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EXECUTIVE PERSPECTIVE: Tough love, is divesting from fossil fuel the only answer?

Paul Dickinson

16 Feb 2015

Amid growing popular concern and political attention on climate change, the first ever global divestment day will encourage institutional investors to divert funds away from companies linked with fossil fuels.  Divestment is one of the most potent signals of investor discontent and can be a valuable method to manage portfolio risk.  However, my experience as a business entrepreneur and founder of a non-profit dedicated to achieving sustainable economies leads me to consider whether divestment can truly lead us to a low-carbon future.  The landmark event occurs across two days, including the date famously dedicated to Saint Valentine; whether we worship planet or profit, should shareholders love or leave oil?

There is no doubt that the “fossil free” movement is gathering momentum and influence.  When Norway’s Government Pension Fund Global (GPFG) recently announced that it has divested from 114 companies in the past three years, the world’s largest sovereign wealth fund became one of the highest profile institutions to divest for environmental and sustainability factors.  Last year a powerful group of philanthropists, including the Rockefeller Brothers Fund, pledged to sell more than US$50 billion in fossil fuel assets.

Mainstream investors, like many businesses and governments, are becoming well-versed in the risks and opportunities posed by climate change.  Shareholders are especially concerned with the indirect effects of climate change on the value of their investments, in particular how businesses are responding to the myriad regulatory, physical, market and reputational risks.  New research for investors has been published linking carbon emission metrics to earnings of auto manufacturers.

The specter of stranded assets is also beginning to gain significant traction in the financial community.  Mark Carney, governor of the Bank of England, warned several times last year that the vast majority of the world’s fossil fuels are unburnable if we are to avoid dangerous climate change.  Yet businesses in that sector are sinking trillions of dollars into exploring and developing new and unconventional reserves.  Though the dramatic drop of crude prices in recent months has sparked several oil companies to cut capital expenditure, these issues have nevertheless come to a head, leading to a swell of investor pressure over the past year.

With so much focus on how investors are using divestment to pressure companies to reform however, are we missing a trend that could have greater impact on achieving a low-carbon future?

Earlier this year two of the world’s largest oil companies did something unusual: BP and Shell both agreed to ask their shareholders to back resolutions calling on them to take steps to combat climate change, including testing their business models against the widely-recognized target to limit global warming to 2°C, committing to reduce greenhouse gas emissions, investing in renewables and including more detail on how their business impacts climate change in their annual reports.

The resolutions were filed by the Aiming for A coalition, a consortium of 150 major investors with US$300 billion in assets under management.

Helen Wildsmith, head of ethical and responsible investment at CCLA, which leads on Aiming for A, describes these as, supportive but stretching shareholder resolutions.  The objective is to positively direct companies to address the complex challenges involved in the transition to a low-carbon future.  Aiming for A represents just over 1% of BP’s shares.  Its success with BP and Shell demonstrates the impact that can be achieved through positive shareholder engagement, a tool that all investors can and should use.

The Portfolio Decarbonization Coalition, launched by AP4, Amundi, UNEP Finance Initiative and CDP in September last year, is perhaps one of the most exciting developments in mobilizing this kind of investor action.  The goal of the coalition is to ask investors to commit by December this year to reducing the carbon footprint of US$100 billion of investments worldwide.  Investor members are free to choose which of the many tools in their arsenal they employ to decarbonize their portfolios – including divestment and targeted engagement.

Engagement can help to produce results that divestment alone cannot.  Companies in all sectors will have to go through a rapid transition from high to low carbon.  At the very least, engagement from investors will help companies to stress-test their business policies against carbon-risks.  In some cases, companies may not be receptive to this kind of pressure and investors may not have the resources to fully engage, which is where divestment can play a role.  But either way, to secure the shift to low-carbon, many of the companies including those reliant on fossil fuels will need to evolve to become part of the solution instead of the problem.

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