* To cut number of firms in reference index by up to 30%
* Says easier to follow up companies with fewer companies in
* To exclude new emerging markets for now, including Saudi
OSLO, April 9 (Reuters) - Norway's $1.3 trillion wealth
fund, the world's largest, should reduce the size of its global
company reference index by between 25% and 30% to better follow
up companies, primarily by removing small-cap stocks, the
finance ministry proposed on Friday.
The move reflects the growing awareness among international
investors about risk in the environmental, social and corporate
governance (ESG) field, in which the Norwegian wealth fund has
often set the pace.
The fund's reference index would be cut to around 6,600
companies from 8,800 now, the ministry said in its annual
recommendation to parliament.
The fund also should not add, for now, more companies from
emerging markets, including from Saudi Arabia, in the index
governing its investment, it said.
The fund currently holds stakes in around 9,100 companies,
and a smaller reference index could, over time, lead to a cut in
the number of companies owned.
"We see a high number of companies leads to higher costs ...
and leads to a more complex follow-up of companies," Finance
Minister Jan Tore Sanner told reporters.
"To reduce the number of companies
will to a very little
extent increase the risk (for the return of the fund) and lead
to a better follow-up."
The fund pools the Norwegian state's revenues from oil and
gas production and invests them abroad in stocks, bonds,
property and renewable-energy projects.
The government rules in a minority and must win the support
of other parties in parliament to pass its proposals.
NO NEW EMERGING MARKETS
Friday's proposal also said no new emerging markets should
be included for now in the reference index.
Among others, "neither emerging markets Saudi Arabia nor
Romania will be included in the fund's reference index now",
said the ministry's white paper.
The fund uses the FTSE Global All Cap index from the FTSE
Russell index, which included Saudi Arabia in March 2019 and
Romania in September 2020, as the basis for its own reference
"In emerging markets, there are, to a greater extent, weaker
institutions, fewer protection of minority shareholders and so
it is more challenging to have a responsible investment
strategy," Sanner told Reuters.
The fund held stocks in 24 Saudi companies worth 1.6 billion
crowns ($188.1 million) as of the end of last year, according to
fund data. The fund did not take part in the IPO of Saudi Aramco
The financial impact will be negligible, said a banker in
the Gulf who declined to be named due to the sensitivity of the
"However, the messaging may be more important as other
investors consider their position, and will require the Kingdom
to accelerate its ESG efforts," said the banker.
The fund's management, Norges Bank Investment Management,
can still invest in Saudi Arabia if it so decides.
But being excluded from the reference index means the fund
would invest in fewer Saudi Arabian stocks, and other emerging-
market stocks, than they would have had they been included.
The CEO of the Saudi Tadawul Group told Reuters last week
that many of the Saudi companies had "a good ESG compliance
"The issue always is about the importance of disclosing
them. We are trying to educate our Saudi issuers, Saudi
corporates, about the disclosure importance and how to disclose
them in the eyes of the rating agencies," Khalid al-Hussan said.
(Additional reporting by Davide Barbuscia and Saeed Azhar in
Dubai, editing by Terje Solsvik, Emelia Sithole-Matarise, Larry