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Climate risk is investment risk

February 23, 2020

 

Martin Carney, outgoing Governor of the Bank of England, is unlikely to be lying outside the offices of fossil fuel companies along with XR. However, he shares some of their concerns. He has said companies and investors need to step up planning for climate change, with many corporate assets at risk of becoming worthless. The financial sector, he said, has begun to take action, but far too slowly. The CEO of BlackRock asset management has said, “Climate Risk Is Investment Risk.” Forbes magazine reported that in 2019, “… the hands-down winner of 2019 was solar stocks”.

 

And perhaps one day Mr Carney will be out there with XR. A few weeks ago I was in a pub when a “Wealth Manager” told me he’d been to an XR meeting in Sheffield!

 

So what has this to do with High Peak?  The answer is that High Peak has its own funds invested, as it must do: £127 million worth. Most of this it cannot use, mainly because of pension liabilities, so it is placed in long-term investments.  High Peak’s pensions are managed by LGPS Central Ltd, a company created to manage local authority pension funds, including Derbyshire’s and High Peak’s. 

 

The positive news is that LGPS Central and 10 other pension funds have filed a resolution to Barclays’ AGM to

“set and disclose targets to phase out the provision of financial services…including corporate finance…to the energy sector …and gas and utility companies that are not aligned with …. the Paris Agreement…”.

 

Of course, you might ask why local government uses Barclays in the first place.

 

Engagement

 

The Head of the Derbyshire Pension Fund has said

“LGPS Central supports the view that engagement is preferred over divestment”.

 

The Derbyshire Pension Fund invests many millions of pounds in the fossil fuel companies responsible for causing climate change and air pollution.  It is partly Pension Fund money that the fossil fuel industry spends to explore for more oil and gas.

 

 Others believe that engagement has failed, and it seems self-evident: fossil fuel companies are still planning production which would go way beyond the global carbon budget.  A report from Divest Derbyshire says:

“Shareholder engagement can work in some sectors, where the change required does not challenge the companies’ core business model. 

 

But engagement does not work well where it’s the company’s core business model which needs to change, such as the coal, oil and gas sector. Fossil fuel companies still refuse to re-align their business models with a 2-degree world. For example it was reported in October 2019 that the world’s 50 biggest oil companies, with Shell among the leaders, plan to increase production of oil by more than 35% between now and 2030.

 

This is the opposite of the 45% reduction in carbon emissions by 2030 that is necessary to have any chance of holding global heating at a relatively safe level of 1.5 degrees C. While oil companies may be investing in renewables this is a tiny fraction of their investment in fossil fuels: Shell’s investment in renewables represents only US$1-2 billion (4-6%) of its annual US$25-30 billion investment in fossil fuel exploration and production. Thirteen companies, including Shell and BP, are projected to blow almost a quarter of the remaining 1.5 degrees C carbon budget. “

 

Fossil fuel companies are not safe investments

 

This is not just a matter of acting on climate change.  As Martin Carney’s pronouncements over several years suggest, fossil fuel companies are not safe investments. The business models of companies like Shell and BP rely on governments failing to meet their promises under the Paris Climate Agreement, but this is a risk. It makes no sense to base your financial projections on assumptions that are fundamentally at odds with the stated policies of most governments .

 

The Bank of England says that as much as $20tn (£15.3tn) of assets could be wiped out by climate change if it is not effectively addressed. One report suggests that Black Rock's investments in fossil fuels lost investors an estimated US$90 billion over the past decade due largely to ignoring global climate risk.

 

Thinktank Carbon Tracker has warned that the oil industry is at risk of a global market shock that could halve the value of fossil-fuel investments if governments delay setting policies to tackle the climate crisis. Carbon Tracker estimate that the drop in value will occur in the early 2020s. Local government pension funds that fail to divest in time will foot serious losses.

 

High Peak Borough Council

 

Officers at High Peak realise the pressure to take into account environmental and social issues along with governance (ESG) as they manage funds, but they are cautious. They have limited capacity to follow financial markets, so they rely partly their advisers, Link Asset Services. And in the case of the pension funds, the largest proportion of the investments, they are two steps removed from management of the fund; they can use their influence but don’t make the decisions.

 

Local councils have a fiduciary duty to look after their assets, with “security” coming first, followed by “liquidity” (for some investments) and “yield”. Yet yield could be improved by more imaginative and forward-thinking investment, in renewable energy for example. But when I brought it up at a meeting, I was told that yield comes last. This seems an inadequate response. Surely security would also be improved if the Council divested from potentially stranded assets.  

 

LGPS Central and other pension funds manage hugely greater assets than High Peak, and  are asking for divestment from companies which aren’t taking required action towards the Paris climate agreement  goals. Surely High Peak could take the lead from them.

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