Yukon Goes Silicon
A few weeks ago, the financial press took note as Norway’s $1 trillion sovereign wealth fund, the Norwegian Government Pension Fund (“NGPF”), announced that it would drop oil and gas stocks from its index. Yet Norway has not been the only sovereign wealth player exiting oil and gas. International Finance Corporation (“IFC”), a division of the World Bank Group, has also announced that in 2019 it will cease to finance upstream oil and gas projects.
Two months ago, the Alaska Permanent Fund (“APF”) led a $200 million round of investment in Generate Capital, a sustainable infrastructure fund based in San Francisco. The Alaska Permanent Fund is a $62 billion fund composed of royalties from oil payments, and invests about $7.3 billion in private equity and special opportunities–the fund has been weighing several investments in the cleantech space. With these two investment decisions, we have seen two enormous pools of capital that are the product of sovereign oil and gas related revenues betting on clean energy and/or betting against oil and gas long term.
Other oil and gas players have made moves into the cleantech space recently. Total, the French oil and gas company, acquired a 30% stake in SunPower and bought the battery-maker Saft for $1.1 billion, and BP has similarly made significant investments in renewable energy. Sovereign players have also been transitioning mineral wealth into cleantech wealth, with Saudi Arabia’s announced plans to invest $30-50 billion in cleantech by 2023.
But APF and NGPF’s decisions differ from these other investors and their investments. Both funds exist under complicated legal frameworks that emphasize making mineral wealth permanent for each of Alaska and Norway. Each fund answers to complicated regulatory regimes and professional boards, and their investments must be reviewed and approved by these individuals under law, as well as by a population that feels personally invested in these pools of mineral wealth. For the NGPF and APF to make these investment decisions, a combination of legal and professional oversight in two petroleum-rich states must have concluded that divesting from oil and gas, in the case of Norway, or investing in cleantech, in the case of Alaska, was a prudent business decision for a long-term investor.
Below, I will provide some history on each of the NGPF and APF and the meaning of these decisions.
A brief history of the Alaska Permanent Fund
There are two types of Natural Resource Funds (NRFs): Stabilization Funds and Savings Funds. Stabilization Funds use withdrawals into a separate account to discipline government spending and reduce the effects of price volatility. Savings Funds deposit portions of incomes from the resource into a fund to save for the future. Another distinction is that of a Virtual Fund, whereby the state integrates the Fund into its budget, rather than keeping it separate.
The APF, a Savings Fund, accomplishes this through State constitutional mechanisms and through its dividend scheme that gives citizens a direct stake in Alaskan oil revenue. With a long history of natural resource extraction, Alaska began to export oil in 1969 when the state auctioned off oil leases for Prudhoe Bay for a total of $900 million. The windfall would be short-lived, and following the sale the Legislature embarked on enormous and wasteful spending projects. Some of these included programs paying farmers to cut down trees, followed by programs paying them to replant trees.
By 1976, virtually all the money from the Prudhoe Bay leases had been spent, provoking public outcry and leading to the proposal of a permanent fund. The APF was unique in that it dedicated revenues to be set aside, but not expenditures of those revenues or objectives to guide those revenues. Initially, there were arguments in favor of using the money for economic development, but these were defeated.
Key to institutionalizing the APF was that its creation required a constitutional amendment, which in turn required popular support. The Alaska State Constitution prohibits dedicated funds in Article 9 § 7, and to amend the constitution requires a direct referendum, with a popular majority of the votes cast. Alaska’s unique constitutional protections required that the APF be placed beyond the control of the Legislature and the Executive. The Amendment passed set aside 25% of all mineral revenues into a fund for investments. The money in this fund cannot be withdrawn under the State’s constitution. Remaining revenues are deposited into a general fund for state expenditure. Alaska thus insulated this percentage of revenues from the political process.
The Alaskan Legislature further isolated the APF from their control through the creation of the Permanent Fund Corporation (the “Corporation”) to manage and invest the assets of the Permanent Fund. The Corporation was structured to prevent other forms of government interference. Of the six trustees, two must be members of the government, but the governor appoints the other four and they are forbidden to hold offices (state or federal). The trustees can only be removed for cause, stated in writing. A quorum is set at four members, preventing the government representatives from ever being able to exercise control. These checks, while only legislative, isolate the Corporation’s directors from governmental intrusion.
While protected from any raiding of its revenues by the state government, the Corporation faces significant legislative oversight on how its funds are invested. The Budget and Audit Committees review its operations and the Legislature has the final word on investments. Investment strategy is guided by the “prudent-investor rule,” which is defined as using the judgment an “institutional investor of ordinary prudence, discretion, and intelligences exercises.” The legislature in 1980 also exercised discretion in adding $900 million to the APF, in addition to the 25% set-aside, and there have been six additions since. The checks and balances on the fund reinforce both legislative oversight of the corporation in terms of how monies are invested, and the Corporation’s independence in investing that money.
