Trucost, the environmental data group, says it has expanded its service recently to include the “embedded emissions from fossil fuels” – or potential ‘stranded assets’ – as major investors worldwide debate their exposure to fossil fuels.
The firm said: “Investors need to incorporate these distinct yet convergent risks into their existing analyses. Doing so, however, is no mean feat. As with many areas of ESG analysis, there is currently a lot of noise enveloping the subject of fossil fuel stranded assets, and it can be a task in itself to separate the objective analysis from the polemic.”
It continues: “Investors essentially have two options when addressing the concept of fossil fuel reserve exposure: do nothing, or do something.” Those wishing to ‘do something’ then have three broad strategies, Trucost says in a new briefing note.
The first is divestment of some or all fossil fuel holdings. The second is engagement with fossil fuel firms while the third option is what it terms ‘carbon hedging’ – where investors cut their portfolios’ carbon exposure and invest in the replacement technologies of the future. All three approaches require the potential future carbon risk of the portfolios to be measured.
Trucost added it has already worked with several clients who are keen to quantify their investment exposure to potential asset stranding scenarios. “In 2014 alone, we at Trucost have seen a dramatic increase in investor interest in climate and carbon performance of investments,” the firm says. Last month investment consultant Cambridge Associates advised investors to analyse their portfolios – at both the manager and portfolio level – for exposure to fossil fuel companies.
It comes as institutional investors are increasingly starting to assess their exposure to fossil fuel assets. The California State Teachers Retirement System (CalSTRS) has been in correspondence with members who are part of the CalSTRS Network of Educators for Fossil Fuel Divestment, with CEO Jack Ehnes setting out the fund’s preference for engaging rather than divesting fossil fuel firms.Ehnes had earlier discussed the issues around divestment in a blog posting almost exactly a year ago. The members are calling for the issue to be brought before CalSTRS’ Investment Committee.
CalSTRS Portfolio Manager Brian Rice, who oversees the fund’s Green Initiative Task Force, explained to RI that companies it invests in will be in the index for decades and CalSTRS wants to know how they are looking at potential opportunities, assessing risk and making capital allocation decisions. Referring to the response by ExxonMobil earlier this year to investors seeking more details about its stance on climate asset risk, Rice said: “You could say it could be a bit more robust – on the other hand, they ARE willing to sit down and do the analysis.” He added: “I think they hear what we’re saying. We’ll keep talking to them.”
Fellow California giant, CalPERS, at $291.3bn the largest US pension fund, earlier this year rejected calls from elected officials in its home state to divest from fossil fuel companies, saying it prefers to engage with the firms to solve climate change.
Meanwhile, Cary Krosinsky, Executive Director of the Network for Sustainable Financial Markets (and former Trucost Senior Vice President) has argued that engagement and corporate governance run “the danger of being the cause of climate change if continuing to enable the status quo”.
“That might seem an extreme statement, but institutional investors have become the predominant slice of ownership of public companies over the last generation or two.” He argues in a blog posting (On Corporate Governance and Climate Change) that large investors such as BlackRock, Fidelity, Vanguard and State Street remaining positioned as lead investors in coal, oil and gas companies is “basically enabling the status quo on climate change”. He says: “Engaging on transparency on this issue simply isn’t enough.”