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Carbon Divestment: The SRI Dilemma

Updated: Sep 4, 2019


Climate change campaigners have welcomed the recent decision from AMP Capital, a Sydney-based asset manager with US$30bn equity assets under management, to exclude companies with a material exposure to the most intensive fossil fuels from its Responsible Investment Leaders (RIL) fund range. The investor reacted to client demand by amending the funds’ charter to ensure they avoid firms with more than 20% exposure to a range of fossil fuel factors.

According to recent models developed by the Carbon Tracker initiative, only 20% of the total fossil fuel reserves can be burnt in the next decades if climate warming is to be kept under 2°C, therefore keeping emission under 450ppm. Climate change exceeding 2°C would impose significantly larger impacts on our society and economy. Thus, the global economy faces the prospects of assets becoming stranded, creating in effect a carbon bubble.The

Divestment Pioneers

Coinciding with the publication of the Unburnable Carbon landmark report in 2013, Storebrand Kapital with US$11.7bn equity AuM from Norway announced their decision to exclude 13 coal and 6 oil sands companies from their portfolios. Speaking back then with Christine Meisingset, portfolio manager and head of ESG research at Storebrand, she emphasized that it was 'all about returns'. Christine was still coming to terms with the unexpected level of media attention that this pioneering move received.

Still in Norway, earlier this year we learned that the ruling political parties had agreed to set up an expert group to look into the impact of fossil fuels on the US$840bn managed by Norges Bank Investment Management (NBIM). Despite the paradox that limiting investments in fossil fuels would represent for a country whose wealth heavily depends on them, a decision in this direction would certainly send shockwaves through the markets.

Is Divestment the Right Strategy?

Far from being close to reaching a consensus, the fossil fuel divestment debate divides SRI investors like no other. Responsible investors are just as constrained by benchmark tracking, fiduciary duty, investment mandates and the need to meet long term liabilities, as mainstream investors are. Excluding such an important sector from a portfolio is never going to be an easy call. Instead, many SRI investors believe that engagement with companies is their most effective way to help mitigate climate change. The divestment vs. engagement approaches so far seem irreconcilable.

In addition, the carbon bubble thesis has failed to convince all SRI investors. This was one of the main talking points during the recent RI Europe Conference 2014 where a number of responsible investors expressed their mixed views on the topic. Some fear that the different scenarios played out by carbon tracker possibly overstate the chance that legislators from around the World will ever commit to imposing limits on the use of fossil fuels. Indeed, successive summits at Kyoto, Copenhagen and Rio have reminded us of the enormous difficulty to overcome prevailing short-termism and national interest.

Contrary to what many might have expected, despite the pressure from divestment campaigners, SRI investments across our oil & gas clients in Europe continue to increase, according to the analyzed institutional ownership data. Currently, one in ten shares held by institutional investors in the sector is currently managed by SRI investors which have integrated companies’ Environmental, Social and Governance performance indicators in their investment allocation process. Furthermore, their presence in the sector has accelerated and has nearly caught up with the all-sector European SRI Ownership Benchmark.

How are Companies Reacting?

Investor Relations teams working in the oil & gas sector will have noticed an increase in the demand for enhanced disclosure. Most of these requests take place behind the scenes. However, some of the largest companies have had to face increased pressure in the media from investors and other groups going public.

Responding to this pressure, Shell recently set out its position in a detailed 20-page letter signed by its head of investor relations, JJ Traynor: “While the stranded asset notion may appear to be a strong and thought-through case, it does have some fundamental flaws and there is a danger that some interest groups use it to trivialize the important social issue of rising levels of CO2 in the atmosphere. The methodology has significant gaps, not least a failure to acknowledge the significant projected growth in energy demand’’. He concluded that ‘’we do not believe that any of our proven reserves will become stranded’’.

What’s Next?

Fossil fuel divestment vs. engagement is a dilemma likely to haunt SRI investors for the foreseeable future. In the meantime, companies should focus on monitoring regularly the presence of SRI investors in their shareholder base and enhancing their ESG disclosure.

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