Charity Investment

Stranded Assets and the Fossil Fuel Divestment Campaign – how can investors respond?

15/01/2015

Alexia Zavos

Alexia Zavos

Schroders

In 2009 governments at the Copenhagen climate talks committed to limiting global warming to no more than 2°C above pre-industrial temperatures, the level scientists say is necessary to prevent catastrophic climate change.  As a result various scientific institutions began advising on the volumes of fossil fuels that could be burned to stay safely within this limit.  According to a report produced by Carbon Tracker Initiative (CTI) and the Grantham Institute in 2013, as much as 80% of the coal, oil and gas reserves of private companies worldwide are now ‘unburnable’ and represent potentially ‘stranded assets’i

To date political commitment hasn’t been strong enough to realise these risks however this seems to be changing.  Recently China and the US struck a deal on post 2020 emissions reductions marking the end of a bitter stand-off between Western and emerging economies.  This deal greatly increases the likelihood of a binding global climate accord at the UN Climate Change Conference next December.

The stranded assets topic has generated a lively debate among asset owners who are asking how they should respond.  We set out below the 3 main approaches being adopted:

  1. Divest from fossil fuels
    The divestment campaign has gathered pace and according to the US Fossil Free Campaign; $50bn has been divested so far.  Many believe the campaign has grown faster than any other divestment movement, including the 1980’s anti-apartheid movement and tobacco.  For example, The Rockerfeller family, heir to the Standard Oil fortune, announced in September that they were directing their $860m charitable fund to divest from its coal and tar sand assets “as quickly as possible”.  Most recently, the Bank of England has revealed it is to examine formally the risks fossil fuel companies pose to financial stability.
    There are many different interpretations - possible divestments range from fossil sectors such as oil and gas, the dirtiest fossil fuels (coal) or certain activities such as oil sands or arctic exploration. Fossil fuels are systemic and divesting would likely still leave exposure in portfolios, such as chemicals and airlines, potentially undermining the campaign.  Leading index providers have responded by introducing fossil fuel free, coal free and low carbon indices to help guide investors.  
  2. Allocate to low carbon strategies
    Investors can consider investing in more low carbon technologies to help the transition with capital allocation (e.g. a climate change fund or renewable energy fund).
  3. Report and engage 
    Investors can aim to effect change through active ownership and engagement on the robustness of the economic analysis behind new investments in fossil fuels and transition strategies to a low-carbon economy.  The Church of England recently announced that the Church Commissioners and Church of England Pensions Board are filing resolutions requesting Shell and BP to take greater action to tackle the threat of global warming and link executive pay to ‘environmental and social metrics’.
      
    Some clients have signed up to the Montreal Pledge which commits signatories to measure and disclose the carbon footprint of their investments on an annual basis, beginning with equity portfolios by September 2015, with the aim of setting carbon footprint reduction targets or engagement strategies.

The Future
Fossil fuel divestment alone may not be the answer however there is no doubt that the campaign signals a structural shift in energy procurement and usage in the next couple of decades.  Many of those engaged in the debate are the consumers, voters and leaders of the future and so it is likely this will only gain momentum.

Defined by CTI as fuel energy and generation resources that, at some time prior to the end of their economic life, are no longer able to earn an economic return due to regulatory and market changes linked to the transition to a low-carbon economy.

 

Important information

The opinions contained herein are those of the Charity team at Cazenove Capital Management and do not necessarily represent the House View. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital Management does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital Management has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital Management is a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.

 

Read the full report

Responsible investment 1 pages | 71 kb

DOWNLOAD

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

Contact Cazenove Capital

Achieving your charity's investment objectives takes time and thought. 

To find out how we can help you please contact:

 

Giles Neville

Giles Neville

Head of Charities giles.neville@cazenovecapital.com
John Clifton

John Clifton

Business Development Manager
Telephone:
john.clifton@cazenovecapital.com