Pension fund Storebrand urges Norway to follow fossil-free lead

* Storebrand (LSE: 0NO0.L - news) says returns should ultimately be higher

* Returns already at least match conventional investment

* Says Norwegian government overly exposed to fossil fuels

* New Dutch report says insurers also overly exposed

By Barbara Lewis and Carolyn Cohn

LONDON, April 27 (Reuters) - Storebrand, Norway's largest private pension fund, on Thursday launched two new fossil-free funds and called on the government to cut the nation's exposure to coal and other fossil fuels.

Norway's $900-billion sovereign wealth fund, the world's largest and built on oil and gas revenues, has sought to lead the shift from investment in coal, the most polluting fossil fuel, but it remains heavily exposed to oil and gas.

It has also said it earned less money because of divestments over the past decade made for ethical and environmental reasons.

Storebrand CEO Odd Arild Grefstad said getting out of fossil fuel would deliver the highest returns over the longer term, and Norway needed to diversify out of oil and gas as asset values there could suffer if more investors turn their back on them.

"We urge the Norwegian government also to show leadership by opening up for more sustainable investments," Grefstad said in an emailed statement. "This means fewer investments in the fossil fuel industry, and more in renewables."

Storebrand, Norway's largest private investor with a 34 percent share of its pension market, said the two new broad funds were invested in a range of sustainable stocks.

They could, however, have a small exposure to fossil fuel of less than 5 percent through, for instance, companies that use derivatives of oil as an component.

The returns they deliver will be at least as good as for conventional index-linked funds, it said, and are ultimately less risky.

One global fund has a value of 2 billion Norwegian crowns ($234 million) and the other Norwegian fund is worth 750 million crowns.

They will join a family of fossil-free funds managed by Storebrand with total assets of 1.1 billion euros ($1.2 billion) compared with its overall 53 billion euros of assets under management, Storebrand told Reuters.

It said Norway could sell fossil fuel assets and also review its strict investment rules to allow buying into more renewable sources, such as wind and solar.

While mining and oil companies say the world still needs fossil fuel, especially in emerging economies and transport, environmentalists say green energy is becoming cheaper and anticipate breakthroughs in electric vehicles and storage.

Among the sectors with a particular interest in changing financial habits is insurance, which faces having to pay for the damage caused by extreme weather.

A report this month from Dutch consultancy Profundo on the exposure of the insurance industry to all kinds of fossil fuels found the 15 largest European insurance companies invest more than $130 billion in fossil fuel companies.

Eleven of these insurers also continue to underwrite fossil fuel projects. They include Germany's Allianz (Swiss: ALV-EUR.SW - news) and AXA (EUREX: 486352.EX - news) of France, which the report found were most exposed to fossil fuels, with fossil fuel investments of $59 billion and $34 billion respectively. It added the estimates were conservative.

But AXA Investment Managers, which manages money for the French insurer and for external clients, on Tuesday announced it was planning to pull out of companies that derive more than half their revenue from coal-related activities.

This follows AXA’s announcement in 2015 that it would remove around 500 million euros of coal investments from its insurance portfolio.

($1 = 0.9144 euros)

($1 = 8.5549 Norwegian crowns) (Additional reporting by Gwladys Fouche and Alister Doyle in Oslo; Editing by Mark Potter)