At a news conference in Oslo yesterday (December 4), an expert panel unveiled a report recommending that Norway’s $870bn (€701bn) Government Pension Fund (GPFG) should not “automatically” divest from fossil fuel companies.
Instead, the report suggested the giant fund embrace “active ownership,” which includes engaging more with these firms to mitigate the effects their business has on climate change. The report also said divestment was an option, but that it should only be used on a case-by-case basis – for example if the Fund did not succeed in changing the behaviour of the “worst climate offender.”
By not recommending outright divestment, the six-member panel differed with the views on fossil fuels taken by other Nordic investors recently. In October, Swedish buffer fund AP2 said it would completely exit the sector due to the risk of “stranded assets.” Then last month, Norwegian pension provider KLP said it would divest 20 coal companies because their business was contributing directly to climate change.
Responsible Investor interviewed the head of the expert panel, Martin Skancke, after the news conference. Skancke, an economist and former senior official at the Norwegian Finance Ministry, is also the Chairman of the Principles for Responsible Investment (PRI).
Can you explain the thinking behind your findings?
Martin Skancke: Even the Oil Fund [as the Government Pension Fund is known] has divested from some coal and oil companies based on its view that their business model was not sustainable. But our view is that even if we are successful with climate policy, fossil fuels will still be around for several decades. No one wants coal production to end overnight, for that would have very dramatic social consequences. It’s therefore not a question of whether fossil firms will have shareholders but whether these owners are good ones from a financial and an ethical perspective. A good owner is one who is active and engaged and can promote change in this industry. We think that given its size, long-term orientation and the fact that it comes from a very transparent and open society, Norway’s GPFG is perfect for that role. That said, there has to be some sort of safety valve so that the worst offenders on climate change can be excluded – and not just the producers but also its consumers. But this has to be done on a case-by-case basis and only after active ownership hasn’t worked.When you say fossil fuels will remain with us for the foreseeable future, does that mean that the panel sees them as a permanent part of the mix?
Skancke: Fossil fuels will not remain with us forever. We have to transition out of fossil fuels and into renewables at some point. But this will take a long time, a gradual transition over decades. This means that many fossil fuel firms have to transform themselves. And they can do it, as they have the engineering, marketing and product management skills. But in order to transform, they need the support of active, long-term oriented owners.
Though it promised to do so in the late 1990s, BP is an example of a company that has not gone through with the transition to renewables. How should a responsible investor like the GPFG deal with that?
Skancke: Although we advocate active ownership, we have also said that divestment can happen if a company has high CO2 intensity in its production and there are no prospects for change, even with engagement. The issue is not whether we should divest or not from fossil fuel companies or not. It’s whether we should automatically divest. That is not ideal, as investors have no way of engaging with them as owners.
Are there any other grounds for (ultimate) divestment in your view?
Skancke: The criteria we propose cover omissions as well as acts. For instance, if there is emission-reducing technology available and they haven’t employed it, that’s a problem. Another issue that I think is appropriate for engagement is how the companies deploy excess capital that they earn through existing operations. They may want to invest that in their existing business. The shareholder, however, may find that it could be better if the money were paid out in dividends so that it can be re-invested in other sectors, for example renewables.
Speaking of engagement, your panel calls on Norges Bank, the manager of the GPFG, to step up its efforts. Why is this necessary?
Skancke: We came up with some suggestions for Norges Bank so that it can help the Oil Fund be more of an active owner. One example is increased reporting on the climate risks associated with the fossil fuel companies in the portfolio. It could also be clearer about how it assesses the sustainability of business models, as has happened at other value-driven investors.
In the report, the panel says the “stranded assets” argument is not inherently new. It seems, though, that Carbon Tracker has really hit onto something by warning that the expansion of renewables and tighter regulation of carbon emissions could lead to fossil reserves being left untouched…
Skancke: What we’re saying is that the stranded assets argument as such is not new. Of course, the application of it to the fossil fuel industry is very relevant considering climate change and the possible cost of CO2 emissions in the future. But in principle, any asset can be stranded, and there have been a lot of examples of that in the past. They can be stranded either because of technological changes, which is a shift along the supply curve, or because demand changes. The manager of an oil company or a coal company can have incentives to expand their business, even if that is not optimal from the point of investors.So we have what is called a ‘principal-agent problem,’ which is a natural arena for an engagement effort by investors. And indeed, if you look at Carbon Tracker’s report, it doesn’t really recommend divestment. Rather, it makes concrete suggestions for active ownership, to include engagement.
Does the current situation – namely plunging prices on oil, gas and coal – already prove Carbon Tracker’s point?
Skancke: It’s true that energy markets are currently being affected by technological and demand change. Now that the threat of stranded assets looms, investors in fossil fuel firms have to engage on the robustness of their business strategy. They also have to ask the companies: How robust are your business plans given various scenarios regarding climate change?