FTSE joins Blackrock to help investors avoid fossil fuels

by Pilita Clark, Environment Correspondent, Financial Times, April 28, 2014

©Getty

An anti-fracking protester at a drilling test site near Salford, in Greater Manchester.

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.

. . . 

‘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.

http://www.ft.com/intl/cms/s/0/14787a44-cef6-11e3-ac8d-00144feabdc0.html

Australians Divest From the ‘Big Four’ Banks That Fund Fossil Fuel Projects

by 350.org, EcoWatch, May 2, 2014

Today and tomorrow hundreds of customers with Australia’s Big Four Banks will close their accounts in a statement against the banks’ investments in new coal and gas projects. These customers will be taking part in Australia’s first “National Days of Divestment Action” organized by Market Forces and 350.org Australia.

Below, a slideshow of the first day of Divestment highlights conscious residents who are taking a stand:

Since May of last year, hundreds of customers have “put their bank on notice” and pledged to move more than $100 million AUD out of the Big Four banks unless they commit to ruling out future loans to coal and gas projects.

This is the first time that customers of Australia’s largest banks have been mobilized for a divestment action of this scale. Since 2008, Westpac, ANZ, NAB and the Commonwealth Bank have loaned a collective $19 billion AUD to new coal and gas projects, including the controversial Abbot Point coal terminal and the Maules Creek coal mine.

“The rapid expansion of coal and gas in our country at the expense of communities, other industries and the environment is cause for concern for a great many Australians,” said Julien Vincent, lead campaigner for Market Forces. “By moving their money to banks which do not fund fossil fuel projects, individuals are making a statement that it is not socially acceptable to profit from the destruction of our planet.”

The key objective of the “National Days of Divestment Action” is to cause a social stigma around fossil fuel investments in a similar manner to the boycotts against the South African apartheid regime and the tobacco industry.

This is the latest phase in the rapidly growing fossil fuel divestment movement, which has won support from high profile individuals such as  Archbishop Desmond Tutu, World Bank President Dr Jim Yong Kim and Head of the UNFCCC Christiana Figueres. 

“Banks worldwide are fueling the climate crisis with investments in fossil fuels that also expose them to a huge financial risk,” said Tim Ratcliffe, 350.org European divestment coordinator. “The global divestment movement is challenging this gamble with our money and our future.”

“To prevent climate catastrophe, 80 percent of the known fossil fuel reserves need to remain underground. The days where it was acceptable to invest in fossil fuels are over. There is a groundswell movement building up and the banks need to start listening,” Ratcliffe added.

Fossil fuel companies are currently grossly overvalued. The vast majority of their carbon reserves is unlikely to be exploited, which will turn them into stranded assets. For example, a report commissioned by the Greens/European Free Alliance Group of the European Parliament assessed the risk the exposure to high-carbon assets poses to Europe’s top 43 banks and pension funds. It concluded that more than €1 trillion in European financial institutions is at risk from the growing carbon bubble.

According to a study conducted by Oxford University, the fossil fuel divestment movement is the fastest growing divestment movement in history. It has already seen numerous institutions committing to divest and is making an impact in the financial community, as well. The Norwegian Sovereign Wealth Fund, the world’s largest investment fund, recently announced an investigation into whether it should divest entirely from fossil fuels. Similarly, just this week, the world’s largest fund manager BlackRock teamed up with London’s FTSE Group to create a new set of indices excluding fossil fuel companies.

Last month’s report by the Intergovernmental Panel on Climate Change also recommended that $30 billion be moved out of fossil fuels each year to keep warming below the two degree threshold that international governments have committed to.

“Companies are becoming increasingly sensitive to the financial and reputational risks associated with investing in fossil fuels,” said Blair Palese, CEO of 350.org Australia. “At the end of the day, no company wants their logo displayed on a weapon of mass destruction.”

http://ecowatch.com/2014/05/02/australians-divest-from-banks-fund-fossil-fuels/

More institutional investors consider divesting from fossil fuel stocks

by Glen Yelton, GreenBiz.com, April 9, 2014

This article originally appeared at IW Financial.

Investors have been continuing the trend toward environmental activism during the current proxy season, with more shareholder resolutions on environmental issues being filed in 2014 than any previous year.

Shareholder support for these initiatives has also been rising, showing corporate managers that they will ultimately need to address environmental, social and governance (ESG) issues one way or another, whether they take a proactive approach or wait for the relevant decisions to be made for them by investors. Over the last decade, the number of sustainability-related resolutions receiving at least 20 percent support has more than tripled.

As a result, some corporations seem to have become more open to meaningful engagement on ESG issues. The recent announcement that ExxonMobil, the largest American energy company, has agreed to publish a "Carbon Asset Risk" report is particularly noteworthy.

However, despite the signs of progress being touted by members of the engagement camp, activist investors and organizations continue to make the case for divestment from fossil fuel companies, arguing that it sends a much more powerful message about the need to start taking action on environmental issues.

The Carbon Tracker Initiative has identified the top 200 fossil fuel companies, ranked by the size of their carbon reserves. Many advocates of divestment point to this list as the best place to start. However, there are plenty of other questions remaining for investors considering divestment.

