Vacating their seat at the table: the rise of fossil fuel divestment

Belief in the power of engagement over divestment has been a core tenet for institutional investors when it comes to the systemically big polluters. The world’s largest investor engagement initiative, Climate Action 100+ (CA100+), is built on the premise that the world’s largest polluting firms can be nudged towards low-carbon futures, in part, through investor stewardship. 

To divest is to abdicate that duty, potentially handing ownership to a less scrupulous investor, as Simiso Nzima, Investment Director & Head of Corporate Governance for Global Equity, at Californian pension giant CalPERS recently told RI: “When an investor divests, they lose their seat at the table, and hence their ability to influence and drive change”. 

But are we beginning to see signs that some big investors’ faith is weakening, particularly when it comes to the ability of fossil fuel firms to transition to a low-carbon future? 

Last week saw a raft of big divestment announcements that suggests so. 

On Monday, two of New York City’s five public pension plans revealed that they had voted to divest an estimated $4bn in fossil fuel securities, with a third fund expected to make its decision soon. Those votes came almost three years to the day since New York City Comptroller Scott Stringer made the blockbuster announcement that the City’s five funds would explore divesting fossil fuel within five years.

Then on Friday, Bloomberg reported that Norway’s sovereign wealth fund has divested its entire portfolio of oil exploration and production companies, worth around $6bn.

And this weekend it was reported that Aviva Investors, the investment arm of the insurance giant, had put 30 of the world’s largest oil, gas, mining and utilities companies on notice that it would use “ultimate sanction” and ditch them, if they didn’t do more on climate. 

“As fossil fuel valuations have tanked and there's been a collapse in the valuation of utility companies focussed on fossil fuels, investors have suddenly sat up and said, ‘Oh, I thought this was an ESG issue, but it's really an investment issue'” – Mark Campanale

Arguably the boldest move, though, came at the end of last year, when Sweden’s €39bn state pension fund AP2 (also known as Andra AP-fonden) revealed it had effectively divested the entire energy sector – around 250 companies – from its global corporate bonds and equities portfolios. That decision, which included substantial exclusions around coal, oil and gas, brought  AP2’s bonds and equities into alignment with the EU’s recently defined and ambitious Paris-aligned Benchmarks. 

Paris-alignment clearly has big implications for investors when it comes to their fossil fuel holdings, and new research from HSBC suggests this is even greater for net-zero pledges. The global bank’s independent research house states that any financial institution with net-zero aspirations will find it “difficult” to “justify” holding bonds from oil & gas issuers. As of December, 30 institutions representing $9trn in assets have made a 2050 net zero commitment. Could these pledges drive a wave of divestment?

Mark Campanale, Founder of influential non-profit Carbon Tracker tells RI that “a lot of what is being called divestment is actually people coming to a rational investment decision based on prices and signals from the market”. The market, he says, “no longer believes in the fossil fuel growth story”. 

“As fossil fuel valuations have tanked and there's been a collapse in the valuation of utility companies focussed on fossil fuels, investors have suddenly sat up and said, ‘Oh, I thought this was an ESG issue, but it's really an investment issue',” he tells RI, adding that it’s also spurred on by the “extraordinary crescendo in the prices of clean energy stocks”. 

Oil and gas majors lost hundreds of billions in value in 2020, ravaged by the impacts of the pandemic and the war between Russia and Saudi Arabia over oil prices. But as dividends were slashed and assets written down, a number of renewable energy firms experienced major growth – Dutch energy storage company Alfen, for example, saw its value more than double last year. 

Last week, S&P Global Ratings added to oil majors’ woes, warning that they faced credit rating downgrades in the face of growing risks such as “the energy transition, price volatility, and weaker profitability”. A study by the International Energy Agency (IEA), comparing the performance of renewable stocks with fossil fuels over the last five and 10 years, found that renewables offered investors not only higher returns, but also lower “annualised volatility (a measure of investment risk)”.

“What you should be doing as an investor is fundamental valuation, an appraisal company by company, sector by sector, to determine business resilience and then calculate whether the market's priced it in,” says Campanale. “If you think it has, these are your overweights or holds. If you don’t think it has, that's your underweights and sells.”

Fraying investor patience also seems to be a driver of some of the recent divestment headlines.

Dutch manager MN’s axing of Exxon appears to be a case in point. The €130bn investor decided to divest following four years of unfruitful engagement. During that time it co-filed two climate-focused shareholder proposals that were successfully opposed by Exxon. Last year, MN escalated its efforts by voting against the company’s entire board.

Bas Bijleveld, Advisor Responsible Investment & Governance at MN tells RI that Exxon “didn’t respond at all” to its attempts to raise concerns around climate risk. Ultimately, he says, MN "lost trust” that the company would “move anytime soon in the direction we wanted to see it go”.

As MN made its decision, however, Exxon did make a concession to investors, publishing scope three emissions data for the first time, a disclosure MN had asked for in the past. 

“Our ambition is always to stay invested and help companies transform and shift in the right direction at a faster pace, but I do think we need to tighten the requirements and we may see an increasing amount of companies that are not able to make that transition fast enough” – Jan Erik Saugestad

MN's Head of Responsible Investment, Karlijn van Lierop, tells RI that they were aware of the disclosure, but that “it didn't change our view”, since “it didn’t change anything about the long-term strategy of Exxon, and that is what concerns us”.

Bijleveld says that Exxon is a good example of “where climate risks materialise into financial risk” because the company’s strategy assumes a high future price of oil, which could be used to justify spending on exploration and new reserves, which in reality may result in losses for investors. 

Another big investor to shed Exxon recently was Storebrand Asset Management. As part of its new climate policy, the $91bn Norwegian manager publicly ditched the oil giant along with five other companies last summer over their lobbying activities. The policy also ramped up its restrictions on coal, resulting in the divestment of 19 firms. 

Similar moves against thermal coal companies were also made last year by the likes of the $226bn New York State Common Retirement Fund and Edinburgh-based insurance and pensions specialist Scottish Widows.

Storebrand Asset Management’s CEO, Jan Erik Saugestad, tells RI that since the end of 2018, the number of companies divested over serious climate and environmental concerns rose from 91 to 139.

“Our ambition is always to stay invested and help companies transform and shift in the right direction at a faster pace, but I do think we need to tighten the requirements and we may see an increasing amount of companies that are not able to make that transition fast enough,” he says.

But what happens to stewardship, if more investors are compelled to divest, because of waning financial incentives or pressure over climate pledges?

This issue was recently raised in a report by the Australian Centre for Corporate Responsibility (ACCR), which voiced concerns that a growing number of superfunds in the country were quietly exiting big emitters without delivering on their stewardship promises. 

“Many investors have resisted calls for divestment from fossil fuels for years, claiming that engagement with companies would bring about the change required to reduce emissions,” said Dan Gocher, the non-profit’s Director of Climate and Environment. “But investors have not demonstrated if and how they have applied pressure to emissions intensive companies prior to divestment. Not a single director has been removed on climate grounds, nor has a remuneration report been opposed. Instead this divestment happens in stealth and often without any public acknowledgement.”

With COP26, the high-profile international climate negotiations, on the horizon, it’s likely these big fossil divestments will continue to gain momentum over coming months. But if the trend does continue, focus will turn to how investors are divesting, and what efforts preceded the decision.