard to say. It depends how much [the world] polarises,” adding that, so far, the trend had not had a big impact on the fund’s allocation.
“What’s new in the last couple of years is how technology is driving the polarisation … access to micro-chips is being embedded in the [geopolitical] rivalry,” he said.
Roughly half of the fund’s portfolio is allocated to the US, with the majority of the remainder invested in Europe. At the end of the first quarter of 2024, 72% of the fund was invested in equities with 26% in fixed income and 2% in unlisted real estate and renewable infrastructure.