Analyst: Divestment advocates focus on long-term value

In a recent article for Responsible Investor, independent analyst Paul Hodgson called attention to two of the most important questions facing the divestment movement today: how can institutions be convinced to divest and how will the process of investors moving their money out of fossil fuel stocks actually work?

The Fossil Free campaign advocated by 350.org urges city and state governments, educational, religious and other types of institutions that "serve the public" to immediately freeze new investment in fossil fuel companies and sell any shares they currently own within five years. With university endowments alone controlling hundreds of billions of dollars in investments, it is clear that this action could put a significant amount of pressure on major fossil fuel companies.

However, Hodgson concedes that for most institutional investors, the process is rarely as simple as it may sound. For starters, these organizations have to sell their constituents on the idea that investments which have proven to be highly profitable in the past will start to decline in value and become unacceptably risky in the relatively near future. This may be a challenge, but as 350.org advises, stakeholders simply need to "do the math."

Fossil fuel companies' valuations are based in large part on their possession of about $20 trillion worth of carbon reserves. However, a large portion of these assets will likely be rendered "unburnable" at some point, due to governmental efforts aimed at limiting global warming to 2 degrees Celsius. The International Energy Agency has previously calculated that, in order to meet the 2-degree target, which has been agreed to by nearly every country on Earth, the energy industry will have to write off up to 80% of its fossil fuel reserves. Recent research suggests that even more aggressive limits on carbon consumption may be required to sustain a reasonable chance of achieving the international community's climate goals.

The latest report from the Intergovernmental Panel on Climate Change (IPCC) indicated that, given current trends, climate change will likely exceed the 2-degree threshold and cause more severe effects on ecosystems and economies than previously anticipated. As these impacts become more clear over time, it could galvanize political support for stricter emissions limits and hasten the devaluation of fossil fuel reserves.

If governments follow through on their commitments and $16 trillion in assets become stranded, it seems inevitable that fossil fuel stocks will tumble in value. It is a slippery slope for investors to stand on. Even faced with these facts, it is still difficult for institutions, particularly larger ones, to move forward with divestment initiatives. Hodgson looked at a few current examples to highlight the challenges divestment advocates face in building momentum at their organizations.

Despite challenges, divestment initiatives gaining momentum

After the Board of Supervisors of San Francisco City and County passed a resolution urging the San Francisco Employees' Retirement System (SFERS) to divest from fossil fuel stocks, the SFERS board opted to slow down and gather more information before making any decisions. Specifically, the retirement system board said it would review its approach to ESG issues and analyze relevant proxy voting strategies.

At the University of Maine at Orono, there are 40 different managers involved with the school's endowment. The sheer number of decision makers involved is a sign that it could take years just to get an institutional commitment to divestment, let alone actually carrying out the process.

For Unity College, a small liberal arts school that focuses on environmental science with a $15 million endowment, the process was somewhat simpler. However, the college still faced issues. With its endowment invested in exchange traded funds (ETFs), Unity could not guarantee that it would have zero exposure to fossil fuel stocks. It set a goal of reducing such holdings to less than 1 percent of its portfolio by focusing on non-energy ETFs. The school's CFO told Hodgson that there has not been any substantial impact on the fund's performance since it began divesting in 2012.

Despite the challenges it faces, the divestment movement has a growing number of advocates and successes. Hodgson notes that nine colleges, 22 cities and towns, two counties, 22 church foundations, 25 private foundations and a variety of other organizations have committed to going fossil free. Divestment is also gaining attention abroad, with 350.org's campaign seeing "substantial expansion" in Europe, Australia and New Zealand.

Is there room for a nuanced approach to divestment?

Beyond the hurdles to broader acceptance of divestment, there are also complications that will emerge within the divestment process once commitment reaches a critical mass. For example, those institutions that are planning to divest could see their holdings devalued if other investors begin divesting en masse. It is also difficult to predict what would happen if the market was suddenly flooded with fossil fuel shares.

As clients contemplate next steps in their approach to reducing the carbon content of their portfolios, it is becoming increasingly clear that there may be a need to develop more nuanced strategies. For many clients, practical considerations may be seen as additional hurdles to implementing the straightforward approach to divestment advocated by 350.org and other similar organizations. Tax implications, diversification, portfolio risk profiles, and fiduciary responsibilities must all be taken in to account in the implementation of any divestment strategy.

Some clients are choosing to approach the divestment of these companies in an incremental, phased approach, similar to the strategy used by Unity College. Such an approach allows for the sale of targeted companies under appropriate market conditions with the end goal of achieving divestment benchmarks in a longer timeframe, while addressing the practical considerations outlined above. However, as also noted earlier, such an approach could become a liability if broader acceptance of the divestment strategy emerges.

These uncertainties will create challenges for advocates of divestment, but it seems clear that a growing number of capital market participants would prefer to deal with these potential issues as they arise, rather than face the certain risks of remaining invested in fossil fuel companies' unsustainable business models.

IW Financial is currently preparing a report that provides a closer look at how investors are quantifying financial risks associated with owning fossil fuel stocks. Additionally, our firm works closely with clients to design and implement divestment plans using any of the above concepts — from complete divestiture to incremental portfolio realignment.

http://www.greenbiz.com/blog/2014/04/09/more-institutional-investors-consider-ditching-fossil-fuel-stocks