This blog post was originally published in November 2019
Councils are declaring a climate emergency up and down the country and the Labour Party is proposing an ambitious policy package that adopts a carbon neutrality target of 2030. It looks like the City of London is on the Shadow Chancellor’s radar, with a progressive report on green finance strategy landing on John McDonnell’s desk waiting to be made into policy. Now it’s time for Labour and Co-operative local councils to ensure big business, big polluters can’t go on shirking their responsibilities with a new campaign of fossil fuel divestment.
In 2014 Oxford City Council became the first UK local authority to introduce a fossil fuel divestment policy and, in subsequent years, we’ve passed cross-party motions calling for the Oxfordshire Pension Fund to recognise that taking money out of fossil fuels is the right thing to do. Recently, openings have been created which campaigners and I are seeking to exploit, most recently with a workshop by the Pension Fund, where we achieved progress.
It makes no sense to invest in companies that undermine our future, yet councillors who are also Pension Fund committee members may be sustaining frameworks governing their investments that don’t recognise, or meet, a target to become carbon neutral by 2030. Now is the time for councillors who are Pension Fund committee members to move investments out of companies that extract and explore for fossil fuels toward new forms of clean energy.
Pension Fund Committees have resisted calls to divest from fossil fuel companies because they may have been encouraged by officers, financial advisors and even fund managers to pursue a policy of engagement with a view to changing the companies’ business practices such that they fulfil the Committee’s fiduciary duty to the beneficiaries and square with a safe and secure future for Pension Fund members. Too often Committee Members have raised concerns only to confront counterarguments on three grounds, all of which can be challenged by you and exposed by evidence as myths. Then you can make progress with ensuring your next written Statement of Investment Principles truly reflects your values.
Myth 1: Keeping Fossil Fuel companies in the portfolio increases portfolio value whereas so-called ESG is a source of financial detriment to Pension Scheme members
You may have heard the argument that pension scheme members might not care if their money is propelling the planet toward climate catastrophe if they get a better return. In a nutshell, performance is something to be traded off against environmental issues. But this ignores the fact that investment in fossil fuel firms has been a source of underperformance in the past and financial authorities warn that it will likely continue to be in the future. The pivot away from fossil fuels has hit China and India, now pouring money into renewables.
The dirty little secret of the Pension Fund industry is that investing in fossil fuel polluters produces worse returns not better. In the case of fossil fuel investments, the indices from Morgan Stanley, the Financial Times, and other providers show that indices excluding fossil fuel firms outperform those. Further, the Governor of the Bank and England Mark Carney suggests that portfolios containing fossil fuel firms could underperform going forward since they will end up holding stranded assets; that is, oil and gas reserves that can’t be extracted in future due to the tightening of global climate change legislation. A law-suit tsunami is looming. Just as tobacco companies have been taken to task for ravaging the lungs of smokers, fossil fuel firms are being brought to court for the damage they have done to the planet.
The regulatory regime surrounding these firms is also about to tighten like a noose as policy makers finally comprehend the shortening odds of catastrophic climate change, with a little bit of help from Greta, Extinction Rebellion, David Attenborough and the Sunrise Movement in the U.S. My personal preference would be a Labour Party manifesto pledge to require Pension Funds to poll members over whether they want their money invested in fossil fuel companies, and, if they reply “no”, to require that such money be invested in low or zero carbon or fossil free funds. That would be good for tackling climate change while at the same time empowering Pension Fund scheme members and building grassroots activism.
Myth 2: The Pension Fund is an island sitting outside the scientific and political imperatives of climate change
The defence is put up that a Pension Fund needs to be protected from environmental, and other social and governance, issues. This is a falsehood. Your Pension Fund is part of your broader society and should reflect its needs and concerns. The impact of the climate crisis is not limited to the poor performance of fossil fuel equities. If humanity goes on burning fossil fuels, the global economy will stop functioning, and in such a scenario the Pension Fund will be unable to meet its liabilities. “Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision”, to quote Lord Stern, the former World Bank Chief Economist.
