OUR REPORT WITH MERCER: INVESTING IN A TIME OF CLIMATE CHANGE wwf.org.uk: “We worked with Mercer consultants and several leading global investors on a landmark report entitled ‘Investing in a Time of Climate Change’. Launched before the 2015 Paris COP, this report illustrates how keeping global temperature rise below 2°C would not be detrimental to investment returns over the long run. / Read our blog 'Investing in a time of Climate Change' >> / Read the Mercer report (external link) >>”
Climate Change Will Affect Investment Returns, Concludes New IFC-Supported Study by Mercer, ifc.org: “Investors can no longer bypass implications posed by the changing climate on their portfolios, says the new report --“Investing in a time of climate change,” led by Mercer and supported by IFC, in partnership with the Federal Ministry for Economic Cooperation and Development, Germany and the UK Department for International Development (DFID). / This update to a 2011 estimates the impact of climate change on returns to demonstrate why climate-related risk factors should be standard considerations for investors, as the majority of investors are not incorporating climate considerations into their portfolio decisions. / The study warns the investors not to expect that the future will mirror the past, particularly at a time when economic growth is heavily reliant on an energy sector powered by fossil fuels. It shows that impact on returns from climate change are inevitable – irrespective of which climate scenario -- 2 or 4 degree -- unfolds. The new research also points to opportunities for investors in an economy that would transition to a 2 degree low carbon scenario, laying out the fact that this scenario would not jeopardize financial returns for long-term diversified investors. / Climate change will give rise to investment winners and losers, with the energy sector becoming the most impacted: the coal industry will be the biggest loser while the renewable sector will win. Depending on the climate scenario which plays out, the average annual returns from the coal sub-sector could fall by 26 percent to 138 percent over the next 10 years. Conversely, the average annual returns in the renewables sub-sector could increase by between 4 percent and 97 percent over the next 10 years. / The report assesses investment exposure to climate risk, estimates the impact on investment returns through to 2050 and offers insights on how investors can improve the resilience of investment portfolio in a time of climate change. / The research was conducted as a global collaboration, led by Mercer, with input from 16 asset owners and asset managers (four in US, four in Australia/New Zealand and eight in Europe), representing more than $1.5 trillion in assets under management. / Download the full study here [INVESTING INATIMEOF CLIMATE CHANGE, 108 pp] **Additional resources [linked by IFC]:
Abstract: Fossil fuel divestment is discussed controversially with regard to its financial consequences and its effect on decarbonizing the economy. Theory and empirical studies suggest arguments for both financial underperformance and outperformance of divestment. Therefore, our first research objective is to understand the financial effect of divestment. The second objective is to analyze the influence of divestment strategies on the carbon intensity of portfolios. Empirically, our analysis is based on the Canadian stock index TSX 260 for the time between 2011 and 2015. The results of the study suggest higher risk-adjusted returns and lower carbon intensity of the divestment strategies compared with the benchmark. We conclude that divestment is not only an ethical investment approach but also that it is able to address financial risks caused by climate change and, at the same time, is able to reduce the carbon exposure of investment portfolios.
