Author: Sarayu Krishnan
Bio: Sarayu is a student at the Graduate Institute of Geneva hoping to leverage her background in consulting and sustainability to increase private sector engagement in issues relating to climate change.
Last year, I had keenly followed the news on Oil and Gas companies, particularly about their Net-Zero commitments. Equipped with the critical thinking and financial tool skills acquired through the SDG Financing course at the Graduate Institute, I have especially focused on a particular aspect of current oil & gas companies over the past weeks: the disinvestments from these companies due to the concern for climate change.
The question “is disinvestment by asset managers an effective tool to prevent the larger issue of carbon emissions in line with the Paris agreement?” piqued my interest due to the slew of disinvestment strategies pursued and I hope to explore this question with you here.
Some of the notable disinvestments have been that of Waltham Forest, which is the first local government in the UK to announce that it will terminate all its fossil fuel investments. In the US, we also observe that the New York State’s pension fund is gearing up to sell its energy companies that do not have plans to cut their emissions and transition away from fossil fuels (Temple-West, 2021). In the current context of 2021, the EU's biggest pension fund ABP announced its $17 billion divestment plan followed by the $16 billion worth of Ford Foundation’s announcement that it will cease to invest in fossil fuels (Marsh, 2021).
The fundamental puzzle in this development is that there is no guarantee that a strategy of divestment will reduce carbon emissions. Firstly, simply selling fossil-fuel stocks does not automatically lead to a reduction in fossil fuel demand. The IEA is predicting that the oil demand will continue to grow by 1.1 million barrels per day by 2040, with the bulk of the demand coming from Asia (IEA, 2021). Divestment in such a scenario would simply lead to oil and gas assets moving to the hands of investors who are less sustainably motivated. Secondly, it does not continue to increase the transparency and accountability of fossil fuel companies through consistent pressure to improve environment disclosures and standards. A financial institution, the Maine Pension Fund, affirmed this argument by highlighting that divestment does not allow asset managers to engage with companies and ‘stay in the game’ to drive transformation.
If disinvestment is a solution to band-aid to climate commitments and makes firms simply ‘look good’ by washing their hands off fossil fuels, then a possible alternative should be ‘engagement’. Engagement, in the literature, is the ongoing dialogue between an asset manager and the leadership of invested companies to ensure effective management of risks and opportunities (Maximilian Funk & Walker, 2021). This strategy could alleviate the woes of disinvestment by leveraging the stake that asset managers have in fossil fuel companies to transition to a low carbon future. Asset managers have the ability to bring in shareholder resolutions on climate disclosures and promote more transparency. In the same vein, asset managers can also oppose management decisions that violate climate goals (Carlin, 2021). An illustrative example is the Climate Action 100+ initiative which is an investor initiative to ensure greenhouse gas emitters take necessary actions on climate change. Investors with $55 trillion in assets under management are engaging companies to improve climate-related financial disclosures (Climate Action 100+, 2020). Another example is the shareholder-backed activism of Engine1 which backed a seat in Exxon Mobil to push for a transformation of the company (Quinson, 2021).
Of course, there are limitations to engagement as well. It could be a futile effort if companies simply engage by driving no real change at the corporate level (Mooney, 2021). Furthermore, the issue with a pure engagement strategy is that fossil fuel companies’ net-zero commitments often lack substance and simply cover emissions only directly related to their production processes rather than also covering emissions that relate to the consumers of their products. Thus, to show real commitment while pursuing an engagement strategy, asset managers have to design and employ measures and demand fossil fuel companies to show elaborate strategies to reduce all the scopes of their emissions: Scope 1, 2 and 3.
Going back to the question set at the outset of this article, I am happy with the current ‘grey’ combination of answers found to whether disinvestment solves or causes problems to climate commitments. Disinvestment cannot be the only solution to dealing with fossil fuel companies. Effective engagement along with disinvestment surrounded by a tight and effective policy system with carbon pricing is required to ensure a move towards net zero. The lack of a clear-cut answer to my puzzle is perhaps a reflection of the larger picture of climate finance we are dealing with. Ruling out any one strategy or not engaging stakeholders will simply make the fight harder and we cannot afford that.
Author: Sarayu Krishnan
Editor: Khaliun Purevsuren
Carlin, D. (2021, March 4). The case for fossil fuel engagement. Forbes. Retrieved November 11, 2021, from https://www.forbes.com/sites/davidcarlin/2021/03/02/the-case-for-fossil-fuel-engagement/?sh=5a2de810d726
IEA (2021), Oil Market Report - October 2021, IEA, Paris https://www.iea.org/reports/oil-market-report-october-2021
Marsh, A. (2021, October 26). Bloomberg.com. Retrieved November 11, 2021, from https://www.bloomberg.com/news/articles/2021-10-26/fossil-fuel-divestment-supported-by-investors-with-39-trillion
Maximilian Funk, C., & Walker, R. (2021, July). Insights Environmental, social engage or divest ... - ssga.com. State Street Global Advisors. Retrieved November 11, 2021, from https://www.ssga.com/library-content/pdfs/insights/engage-or-divest.pdf
Mooney, A. (2021, November 9). Stay or sell? the $110TN investment industry gets tougher on climate. Subscribe to read | Financial Times. Retrieved November 11, 2021, from https://www.ft.com/content/ee08d61d-4c98-4398-9971-93036d67e91e
Principles for Responsible Investment. (2020, August 18). Climate Action 100+. PRI. Retrieved November 11, 2021, from https://www.unpri.org/collaborative-engagements/climate-action-100/6285.article
Quinson, T. (2021, July 7). The case against fossil fuel divestment - BNN Bloomberg. BNN. Retrieved November 11, 2021, from https://www.bnnbloomberg.ca/the-case-against-fossil-fuel-divestment-1.1626155
Temple-West, P. (2021, January 27). The ESG Investor's dilemma: To engage or divest? Financial Times. Retrieved November 11, 2021, from https://www.ft.com/content/814cbd2c-00db-41b7-91af-28435301a8a2