Norway's wealth fund grapples with conflicting ethics expectations at home and abroad

By Gwladys Fouche

OSLO, Feb 12 (Reuters) - Norway's $2.2 trillion sovereign wealth fund, the world's largest, faces conflicting expectations at home and abroad over responsible investments, the governor of the central bank said on Thursday.

In her annual address to policy-makers and business leaders, Governor Ida Wolden Bache said the fund, which is managed by a unit of the central bank and follows ethical rules set by parliament, is grappling with dilemmas over its responsible investment strategy.

"We increasingly see that there is a gap between international and domestic expectations regarding responsible investment," said Bache.

Last year the fund, whose formal name is the Government Pension Fund Global, came under intense scrutiny for its investments in Israel over the war in Gaza and the occupation of the West Bank.

POLITICAL CAMPAIGN ISSUE

Several political parties campaigned on the issue during the elections in September, calling for a full divestment from Israel.

Meanwhile, in the United States, the State Department said it was "very troubled" at the fund's ethical divestment from U.S. company Caterpillar CAT.N over Israel's use of its bulldozers, raising concerns over possible U.S. retaliation against Norway. Over half of the fund's investments are in the U.S., across equities, bonds and property.

"In today's world, some aspects of investment management might strengthen confidence in the GPFG at home, while weakening its position and investment opportunities abroad. That is a matter we must dare to speak about."

That tension led Finance Minister Jens Stoltenberg to suspend the fund's ethical guidelines in November and appoint a commission to issue recommendations on what they should be in future. The commission is due to deliver its findings in October.

Bache said the fund's primary goal was to continue to seek high returns.

"Regardless of the outcome," she said, "the framework must be clear about where the responsibilities lie, must be based on realistic ambitions for responsible investment and enable the GPFG to continue to fulfil its purpose: high financial returns that can benefit future generations."

Elsewhere in her speech, Bache flagged that tackling persistently high inflation remained the central bank's priority.