Many investments in the energy sector are still needed before the energy transition is complete. Both in- vestors and financial institutions are eager to invest in sustainable energy, in energy efficiency and innovation. There is no lack of enthusiasm and it seems that there is no shortage of funding too as a result of low interest rates. / At the same time, the call to divest in certain - mainly fossil - parts of the energy sector becomes stronger. Several large investors ask for more action from the International Oil Companies (IOCs). They are asked to identify the financial risks of climate change and align their investments with the Paris Climate Agreement goals. / The fear over financial risks due to climate change – for instance due to stranded assets – and the link with the need for an energy transition is not new. We have already seen reports from the ECB, the Bank of England and the Dutch central bank (DNB) warning of possible financial risks should the energy transition progress too abrupt. / The real economy is still strongly dependent on fossil fuels, especially oil and gas, and large investments and financing are still needed for further exploration. Here, too, we see a rise in risks. Not only financial risks, but also risks to the security of supply of these commodities and the risk of negative economic impact. / We also see that in large parts of the world people are still confronted with immense energy poverty. Indeed, even today there are still hundreds of millions of people who have no access to the electricity grid. Due to the expected rise in welfare and population, global energy demand will continue to increase fast. To some extent, this demand will be met by renewable energy, but also by fossil fuels. As a result, global demand for fossil fuels will also continue to rise, especially in emerging markets. / But since investments in fossil fuels are under pressure, it will become more and more difficult to meet the global need for oil and gas demand in the coming years. Shifts in the demand for energy do not necessarily move in tandem with changes in investments on the supply side. As a result, investments in oil- and gas-production may decline too abruptly. This could not only lead to shortages, but also to a loss of expertise in geology and drilling. Both are not only important for oil and gas exploration, but also for other energy sources such as geothermal, which will be part of our future energy mix. / Meanwhile, major O&G companies have all started their transition towards a more sustainable business model. These companies are actually able to shift their portfolios significantly in a period of just 6 to 8 years. This is possible because they have reduced a large part of their reserves in recent years. If we see stranded assets in due course, the financial risks for investors will therefore not be as big as some may fear today. Nevertheless, that does not mean that this transition is free from (financial) risks. Small shortages can - in current market circumstances - lead to strong oil price gains. And the price gains of these so-called marginal barrels will have an economic impact. A common rule of thumb is that a $10/bbl increase of oil prices leads to a reduction in economic growth of roughly 0.2pp, and a rise of inflation by 0.1-0.2pp. / A higher oil price - on the other hand - should increase the economic feasibility of sustainable solutions. However, this also comes with economic side-effects. Reduced financial capability on the back of high oil prices could also hurt the investments in renewable energy. This is why I am calling for appropriate and controlled adjustments to investments in the energy sector. This applies to both renewable energy (increase) and a decrease on the fossil side of the mix.
Why? Because divestment is a card that, once played, can’t be used again. It might bring a rush of principled vindication, but once you’re out, you lose your say over the company’s future – literally, in the case of a shareholder with voting rights at an AGM. And if there’s money to be made out of a business, however filthy, then someone will buy the shares you’re selling. Someone with a lot less scruples, a lot less concern over long-term impact, than you, the principled investor. / As Waygood puts it: “Divestment isn’t a badge of honour; it’s a failure of the engagement process.” Robust engagement can be a lot more effective. “Imagine you’re running a listed coal firm. You’re concerned about your re-election at the AGM, concerned about your pay packet, concerned about keeping your job … And if large institutional investors are coming to you and saying ‘you are not doing your job in relation to climate change, so we are going to withhold support, table a resolution at the AGM, vote against you, against your pay package' – these are much harder problems to deal with than someone just divesting.”
” I have met more investment committees than I care to think about. Perhaps a couple of thousand. There is a no more conservative group on the planet than an investment committee. You could be forgiven for thinking that if you cough at an investment committee they will think they are ruined! / So if you tell them that you are going to interfere in any way, such as by removing a particular group of companies from their investment portfolio, an investment committee will likely warn that it will cause great harm to the long-term return. And the committee would definitely baulk if you wanted to remove a major group like fossil fuel companies. / So my colleagues and I finally carried out a test to see exactly how an investment portfolio would have been affected by divesting from a group of companies that are listed in the Standard and Poor’s 500, the index based on the market capitalisations of 500 large companies listed on the New York Stock Exchange or NASDAQ. / These companies can be divided into 11 sectors (not including real estate). We considered the 10 long-term sectors (real estate was added relatively recently), and analysed how the index performed without each sector. / Initially, we considered the period from 1989 until 2017. The results are shown in Figure 1. You will see how dramatically the index changes with the removal of each sector – there is only a 50 basis points difference between the best and the worst. They are basically all the same! / You will see that excluding the information technology sector made a small difference for a few years around the turn of the millennium. That was the technology bubble. Beyond