Even the Conservative Government accepts the need for Local Government Pension Scheme (LGPS)-administering authorities to consider environmental, social, and governance issues (ESG), including climate considerations. Indeed, LGPS pension schemes are directed to take such considerations into account and include them in a written Statement of Investment Principles. Keeping in mind the point that financial detriment arises from investments in fossil fuel companies, not divestment, your Pension Fund Committee has a critical role to play. If your council has declared a climate emergency and adopted a target to become carbon neutral by 2030, the motion was passed on a cross-party basis, and a majority of Pension Fund members likely reside in your local authority area, it is in the interests of Pension Fund members to have an ESG framework governing their investments that is clearly recognising and working to meet a 2030 target.
Myth 3: Climate change engagement with fossil fuel firms works, divestment won’t
Contrary to the claims of those who defend the status quo, engagement has for decades been shown to be ineffectual in influencing fossil fuel companies’ behaviour. How many fossil fuel companies are investing significant sums in new energy sources? How many incorporate zero or carbon-neutral targets into their business plans? How many business plans are in line with or improve on the 2015 Paris Accord agreement over emission paths? Or the Government’s recent decision to bring a 2050 zero carbon target into law?
Engagement may only work if alternatives are available, but, without pressure, fossil fuel companies have no incentive to change their core business model. After all, production of fossil fuels is the reason for coal, oil or gas companies to exist. While remaining invested in fossil fuel firms in order to pursue engagement, your Fund is at risk of losing value because these investments are underperforming historically and, due to regulatory changes, set to continue to underperform. Not only could you help to move investments out of fossil fuel firms to reduce the strength of their core business model, but you could produce the same effect on a greater scale by moving money into alternative energy sources to fossil fuels.
Engagement should only continue with fossil fuel firms if they accept local, national, and multilateral carbon emission targets, progress against which can be tracked through the creation of meaningful timelines and the public sharing of relevant information. Where fossil fuel producing companies and related service companies are unable to commit, your Pension Fund should resolve to sell direct investments immediately. Passive investments should be transferred to a low carbon portfolio which then should be reduced to a zero-carbon fund as soon as possible.
Taking these practical steps at an accelerated pace will make progress on environmental issues, but also to go beyond the E in ESG. Thanks to the action of councillors such as Islington Borough Council’s finance chief and Vice Chair of Islington Pension Fund, Andy Hull, the London Borough of Islington’s Pension Fund has gone beyond divestment to seek decarbonisation while engaging on social issues such as poverty pay and executive pay.
Forging that new consensus
Creating a consensus that investment in fossil fuel firms is a financial detriment to Pension Scheme members is key. When you can show reluctant councillors on your Pension Fund Committee that their support for the status quo of fossil fuel investment means they are taking the far riskier position with respect to fiduciary duty obligations, you will surely make progress.
Creating a consensus among councillors of all parties if possible that their Pension Fund must be responsive to local needs and interests is game-changing. And finally, a consensus around the fact that engagement with fossil fuel firms through investment won’t change their behaviour, especially when you don’t require them to face targets and timelines for compliance, is critical. The consequence of non-compliance with targets and timelines must, for your Pension Fund, be divestment to exercise your fiduciary duty to protect the fund.
To quote no less an authority than the former President of the World Bank, Jim Yong Kim (and cautious Pension Fund officers don’t appreciate it if you quote unlikely messengers), “The so-called ‘long-term investors’ must recognize their fiduciary responsibility to future pension holders who will be affected by decisions made today.” Reducing our dependence on fossil fuels is the single most urgent challenge we face to avoid a climate crisis.
Already, the trend toward fossil fuel company divestment is accelerating, with $11 trillion of assets now carbon free. The smart money is ditching shares in coal, oil and gas companies but we can help it run out the door. Labour Councils can make sure that the UK Pension Fund industry is not the laggard. By promoting more robust engagement and divestment policies, you can secure a win-win for pension scheme members—they get to choose the ethically right course of action and protect their Pension Fund returns.
Fossil fuel divestment is a rare case of having your cake and eating it. In these troubling and unsteady times what is there not to like about that?