Denmark’s Unipension unveils study by PRI’s Skancke urging fossil fuel engagement, not divestment

PRI Chair advises pension investor in a personal capacity

Danish pension administrator Unipension has released a study by Martin Skancke, in which, writing in a personal capacity, the Chairman of the Principles for Responsible Investment strongly recommends investors engage with fossil fuel companies rather than divest them.

Created in 2008, Unipension manages DKK115bn (€15.4bn) in assets on behalf of three pension schemes, AP (for architects), MP (for academics and psychologists) and PJD (for veterinarians). They currently have around 125,000 members between them.

For the last two years, AP, MP and PJD have faced resolutions backed by just a fraction of their membership calling for divestment from fossil fuels on ethical grounds. But despite the resolutions, Unipension, which has 3.9% of its assets in fossil fuels, has not been directed by the three underlying schemes to exit the sector. Its Chief Investment Officer, Niels Erik Petersen, is a member of the PRI Association Board which Skancke chairs and Unipension was not among a group of Danish asset owners that left the PRI in late 2013/early 2014.

In the 38-page study, which he conducted as a private consultant for Unipension, Skancke first establishes that fossil fuel companies pose a risk to investors because of their impact on the climate. “Investors should focus on actions that address the source of that risk by limiting the capacity of fossil fuel companies to invest in projects that are not viable under reasonable assumptions about climate policies,” he states. One reasonable assumption post-COP21 is that governments will attempt to limit global warming to 2 degrees Celsius in part through tighter regulation of carbon emissions.

As for a ‘carbon bubble’, Skancke says that aiming to exclude an entire sector based on this assumption “is not appropriate as part of the strategic benchmark set by the fund owners”.He goes on: “It is generally not a proper role for fund owners to make time-critical investment decisions based on perceptions of mispricing in the market.” He argues divestment results in carbon risk being merely redistributed to other investors.

“Responsible investors,” Skancke argues, “should focus on environmental consequences and be conscious of the potential effects if all environmentally aware investors divest from fossil fuel companies.

“Pension fund investors are not a climate policy instrument.”

“The issue is thus not whether investors will own these assets, but which investors will hold them.”

“Investors cannot through their own actions bring about a sufficient reduction in greenhouse gas emissions to achieve climate change objectives,” he continues, adding it is not reasonable to expect investors to solve a climate policy problem there the political system has so far failed: “Pension fund investors are not a climate policy instrument.”

So investors should engage with the companies rather than divest them, says Skancke. Divestment, moreover, could have unwanted consequences. “For example, long-term coal supplies can be secured at low-cost and the incentive to switch to other sources of energy (like renewables) becomes weaker. So there is a potential risk that divestment of coal-related assets will delay the transition to a low-carbon economy,” adds Skancke.

However, what impact of Skancke’s study will have on Unipension is unclear following recent turmoil at the administrator. On December 7, Unipension’s two smaller backers, AP and PJD, abruptly announced they would leave the administrator to join rival Sampension. Unipension’s Chief Executive Cristina Lage resigned over the move and will be replaced by Jens Munch Holst, its current Chief Financial Officer. Link