the burst of the bubble, all of the indices track together again, as if nothing had ever happened. / But basically, all of those 10 variations of the index track between 1989 and 2017 as if they were the same. So we decided to see what happened if we chose a different period, incase there was something extraordinary about the past 28 years. We extended the analysis, first to start from 1957, and secondly to begin in 1925. / You will see in Figure 2 that changing the period of analysis does not make much difference. The difference between the best and worst is 54 basis points instead of 50. So over 90 years, it would not have cost an investor to have divested from any one of the sectors. / Who knew that the stock market was that efficient? It may be hopeless in bubbles and busts, but it has evidently priced these groups of big companies pretty well. And there is no advantage to an investor of choosing the high-growth information technology sector over, say, utilities. Utilities are priced down and information technology is priced up, but they produce the same returns. It is amazing. / What does this mean for divestment? It means that if investors take out fossil fuel companies from their portfolios, their starting assumption should not be that you have destroyed the value. Their starting assumption should be until proven otherwise. that it will have very little effect and is just as likely to be positive by 17 basis points as negative. That is an amazing contradiction to what every investment committee has ever said, as far as I am concerned. / It obviously takes a major miscalculation to move the dial when it comes to divestment. I think that decarbonisation is just such an event. And the reason I think that is that the oil companies and the chemical companies are not rolling with the punches. They are fighting decarbonisation tooth and nail. They are still funding obfuscation programmes in North America. And if you do that as a corporation, as a capitalist, you are likely to bite the dust if you are facing a major change, if you fight it. And they are fighting it. If they rolled with the punches, they might do quite well, and bleed off their capital and pay big dividends. But they are not doing that. / There is an argument that even if the oil companies eventually lose most of their gasoline market, they can at least fall back on their chemical feedstock business. I think this is very optimistic. Chemicals are making our world toxic to life in general, from insects to humans. This is an even more visceral topic than climate change, and I believe there will be even more lawsuits and general resistance to many chemicals in 10 and 20 years than there is to oil for energy. And this is a high hurdle, for oil companies have since the late 1970s provably known the serious harm that their products would cause. / Investors with long-term horizons should avoid oil and chemical stocks on investment grounds. They face a sustained headwind. In contrast, investing in companies that benefit from decarbonising the economy, although they come with no guarantee of success, do offer a sustained tailwind; their top-line revenues will certainly be growing faster than the rest of the economy. Ethical arguments for divestments are simply not necessary. They are a pure bonus. / This commentary is based on a lecture by Jeremy Grantham which was delivered in London on 11 April 2018 – a recording of the lecture can be accessed here.”
“This is just the latest example of politically motivated divestment policies, which have often had a significant negative impact on pension investment performance,” reported The Orange County Register, a newspaper in southern California. The article mentioned an October 2015 report from pension funds consultant Wilshire Associates showing that CalPers’ divestments cost it about $8bn over 15 years. If the performance is lower than a pension fund’s target it could worsen its funding status. For public-sector funds such as CalPers, it forces taxpayers to fill the gap by paying more taxes and the employees to pay more contributions or lose some benefits. That is why some unions, although they mostly support the Democrat lawmakers who push for divestment policies, have begun to raise doubts about the latter’s aptness. “It’s time for CalPers to re-valuate their investment strategies and focus more on improving their investment returns and less on ‘socially responsible’ investments”, says Steve Crouch, director of public employees for the International Union of Operating Engineers, which represents roughly 12,000 California state maintenance workers. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment strategy,” police lieutenant Jim Auck, treasurer of the Corona Police Officers Association, told CalPers board members at a meeting in May. “Your fiduciary responsibility is to the employees, the employers and the taxpayers of this state, not to the many agendas of the many special interests that dominate Sacramento politics.””
“ In a previous BMJ editorial, Law and colleagues argued that the case for divestment from fossil fuels is now clear cut. Extraction of fossil fuels damages our planet. Products of the fossil fuel industry harm health, causing global conflict, driving climate change through carbon emissions, and shortening lives through air pollution. Yet politicians refuse to relinquish their political and commercial links to fossil fuels, and fossil fuel companies manipulate science to downplay the ill effects of their business. This allows us all to continue the convenient fantasy that all is well with the way we live. Consuming our planet’s fossil fuel reserves will ensure we miss carbon emission targets. Although the industry shows little sign of changing its strategy, the financial world is waking up to the threat to investments as well as to the planet. The governor of the Bank of England considers fossil fuels a risky investment because the demands of meeting the 2°C climate target will render the majority of oil, gas, and coal reserves “stranded” and “unburnable.” In 2017, at the One Planet Summit in Paris, the World Bank announced its intention to end financial support for oil and gas extraction in response to the threat posed by climate change.8 Recently, the European Investment Bank, the European Union’s lending arm and the world’s largest multilateral financial institution, stated its ambition to become the world’s first “climate bank” by ending its multibillion euro financing of oil, gas, and coal projects after 2021.”