Alaska’s oil management also creates a duty of transparency on behalf of Alaska’s citizens, not just its legislators. Under Alaska law, the report must “be written in easily understandable language” so that any individual citizen could follow the activities of the APF, and information is also made available on the APF’s website. This serves to bring citizens into the APF’s oversight, not just the political class.
The critical way that the APF has entrenched itself is by involving its citizens in protecting the health of the APF through its annual dividend (the “Dividend”). Alaska Governor Jay Hammond proposed the Dividend in 1980 to further isolate the APF from legislative propensities to spend the earnings. Originally, Hammond hoped to distribute dividends based on residency in Alaska, but the Supreme Court found this violated the Equal Protection Clause in Zobel v. Williams. Instead, it is allocated to all citizens who register.
Alaskan Law carefully spells out the use of earnings. 21% of the net income for the last five years is considered income available for distribution. Of that available income, 50% must go to the dividend, while another calculation is done based on the consumer price index for inflation-proofing the APF. The remainder is the Earnings Reserve Account, which the legislature has historically added to the APF’s principal for future investments. The Legislature could take the Earnings Reserve through appropriation and could amend the Dividend itself if it chose to, but is restrained from such actions by public opinion alone.
In 1999, 84% of the votes cast in a non-binding referendum opposed using the earnings for state funding instead of the Dividend. Many letters to the editor from the referendum debate make references to “our oil,” suggesting the extent to which Hammond’s program has instilled a sense of ownership. Alaska’s Dividend has served to give the public a perceived stake and vested interest in preserving oil wealth, with which it can demand accountability to the point of intimidating legislators.
The Fund Today
The Permanent Fund Corporation today is more ambitious in its investment strategy. Originally limited to fixed-income instruments with federal guarantees, the Fund now has a diverse portfolio of public equities, fixed income, private equity, real estate, private income and other assets. The Fund seeks an average annual real rate of return of 5% plus inflation over the long term, which it exceeded in the year ending June 30, 2017 with a return of 12.57%. The Fund has averaged an 8.78% return over the past 33.5 years.
A brief history of the Norwegian Government Pension Fund
The NGPF provides a contrast to Alaska in relying exclusively on government restraint in the face of its citizens, without specific citizen empowerment and with limited stake creation. NGPF is both a Stabilization Fund and a Virtual Fund. The Norwegian Fund has also become the model for Kazakhstan. Norway first discovered oil in 1969 in the North Sea, the same year as the Prudhoe Bay sale. At the time, Norway was already an affluent, established democracy with a strong industrial base. As a result, the Norwegian Government chose to focus on integrating its newfound oil wealth into the economy rather than making this wealth permanent.
In 1986, oil prices fell dramatically, and cash flow from oil was reduced to zero, underscoring to Norwegians the need for a fund to manage oil rents. In 1990, the Norwegian State Petroleum Fund was created, although this fund received no deposits until 1995, since oil revenues were so low that they only accounted for 10% of government spending from 1990-1992.
NGPF’s management, like Alaska, is separated from the government yet faces government oversight. Norges Bank, the central bank of Norway, manages the investments, although the Ministry of Finance sets investment policies and procedures. In 2005, the Ministry appointed an Investment Strategy to manage the guidance that is given to Norges Bank. There has traditionally been less of the formal, corporate framework seen in the APF, which underscores the ease with which the Storting—the Norwegian Parliament—could access the money in the NGPF if it so chose.
NGPF, like APF, utilizes the internet for transparency purposes. Information concerning the NGPF is available online through the Ministry of Finance’s website, including annual reports and evaluation reports. Norges Bank is required to report formally to the Finance Ministry four times per year, and these quarterly assessments are available online along with information about the return and condition of the investments. The Investment Advisory Council also conducts oversight. There is no formal requirement to make the information more understandable.
While the NGPF was designed as a Stabilization Fund, it has both stabilization and savings functions. For stabilization, the Storting withdraws from the NGPF however much money is required to balance the budget. This suggests that in a year of particularly unsound budget practices by the Storting, the NGPF’s principal could be significantly eroded, although no such year has been encountered. For savings, the NGPF receives annual deposits and earnings that the Storting chooses to add back. Yet there is no required deposit every year. Indeed, whether there is any deposit at all, as well as whether the budget is balanced, is “entirely at the mercy of the parliamentary majority.” The NGPF grows solely because the government feels accountability from the citizens to grow the NGPF and not to spend it.
Including the NGPF revenues in the budget as a whole and using it to plug holes in the budget is the Virtual Fund aspect of Norway’s program. The goal is for the Storting to view the state’s finances in their entirety and prevent the outcome seen in both Alaska and Alberta, where the government ran up debts while amassing significant savings in a separate oil fund. The Storting also prohibits using the NGPF as collateral for government borrowing. Yet both these measures also serve the function of making the NGPF’s existence tenuous, and they are dependent on the pressures the public can exert on the legislature.
