“We will move to a low-carbon world because nature will force us, or because policy will guide us. If we wait until nature forces us, the cost will be astronomical.” Christiana Figueras
The Divest Invest campaign claims that investors controlling some $5.5tn have partially or wholly disinvested from fossil fuel companies. Many charities are under pressure from members and supporters around the issue of such investments. Many have already sold their shares in coal producers such as Glencore. At the same time, shares in companies such as BP and Royal Dutch Shell have formed part of the core of many charity investment portfolios for decades. What should charity investors do? How has the situation changed in the last few years?
The Paris Agreement and carbon budgets
The 2015 Paris Agreement broke years of logjam in international negotiations on climate change. It strengthened the global consensus, adopted a goal to keep the increase in global temperatures to well below 2°C, and recognised the need for global emissions to peak as soon as possible. In the last few years scientists have also developed the concept of the carbon budget, the amount of carbon that can be emitted globally to meet the constraint of limiting global warming to an acceptable level. The efforts of groups such as Carbon Tracker have made us all aware that if all the known fossil fuel reserves globally were burnt, then the outcome would be global warming of significantly more than 2°C. BP has acknowledged this by stating: “We agree that burning all known reserves would probably cause global temperatures to rise by more than 2°C – and that addressing this issue will require the efforts of governments, industry and individuals.”
The importance of transition
At first glance the argument for disinvestment seems very strong, but it’s important to consider what disinvesting would achieve, and why investors typically exclude certain sectors. Investors normally exclude sectors because they think it is morally wrong to finance or profit from activities such as tobacco, gambling, cluster bombs, alcohol or pornography. Often these views on investments flow from the operating activities and objectives of the charities themselves.
One of the complications in the disinvestment argument relates to those operating activities. Almost all charities are still dependent on fossil fuels. For some of us it is about gas boilers that heat buildings, for others it is the petrol-driven cars and vans used for activities. This would suggest that charities are not currently of the view that it is immoral to burn fossil fuels.
The key to understanding the arguments around disinvestment is to focus on the need for a huge transition in the global energy system. The International Energy Agency has estimated that to meet the target of limiting global warming to less than 2°C, global coal use will need to fall by roughly half by 2040, and oil use will need to fall by roughly a quarter. This will involve both a significant increase in the use of electricity and a transformation of the electricity generation industry as coal and gas plants are replaced by renewable sources such as wind or solar.
The energy industry is characterised by long-lived investments. New coal mines, oilfields and power stations often have lives measured in decades. The coal-fired power plants that are currently being decommissioned in the UK were mostly built in the 1960s. The investments that are made in energy infrastructure by companies today will still be determining the energy system in 2030, 2040 and 2050. For there to be a successful transition to a 2°C world, then new investments in coal and oil producing facilities need to be dramatically curtailed and investments in renewable energy facilities and associated infrastructure need to be dramatically increased.
How is the transition developing?
In some sectors the pace of transition has been very impressive. If we look at electricity generation, the last new coal-fired plant to be built in the UK was Drax which was completed in 1986. According to the Digest of UK Energy Statistics, the proportion of coal in the UK’s generation mix has fallen from 40 per cent in 2012 to 9 per cent in 2016, while the proportion from low carbon sources (nuclear, wind, solar and other renewables) has increased from 23 per cent in 2012 to 46 per cent in 2016.
There are, however, sectors not doing so well. Coal and oil producers are still investing to discover new reserves and develop and expand existing assets. Many of these companies have business models and executive remuneration policies predicated on expanding production, when all the evidence would suggest that these companies need to shrink for the transition to a 2°C world to take place. These policies reflect the excessive focus on shortterm profits that can be prevalent in some listed companies.
Disinvestment or engagement?
The argument in favour of disinvestment would seem to hinge on whether or not these companies are changing their business models to become part of the transition. This is not an easy question to answer, and is a challenge for many investors as it involves taking a very long-term view.
How much of BP or Royal Dutch Shell’s capital expenditure is consistent with a 2°C world? Carbon Tracker has tried to answer this in its 2 Degrees of Separation report. It estimates that for BP, between 70 per cent and 80 per cent of capital expenditure is consistent with 2°C and for Royal Dutch Shell between 60 per cent and 70 per cent is consistent. This compares with ExxonMobil of the US, where only between 50 per cent and 60 per cent is consistent with a 2°C world. Is a company where their products today are ones we all use, and where threequarters of their capital spending is consistent with a 2°C world, one which we should view as morally wrong? It is not an easy question to answer, and one which different charity trustees have taken different views on.
The other side of the coin is for trustees to focus on engagement, whether directly or through their investment managers. Selling existing investments in large companies is unlikely to hinder their ability to operate. Tobacco companies have not gone out of business because many investors refuse to hold their shares. Those in favour of engagement would argue that change is more likely to come by engaging with companies and encouraging them to curtail their plans for investments in new fossil fuel facilities. Instead the capital can either be returnedl to shareholders or invested in renewables. The first step to such change is disclosure and many charities were part of the Aiming for A coalition, which succeeded in getting shareholder resolutions passed which forced greater disclosure around emissions reduction plans by major coal and oil companies.
There is no magic bullet in achieving the transition to a low carbon future. Some trustees have favoured disinvestment from fossil fuel companies, others have focused on engagement. What is clear, however, this is a pressing problem which all investors should be focused on – not to address an issue which threatens the future of the environment and society would surely be a dereliction of fiduciary duty.
Christophe Borysiewicz is client relationship manager at Epworth
Charity Finance wishes to thank Epworth for its support with this article