As tech and defense increasingly merge, simple ESG divestment rules become unworkable. The rationale for divesting from a company like Caterpillar due to a small fraction of its products being misused would, if applied consistently, force divestment from major tech companies that are essential to a diversified global portfolio.
Creating a successful sovereign fund hinges on three politically difficult choices: establishing a rule for how much revenue to save (Norway chose 100%), a strict rule for withdrawals (Norway spends only the ~3% real return), and the investment strategy (Norway embraced equities). These were not obvious or popular decisions at the time.
While avoiding "Dutch disease," Norway faces a different risk: complacency. With its massive fund financing 25% of state expenditures, the country struggles with declining work participation rates. The main economic challenge shifts from generating wealth to motivating the workforce when hard choices are less necessary.
The Norwegian fund's strategy of broad diversification across thousands of companies isn't just about financial risk. It's a crucial governance tool that prevents politicians from attempting to time the market or pick specific stocks, a practice that would politicize the fund and likely lead to disastrous results.
A significant paradox emerged from Norway's ethical guidelines: its sovereign fund was prohibited from investing in defense companies like Lockheed Martin, even while the Norwegian government was purchasing their F-35s for its own security. The war in Ukraine made this contradiction untenable, forcing a policy review.
Unlike the UK, which produced similar oil amounts, Norway's success stems from two key decisions: a 78% tax rate on oil/gas and a high general tax level. This structure enabled them to save every dollar of oil revenue, creating the world's largest sovereign wealth fund while the UK accumulated debt.