This relationship is further complicated because the public has not always been supportive of saving oil revenues. The substantial accumulation of revenues in the NGPF increased pressure for the government to spend it, as many became annoyed at government savings when pressing needs for spending could be identified. Since 2002, the law has required that 4% of the NGPF’s earnings be used for social spending.
Significance of the Funds’ Actions
Reading the above should give you a sense of just how seriously both states take their resource funds. These are not ordinary investment vehicles or sovereign wealth funds, but ones that faces strict legal requirements. APF in particular is governed by the constitution, statutes and case law of Alaska, as well as a popular and deep attachment among Alaskans. The Board of the APF is a group of serious professionals, and it has at least three members with significant experience in and ties to the conventional oil and gas business and given the 4 board-member voting requirement at least one of them was convinced of the merits of this investment. NGPF is a similarly well-run and overseen fund, but with a longer history of activism, and it has previously excluded tobacco and coal companies from among its holdings. Yet NGPF’s revenues are not based in tobacco and coal—this is the first time the fund has explicitly excluded companies that form the underpinnings of its earnings.
APF’s investment in Generate Capital in particular deserves attention as well. Generate is not just a player just in the most conventional parts of the market, such as solar and wind. It’s investment targets include newer sustainable technologies in spaces like recycling/reuse, irrigation, anaerobic digestion and biomass, as well as transactions with a unique angle on the market, like Clean Capital, which is taking a fintech approach to solar investment.
While APF’s investment is a small amount of investment in the scheme of the fund, there is a deeper message here from both APF and NGPF as well as the actions of IFC: cleantech and sustainable investments are becoming prudent even to the most conservative players in the oil and gas space, while conventional oil and gas investments are disfavored. In seeking a reliable and outside return, one fund is diversifying its mineral wealth into cleantech while the others are withdrawing from conventional resource plays.
A century and a half ago, Alaska drew pioneers seeking mineral wealth during the gold rush. Half a century ago, Alaska and Norway beckoned adventurers with promises of limitless opportunity in oil and gas. Today, the descendants of those same intrepid businessmen and women, using their informed judgment, see riches in cleantech and away from conventional oil and gas. We would be wise to heed their wisdom.
This article was originally published on December 15, 2017.
 Christian E. Petersen and Nina Budina, Governance Framework of Oil Funds: The Case of Azerbaijan and Kazakhstan, 3-4 (Washington, DC: World Bank, 2003).
 Id. at 4.
 Rögnvaldur Hannesson, Investing for Sustainability: The Management of Mineral Wealth, 58 (2001).
 Jonathan Anderson, The Alaska Permanent Fund: Politics and Trust, Public budgeting and Finance, Vol. 22, 57-68, 58-59 (2002).
 Id. at 59.
 Ala. Const. art 13.
 Ala. Const. art 9, § 15.
 HANNESSON, SUPRA NOTE 9, at 59.
 Alaska Stat. § 37.13.040.
 Alaska Stat. § 37.13.050.
 Alaska Stat. § 37.13.070.
 Alaska Stat. § 37.13.080.
 Svetlana Tsalik, Caspian Oil Windfalls: Who Will Benefit? 6 (Roger Ebel ed.) (2003), available at https://www.opensocietyfoundations.org/sites/default/files/full_report_0.pdf.
 Id. at 120.
 Anderson, supra note 10, at 62-63.
 Alaska Stat. § 37.13.170.
 Alaska Permanent Fund Corporation, http://www.apfc.org.
 Anderson, supra note 10, at 61.
 Zobel v. Williams, 102 S.Ct. 2309, 2315 (1982).
 Alaska Stat. § 37.13.140
 Alaska Stat. § 37.13.145
 HANNESSON, SUPRA NOTE 9, at 60.
 Anderson, supra note 10, at 64.
 HANNESSON, SUPRA NOTE 9, at 66.
 Hannesson, SUPRA NOTE 9, at 36.
 Walter Galenson, A Welfare State Strikes Oil: The Norwegian Experience, (1986), 13.
 TSALIK, supra note 21, at 36.
 Hannesson, SUPRA NOTE 9, at 81.
 Id. at 82.
 TSALIK, supra note 21, at 38.
 Larry Catá Backer, Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, Georgetown Journal of International Law, Vol. 41, No. 2, 2009, May 4, 2009, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1398835
 Norwegian Ministry of Finance, Performance of the Government Pension Fund—Global, available at https://www.regjeringen.no/en/topics/the-economy/the-government-pension-fund/government-pension-fund-global-gpfg/fund-performance/id696854/
 Norges Bank Investment Management, The Government Pension Fund—Global: Reports, available at https://www.nbim.no/en/transparency/reports/.
 TSALIK, supra note 21, at 38.
 Id. at 37.
 Hannesson, SUPRA NOTE 9, at 82.
 TSALIK, supra note 21, at 38.
 Hannesson, SUPRA NOTE 9, at 83.
 TSALIK, supra note 21, at 37.