Thomas Pringle, a member of the Irish Parliament and author of legislation to divest the country from fossil fuels, speaks at an event in San Francisco.
Source: Associated Press
Concerns over the environmental, social and financial risks of climate change are fueling disagreement among global investors over whether it is best to divest from fossil fuels or to remain invested in companies producing and using them as a means of shaping decarbonization strategies.
"It's an ongoing debate," Judy Cotte, head of corporate governance and responsible investment at RBC Global Asset Management, said in an interview. "On the one hand, there are people who want to divest and don't want any part of the [fossil fuel] industry. On the other hand, there's the very real concern that if all investors who care about the environment were to divest, those shares would be picked up by other investors, maybe sovereign wealth funds from countries [that] don't care at all about the environment."
Nearly 1,000 institutional investors with $6.24 trillion in assets have committed to fully or partially divest from fossil fuels as of September 2018, with the insurance sector alone accounting for more than $3 trillion in divestment pledges, according to a recent report from Arabella Advisors. The report also cited a "new wave" of commitments from large cities and states, including New York City. Ireland is considering becoming the first country to formally divest from fossil fuels.
Environmental group 350.org calculates an even larger value for divesting institutions, at $7.18 trillion, in addition to 58,000 individuals pledging to divest $5.2 billion. The gathering force of the movement has led some of the biggest fossil fuel producers to list divestment as a risk factor in regulatory filings.
RBC Global Asset Management, a Royal Bank of Canada affiliate with $325 billion in assets under management, has so far played both sides of the debate, investing in and engaging with fossil fuel producers, but also offering a fossil fuel-free fund for investors who wish to screen out all coal, natural gas and oil companies. "I think there is a place for both strategies," Cotte said.
There are signs of robust investment activity supporting both approaches.
A recent RBC Global survey of 540 global pension plans, money managers, insurance companies, banks and other financial industry stakeholders on their environmental, social and governance investment strategies identified a strong preference toward engagement. Only 8.1% of respondents said divestment is more effective than engagement at driving decarbonization, while 45.1% said engaging with fossil fuel companies is more effective and 17.7% said the two approaches are equally effective.
"I am a big fan of engagement versus divestment," said Kenneth Adams, managing director of investment grade research at Nuveen LLC, a subsidiary of TIAA. The Teachers Insurance Annuity Association of America, with nearly $300 billion in assets, has resisted a call from California's insurance commissioner for insurance companies to divest from coal.
By engaging with portfolio companies on their greenhouse gas emissions reduction plans, "we consider ourselves helping to facilitate the clean energy transition," Adams said in an interview on the sidelines of the Edison Electric Institute Financial Conference, held Nov. 11-13 in San Francisco against a backdrop of smoky skies from the worst wildfire in California's history.
While maintaining investments in and engaging with fossil fuel companies has widespread support as a means of reducing emissions, an increasing number of institutional investors are sending a more direct message by simply pulling their money out.
"This economy, although it has some brilliant accomplishments in the past, is now hurtling us towards a climate disaster and social unrest worldwide," said Kat Taylor, CEO and co-founder of Beneficial State Bank, in a recent panel discussion in San Francisco. Based in Oakland, Calif., the regional bank does not finance any companies that explore, develop or refine fossil fuels.
"Our stakeholders' wish is that all of our loans and all of our investment securities are supporting a new economy," Taylor said.
While Beneficial State Bank is a relatively small financial player, its strategy to steer clear of fossil fuels is catching on.
Among the major institutions to dump fossil fuel investments is Norway's Government Pension Fund Global, the world's largest sovereign wealth fund with roughly $1 trillion in assets, which divested from coal companies in 2015. Through 2017, the fund had divested in 68 companies over greenhouse gas emissions. Major insurers Allianz France SA and Swiss Reinsurance Co. Ltd. have both cut off investments in companies that generate more than 30% of their energy from coal or derive more than 30% of their revenue from coal mining.
"Fiduciary duty is driving large institutional investors to divest in order to manage climate and reputational risk, insulate their assets from growing financial stress in the oil and gas industry and align with the goals of the [Paris Agreement on Climate Change]," the Arabella Advisors report said. The report was issued ahead of the Global Climate Action Summit in San Francisco, where advocates issued a call to investors: boost divested global fossil fuel assets to $10 trillion by 2020.