BlackRock, the world’s biggest fund manager, has teamed up with London’s FTSE Group to help investors avoid coal, oil and gas companies without putting their money at risk.
In a sign that a global campaign against fossil fuels is entering the financial mainstream, companies that extract or explore for such fuels are excluded from a new set of indices created by FTSE, a large provider of stock market indexes
Several market benchmarks have already been developed to cover companies likely to profit from tougher environmental regulations, such as renewable energy or water management groups.
But the FTSE ones are believed to be the first from a leading index group that specifically bar fossil fuel companies.
A precise list of excluded companies has not been released but some of the best known names on the London Stock Exchange will be targeted, from oil and gas producer BP to coal miner BHP Billiton.
The groups that are included range from tech giants such as Apple, Google and Microsoft to a number of large US banks and pharmaceutical companies such as Johnson & Johnson of the US and Switzerland’s Roche.
The move comes as climate-change activists tack towards arguing that fossil fuels are not just dangerous for the environment but an increasingly risky financial bet with governments considering tougher action to curb global warming.
This has prompted growing interest from investors keen to understand the risks of fossil fuel holdings, said Kevin Bourne, a FTSE managing director.
“This is one of the fastest-moving debates I think I’ve seen in my 30 years in markets,” he said.
A US campaign modelled on the 1980s anti-apartheid divestment movement has led several small colleges and endowments there to sell out of their fossil fuel holdings.
But larger groups, including Harvard University, have resisted pressure to follow. The FTSE indices are part of an effort to broaden the campaign further.
They were prompted by the Natural Resources Defense Council, a US environmental charity, which helped design the indices and is providing seed capital for a financial product that BlackRock is launching to track the new benchmark.
“So far it’s been relatively niche players that have divested and that is why this launch is game-changing,” said Peter Lehner, NRDC executive director.
“What this aims to do is bring the opportunity for fossil fuel-free investing mainstream.”
Still, hurdles remain when it comes to large pension funds shifting big pots of money away from the fossil fuel industry, said Craig Mackenzie, investment director at Aberdeen Asset Management.
“The question is, will going fossil free have an investment performance impact and there is a significant chance it will,” he said, pointing to recent research by MSCI, another index provider, showing a fossil fuel free investment strategy would have slightly underperformed the broader market during the past 10 years.
That makes such a strategy very difficult for pension funds with a fiduciary duty to their members, he said.
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‘Carbon bubble’ drives debate
When a small London think-tank named CarbonTracker started publishing reports on something it called the “carbon bubble” three years ago, few took too much notice.
Today, there is much debate about its idea that more than $670bn is invested annually in fossil fuel assets that could plummet in value if governments try to curb climate change. Many in the financial sector have started analysing it, including some fossil fuel companies themselves.
ExxonMobil, the US oil group, issued two reports in March looking at the implications of climate change for its business. It rejected the notion that policies to cut carbon dioxide emissions would leave many of its assets “stranded,” or unable to be exploited profitably.
Others have reached different conclusions. The fossil fuel industry stands to lose $28tn of gross revenues during the next 20 years if countries ever reach a meaningful deal to crack down on climate change, European financial services group Kepler Cheuvreux said in a report last week.
So far, only a handful of smaller funds have taken the leap to sell out of fossil fuel holdings, but earlier this year, Norway decided to see if its mammoth oil fund should do so, a step that would transform the debate.
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