Some big investors and banks are rethinking investments in an oil and gas industry wrestling with uncertain oil demand, government regulation and disruptive technology like electric vehicles.

The biggest is in Norway, where the government says it will decide this year whether to wind down its $1 trillion sovereign-wealth fund's investments in the oil and gas sector. Its assets include multibillion-dollar stakes in Exxon Mobil Corp., Royal Dutch Shell PLC, Chevron Corp. and BP PLC.

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Others, including French insurance giant AXA Group and Dutch bank ING Groep NV, are pulling back from parts of the industry that contribute most to climate change, like Canada's oil sands. In a world where the heaviest polluting industries could be penalized, some investors say the financial risks of such investments could outweigh the rewards. For instance, Canada is introducing a carbon tax this year to limit greenhouse gas emissions from oil sands.

The moves are distinct from calls from environmentalists and so-called ethical investors for divestment from the oil industry, although those sentiments have been taken up by large, mainstream financial institutions more often since the 2015 Paris agreement to fight climate change. The World Bank said last month it will stop financing oil and gas exploration and drilling by 2019, in support of the Paris goals. French bank BNP Paribas says it will no longer finance some oil projects seen as environmentally damaging.

The trend resembles--on a smaller scale--the early investor movement against the coal industry, which was rocked by an explosion in production of cheap, cleaner-burning natural gas in the U.S. over the past decade. Norway's parliament decided that the country's sovereign-wealth fund should stop investing in companies with a heavy exposure to coal in 2015, ahead of the Paris agreement. The decision came against a backdrop of mounting scrutiny on the financial risk, as well as environmental impact, associated with coal.

Similar market forces are now applying pressure on oil.

Renewables--once hampered by high costs--have become cheap enough to compete with coal and gas in some instances. The U.K., France, China and India have signaled they plan to ban sales of vehicles with traditional combustion engines, undercutting a potential source of crude demand.

Norwegian officials say the current debate is entirely pragmatic. The country may be overexposed to a sector undergoing turbulent change by having both a large national oil company, Statoil ASA, and billion-dollar-plus holdings in other international oil companies.

"This is really a question of risk diversification," Yngve Slyngstad, chief executive of Norges Bank Investment Management--which manages the fund--told The Wall Street Journal. Statoil's profits and other energy-focused revenue in Norway is plowed into the fund and invested elsewhere.

Mr. Slyngstad said the transition from dependency on fossil fuels to alternatives like solar, wind and other renewables would take several decades. But he said investments in traditional oil companies should come with a "high-risk premium," considering "all the uncertainty around the energy transition."

The Norwegian concerns have "put those industries on alert," said Matt Christensen, global head of responsible investment at AXA's asset-management arm. "The risks which climate change presents are becoming more understood as existential in nature."

To be sure, wholesale divestment from the oil and gas sector remains rare. The sheer size of oil giants like Exxon and Shell make it difficult for fund managers to say they will exclude them outright. And they have advantages over coal companies because oil is harder to replace quickly and natural gas is viewed by many as an emission-reducing fuel.

Big oil companies say they are doing enough now to manage the financial risk from climate change, moving their businesses more toward natural gas and experimenting with renewables and electricity.

"The current risk from climate change regulation, even in a restricted greenhouse gas scenario, is minimal and manageable over time," a Chevron spokesman said.

In an interview, BP Chief Executive Bob Dudley said Norwegian officials had been "pretty clear with me" that their concerns weren't about climate but about diversification. "I can't argue with that really," he said.

Norway's oil fund owns over 2% of BP's stock, according to S&P Global Market Intelligence. Any Norwegian oil divestment is likely to be carefully managed and take place over a number of years so as not to disrupt markets.

U.S. investors appear committed to the oil industry but have begun pressuring it to change. Last year, a task force--commissioned by the G-20 and including major financial institutions like JPMorgan Chase & Co and BlackRock Inc.--published guidelines pushing for better disclosure of the impact of climate change. Across the U.S., utilities and oil-and-gas companies faced shareholder revolts this summer as investors clamored for more information about how they view climate risk.

"We think we can have more influence from inside the tent," said Rob Main who sits on the investment stewardship team of Vanguard Group, which holds $4.5 trillion under management.

This summer, it voted against the boards at Exxon and Occidental Petroleum, demanding more disclosure of the potential business risks presented by efforts to limit global warming in line with the Paris agreement.

Last month, Exxon capitulated to shareholder demands, agreeing to publish new details about how climate change could affect its business.

Write to Sarah Kent at sarah.kent@wsj.com and Nina Adam at nina.adam@wsj.com

(END) Dow Jones Newswires

January 03, 2018 10:22 ET (15:22 GMT)