Norway's $850 billion sovereign wealth fund, the world's largest, would invest in renewable energy, transport and grids if it were allowed to put money into unlisted infrastructure projects, the fund's CEO told Reuters on Tuesday.
His comments came after the Norwegian central bank recommended the fund should be allowed to invest in such projects and to put a higher share of its assets in real estate, changes that could represent the biggest shift in the fund's strategy since it was allowed to invest in real estate in 2010.
"From our point of view the focus will be on the energy transition, renewable energy," Yngve Slyngstad said in an interview on the margins of the Paris global climate talks, when asked what kind of infrastructure projects the fund could consider.
Slyngstad said the "usual suspects" of the transport sector and grids could be targeted too.
The fund is currently allowed to invest about 60 percent of its value in stocks, 35 percent in bonds and has an upper limit of five percent for real estate.
It can invest in companies involved in infrastructure projects, but it cannot take a direct stake in a project that is not listed on the stock exchange.
But it should be allowed to invest up to 5 percent of its value in unlisted projects and raise its stake in property to a range of 5-15 percent, the central bank said in letters to the finance ministry dated Nov. 25, Nov. 26 and Dec. 2 and published on the ministry's website on Tuesday.
The bank also recommended changes to how the fund's performance is measured, as more unlisted assets would make its current use of stock and bond index models less suitable.
The fund is managed by Norges Bank Investment Management, part of the central bank.
The central bank's recommendations will be reviewed by the finance ministry, which will make its own recommendations in a white paper in April. Parliament will then discuss the white paper.
RISKY REAL ESTATE?
A group of foreign experts appointed by the Norwegian finance ministry said in a separate recommendation on Tuesday that the fund should be allowed to invest up to 10 percent of its assets in infrastructure, including in emerging markets and clean energy.
But the group, headed by New York University Professor Stijn Van Nieuwerburgh, said there was no compelling reason for a sharp increase in allocation to real estate.
The Norwegian wealth fund has concentrated its property portfolio around leading global cities including London, Paris, New York, Boston, Washington D.C. and San Francisco, and has said it soon plans to enter Tokyo and Singapore.
"Current valuation and risk levels of real estate assets, especially for core assets in top-tier gateway cities, seem elevated compared to historical pricing," the expert group said. "We recommend caution for new real estate investments."
An independent observer of the fund, who heads think tank Re-Define, welcomed the central bank's recommendation on infrastructure but said that increasing exposure to real estate investments was too risky.
"On infrastructure, that is very promising," Sony Kapoor, managing director of Re-Define and author of a 2013 study on the fund, said.
"Investing in infrastructure is one of the most promising ways to unlock growth potentials," he told Reuters, citing the need to replace ageing infrastructure in mature economies and building new ones in emerging markets.
Because of this, the fund should be allowed to invest up 25 percent of its value in infrastructure, he said, adding that the fund should not be allowed to invest up to 15 percent in property, but between 5 and 10 percent.
"My concern about real estate is that real estate markets ... are among the most distorted markets in the world," Kapoor said. "The real estate sector has been implicated in the world's major financial crises."