BIS central bankers’ speeches  At today’s oil price, it may be necessary to use about NOK 80 billion of the GPFG’s return to finance the structural non-oil budget deficit. 7 In the course of three years, spending of oil revenues has increased by as much as in the 10 previous years. In the budget for 2016, spending of oil revenues is estimated at more than 7 percent of mainland GDP. Spending is well below 4 percent of the GPFG’s value, which is the assumed – but highly uncertain – real return. The 4-percent fiscal rule no longer functions as an effective long-term guideline for fiscal policy. The fall in oil prices will reduce Norway’s national wealth. The GPFG may be close to its peak. Future returns are also uncertain. Against this background, increased spending is not a viable path to follow. Management of the Government Pension Fund Global (GPFG) It is now 20 years since Minister of Finance Sigbjørn Johnsen made the first capital transfer to the Government Petroleum Fund, as the Government Pension Fund Global was aptly named at the time. Since its establishment, NOK 3.5 trillion has been transferred to the GPFG. GPFG capital has almost doubled, and is now the equivalent of around NOK 1.3 million per inhabitant. The return on investments accounts for a substantial portion, close to a third, of GPFG capital. Nearly every year, Norges Bank’s management of the GPFG has outperformed the market average. It would appear that the pattern is too consistent to be due to chance.

Ultimately, these incidents highlight that not properly taking sustainability risks into consideration could result in serious risks, both financial and non-financial risks, that are large enough to impact the viability of the financial institutions themselves. In other words, sustainability risks have been underpriced or underestimated in business practices of financial institutions. Ladies and gentlemen, Let me highlight on risks, especially credit risks, that financial institutions could face from different ESG dimensions. 4/7  On-going global warming can seriously impact future outputs, productivity, or the business continuity of borrowers, reducing their capabilities to generate income and repay debt. Persistent social issues like widening social gaps can fuel social distrust and trigger public unrest and demonstrations, resulting in economic losses. Malpractices by borrowers that have negative implications on environment and society may result in potential business failures, especially in today’s society where information can be quickly disseminated through online and social media channels. Meanwhile, poor governance by financial institutions themselves can result in misallocation of funds and concentration of risks. All of these are examples of how different ESG dimensions can heighten credit risks for financial institutions. Moreover, financial institutions may be subject to credit and reputational risks coming from their corporate clients if their clients fail to adapt business models to meet heightened standards and changing environment. Fast changes in consumer preference for sustainable products and increasing public demand for corporates to demonstrate social responsibility can negatively impact businesses should their business practices fail to meet public expectations.