Matsen said the decision does not reflect a particular view on energy prices or the sustainability of the sector.
In a move 350.org co-founder Bill McKibben called "astonishing", Norges Bank, which oversees the world's largest sovereign wealth fund, advised the Norwegian government to dump all of its shares in oil and gas companies, leaving those entities out of its $1 trillion fund.
Norway's government has been told its state-run fund should drop its investments in oil and gas stocks.
The proposal came in a letter sent by the central bank to the finance ministry and signed by its governor, Oeystein Olsen, and the chief executive of the fund, Yngve Slyngsad, Deputy Central Bank Governor Egil Matsen said in an interview. The government, which also controls Statoil ASA and offshore oil and gas fields, was forced to withdrew cash from the fund for the first time a year ago to meet spending commitments after oil prices dropped.
The Norwegian fund, officially known as the Government Pension Fund Global, is among the largest investors in a wide range of oil companies, including Royal Dutch Shell, BP, Chevron and Exxon Mobil.
The nation will be "less vulnerable" to a drop in oil by not being invested in stocks of companies in the industry, the Oslo-based fund said Thursday.
"This is the biggest pile of money on the planet, most of it derived from oil - but that hasn't blinded its owners to the realities of the world we now inhabit".
The fund's biggest oil and gas holding at the end of 2016 was $5.36bn in Anglo Dutch firm Shell, followed by $3.06bn in ExxonMobil, $2.04bn in fellow USA oil firm Chevron, $2.02bn in the UK's BP, and $2.01bn in France's Total. Norway's fossil-fuel investments are coming under increasing scrutiny from a public that aims to be a climate leader without jeopardizing one of the world's highest standards of living.
Matsen emphasised that the recommendation is to remove oil and gas stocks from its benchmark index but that it wants to keep them as part of its "investment universe". The Labor Party, the biggest opposition group, said it would like to study the proposal before making a decision.
The fund has doubled in value over the past five years and was just given the go-ahead to boost its stock holdings to 70% of its portfolio from 60% to help drive returns. The fund's exposure to fossil fuel markets is now double that of a standard global fund, the Central Bank said.
"The problem raised by the central bank is extensive and has many facets", Finance Minister Siv Jensen said in a statement.