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Asset managers discuss choice to engage, not divest, from fossil fuel companies

Some asset managers prefer to engage with fossil fuel companies on climate change rather than divest from the companies because they can effectively push for change as shareholders and doing so helps them maintain a diverse investment portfolio, asset manager officials said. One official also cited uncertainty over whether or when long-term climate risks will hurt the bottom line for fossil fuel companies.

"One of the things I realize is climate change is happening, it is a certainty, but ... what those impacts are going to be is uncertain," California State Teachers' Retirement System Portfolio Manager Brian Rice said. "The uncertainty tends to paralyze investors, so we said, 'OK, if we invest in a 1.5 scenario and no one else does, where does that leave us?'" he said at a June 11 conference in Minneapolis hosted by the US SIF: The Forum for Sustainable and Responsible Investment. Rice was referring to a scenario in which the world acts aggressively and quickly to limit global warming to 1.5 degrees Celcius relative to pre-industrial levels to blunt the impacts of climate change.

Financial institutions have come under pressure from some environmental groups to divest from fossil fuels even as several of those institutions, particularly pension funds in California and New York, have opted to instead pressure the companies on climate issues through shareholder resolutions, direct engagement and investor activist initiatives such as Climate Action 100+. New York Comptroller Thomas DiNapoli recently released a climate action plan for the state's pension fund that punted a decision on divestment to a later time, citing the benefits of engagement and the funds' own fiduciary responsibility to its members.

During the conference, Rice indicated he does not know if or when California State Teachers' Retirement System would divest from fossil fuels but said the fund continues to monitor the industry. "Our approach is that there's a viable use for petroleum beyond gasoline and energy," Rice said. "To some degree, I think fossil fuels will be a part of society, it's just ... the gradual de-use of that over time [and] how do you know how fast that happens. ... It's something we try to be cognizant of in terms of just divesting from, I don't see that anytime in the near future."

Hermes Investment Management Ltd.'s head of investment, Eoin Murray, indicated the investment manager has historically opted to quietly engage with companies behind the scenes over a period of years.

"I think there is value in incremental change," Murray said to an audience member who pointed to scientific reports that have warned that the world needs to act to limit global warming by 2030. "I think you're right, let's not lose sight of the 2030 targets that have been set," he continued. "We have a very clear course of action and an objective to meet by that time to prevent what could be disastrous for the planet." But Murray also contended, "There is a big argument for trying to take as many people with us as possible on this journey."

Hermes is reconsidering its practice of engagement and not divestment, Murray said. "Without wishing to make promises, I think we will end up, particularly for coal ... with an exclusion."

Wespath Institutional Investments , which manages investments of the United Methodist Church, already largely excludes investments involving alcohol, tobacco, adult entertainment, weapons, gambling and private prisons. And it has a policy to not invest in certain coal-concentrated utilities and companies.

But Wespath has found that the exclusionary process comes with challenges, said Susan Chung, Wespath managing director of investment management.

Among other limitations, "you don't get an active voice with a company ... but also from an investment portfolio perspective ... when the opportunity set is smaller, your return potential is limited as well. And so we've tried to think of other ways to address this," Chung said.

Wespath has taken a number of additional routes to push for change on environmental, social and governance issues, Chung said. Those include direct engagement, pressuring higher-level asset managers to engage with companies, and joining larger multi-institution initiatives pushing companies to assess and address climate risks and opportunities.