A few weeks ago I was part of a conversation between charity investors to discuss how we should respond to climate change in our investment portfolios – how, as stewards of long-term assets, we could support the move to a lower-carbon global economy.
Climate change is an escalating long-term challenge for society. It will no doubt affect the way that we live and the products that we buy. Global leaders have made commitments to limit long-term temperature rises to two degrees. Meeting those commitments will require significant changes in many areas and the experts at Schroders estimate that we’re currently heading for a rise of four degrees, which would have profound implications for the world.
At the forefront of the climate change debate are fossil fuel companies and the role that long-term investors can play in encouraging the transition to a low-carbon world. Should we be making a moral judgement about fossil fuel producers and selling our shares or should we be using our rights as shareholders to push for change?
A growing number of investors are responding to climate concerns by selling shares in fossil fuel producers. At $5.4 trillion (£3.9 trillion), the value of investment portfolios that exclude fossil fuels has doubled in two years, and even voices in the EU Parliament are recommending divestment.
This is because most of the blame for climate change lies with man-made greenhouse gas emissions, about 80 per cent of which are from fossil fuels. Limiting temperature rises to acceptable levels means cutting those emissions by two-thirds over the next three decades, which is a clear challenge to producers. It implies that the world will need to cut fossil fuel production by 1 per cent annually up to 2050, a sharp reversal from the 2 per cent annual growth of the past 30 years.
Many foundations, university endowments and charity investors are part of this divestment movement, choosing to sell their fossil fuel holdings for a variety of reasons. Perhaps they wish to show moral disapproval because they feel fossil fuel companies contradict their missions. Others divest for financial reasons, believing that the intrinsic value of fossil fuel assets are much lower than current market valuations – so-called stranded assets. For some, the act of divestment itself is an attempt to influence public policy or reduce their own indirect carbon emissions. Many universities are feeling pressure from student groups, and stakeholder influence can be a powerful catalyst.
However, perhaps divestment is too simple an answer. It’s clear that oil, gas and coal producers will face challenges as demand for their products fades, but the impact on individual companies will depend on how their businesses adjusts to the new world. Not all fossil fuel producers are the same. Coal generates twice as much carbon as gas to produce the same amount of energy. Oil is somewhere in between.
So coal producers will bear the brunt of the impact, and these are the focus for many divestment strategies. In contrast, gas producers will benefit from the lower carbon content of their fuel relative to other options. Companies with lower-cost operations will be better able to withstand falling consumption. Low-cost producers biased towards gas production sit at the more attractive end of the spectrum and high-cost coal producers are more exposed.
Investors will need to be able to sort the best protected from the most exposed, but companies’ responses to the challenge makes shareholder engagement potentially influential. Many investors, including ourselves, have been vocal in calling for more robust planning and greater transparency. There are signs that pressure is paying off. In the past few months, Exxon has announced that it will publish analysis of the impacts of climate change, and Shell has set a goal of halving the carbon intensity of the energy it produces.
Although there might be good reasons for individual charity investors to divest from fossil fuels, particularly the worst-offending business models, evidence suggests that long-term investors can influence corporate practice through dialogue, helping to steer us towards a lower-carbon future.
Kate Rogers is head of policy at Cazenove Charities