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Why This Trillion-Dollar Wealth Fund Blacklisted Duke Energy Stock

By Rich Smith – Sep 13, 2016 at 11:47AM

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When the world's biggest sovereign wealth fund declares war on one of America's biggest utilities, who will win?

Norway brings Thor's hammer down on Duke Energy stock. Will investors be fried? Image source: Getty Images.

On a black day for U.S. stocks in general, Duke Energy (DUK -0.10%) stock fared worse than most. As stocks all around it tumbled an average of 2.5% Friday, Duke dropped 3.5% -- and it could get worse.

As reported on Norway's The Local news site, Norway's sovereign wealth fund announced last week that it has added Duke Energy stock to a "blacklist" of stocks it will no longer invest in.

Formerly known as the "Government Petroleum Fund," Norway built up this fund from profits earned selling off the company's oil production, and uses the fund to purchase investments around the world, as a means of diversifying its economy. At the beginning of this year, Norway's fund owned $304 million worth of Duke Energy stock, and a further $162 million worth of bonds of both the parent company and its subsidiaries.

"Big" news

Before you shrug off this news -- or ask "what's Norway got to do with me?" -- consider:

Norway's sovereign wealth fund is big  -- bigger than China's, and bigger than Saudi Arabia's. Depending on how you count it, Norway's fund controls nearly $1 trillion in assets. (The exact value depends on the Krone-to-Dollar exchange rate. Currently, Norway's fund is valued at $890 billion. Two years ago, it would have been worth $1.2 trillion).

Any way you count it, the fund is much bigger than Duke Energy itself, whose market cap is less than $54 billion.

A history of activism

Norway  runs its fund "according to strict ethical guidelines, with a focus on sustainable economic, environmental, and social development." In years past, these guidelines have persuaded the fund to divest itself of dozens of  investments that didn't pass ethical muster.

In 2005, for example, the fund divested firms such as Boeing (BA 0.26%), Raytheon, and General Dynamics for their roles in production of cluster bombs. 2010 saw Philip Morris (PM 0.03%) and Altria (MO -0.32%) booted for tobacco ties. In 2014, Alpha Natural Resources, Peabody, and Arch Coal were swept into the coal ash heap as well -- a well-timed decision, as Alpha declared bankruptcy a year later, followed in quick succession by both Peabody and Arch.

Now, Norway has put Duke Energy stock in its crosshairs. Referring to multiple instances of environmental disasters tied to "ash ponds" maintained by Duke's coal-burning power plants, Norway argues that "for many years [Duke and its subsidiaries] have ... repeatedly discharged environmentally harmful substances." Despite multiple court rulings ordering Duke to clean up its mess, Norway accuses Duke of dragging its feet, saying the company won't fully repair the environmental damage it has inflicted for "another 10-15 years."

What it means to investors

Counting both investments in Duke stock, and in Duke's bonds, Norway's fund owns roughly 0.5% of Duke Energy's entire enterprise value. Selling out of these investments could dampen the prospects for the stock growing in value. The Local notes, too, that Norway's actions "are also closely watched and copied by other investors around the world." Thus, selling by Norway's fund could spark similar sales by other investors -- especially in the near term.

Longer-term however, investors can take some comfort in the fact that even the disapproval of a large sovereign wealth fund like Norway's doesn't necessary strike a death knell for an affected stock. Notable exceptions of Arch, Peabody, and Alpha Natural notwithstanding, history is also replete with examples of companies that incurred Norway's wrath, but went on to prosper regardless.

For example, since being blackballed by Norway in 2005, Boeing's stock has doubled in price. Philip Morris International is up two times in value as well, since Norway barred it for investment in 2014, while Altria stock  has tripled.

While there's no guarantee Duke Energy stock will fare similarly well after being "blessed" with a blacklisting by Norway, neither do you need to assume the stock is now forever cursed.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 281 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Duke Energy Stock Quote
Duke Energy
$100.35 (-0.10%) $0.10
Boeing Stock Quote
$179.54 (0.26%) $0.46
Altria Group Stock Quote
Altria Group
$46.71 (-0.32%) $0.15
Philip Morris International Stock Quote
Philip Morris International
$102.09 (0.03%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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