Doing well while doing what? An empirical analysis of exclusionary screening of the Norwegian Pension Fund Global on excluded companies’ returns from 2005 to 2022

Abstract

This thesis investigates whether the excluded companies from the Norwegian Government Pension Fund Global (“GPFG” - “The Fund”) investment universe delivers superior excess returns (alpha). The ethical-based exclusionary screening of the GPFG, as the world’s largest stock owner and one of the most transparent sovereign wealth funds in the world, provides a sample of stocks that face widespread exclusions by other institutional investors. We construct sub-portfolios based on criteria for exclusion, if companies belong to developed or emerging markets, and economic sector affiliation. The performance implications of these portfolios are investigated from September 2005 to August 2022. In our performance regressions, we apply the Fama-French five-factor model to estimate superior excess returns (alphas) and to control for possible differences in risk exposure between the excess returns of sub-portfolios and the market index used by the GPFG. We find statistically significant and positive alpha estimates of 19 out of 26 sub-portfolios. The results of this thesis indicate that companies excluded based on their products delivers superior excess returns, and the outperformance cannot be explained by sector-specific effects. Altogether, our findings are in line with previous research suggesting that exclusionary screening harms financial performance in this period, and thus the GPFG as a responsible investor are sacrificing financial returns. Our analysis suggest that the Fund has had a loss of USD 8.24 billion from 2005 to 2022. We note that the findings of this paper may be affected by the methodological choice.