By  Leon Gettler

26 October 2013 — Just recently 70 global investors with collective assets totalling $3 trillion sent a powerful message to the  world’s 45 largest oil, coal and power companies – including Exxon, BP and Arch Coal. The question?  What’s the financial risks that climate change and these other trends pose to your business plans?

More people are starting to embrace green and sustainable investment.

The finance sector is absolutely critical here. For years, the financial services sector was funding the fossil fuel industry. And they’re still doing it. A recent report Banking On Coal shows that while banks are claiming to support green initiatives, commercial banks have poured $159 billion into the world’s top coal mining companies through loans and underwriting since 2005. What’s the significance of that date? That’s when the Kyoto Protocol was signed to commit countries to reducing carbon emissions. The report notes there has been 397 per cent increase of 397 in financial contributions to coal from 2005 until 2012.

But now, questions are being raised about the sustainability of the fossil fuel industry. There is a growing recognition among some investors that fossil fuel industries are vulnerable as we move to a low carbon economy.

As The Fifth Estate reported earlier this month, Westpac has already invested $3.6 billion of $6 billion earmarked for cleantech projects by 2017. The money has mainly gone into two wind farms, a Solar Shed in New Zealand that gives farmers access to solar energy, an education seminar series to small business on managing in a low carbon economy; and a silver CEEDA certification for Westpac data centres.

This sort of investment is likely to increase across the financial services sector with Bloomberg suggesting that the world’s biggest pension funds are starting to see coal as the new tobacco.

Investors are now citing both ethical and financial concerns with carbon-bearing fossil fuels. Storebrand ASA, which manages $US74 billion of assets from Norway, has sold out of 24 coal and oil-sands companies since July.

The Norwegian fund, the largest of its kind in the world, owns shares in some of the biggest coal producers including a $US2 billion holding in BHP Billiton, the biggest mining company and stakes in Glencore Xstrata, the largest coal exporter, and Anglo American.

Please explain

Mindy Lubber and Mark Fulton at The Guardian say it’s a sea change in the investment environment.

“Just last month, a new and powerful set of market actors – some of the world’s largest pension funds and money managers – publicly recognised the connection between their financial assets and the decisions being made by fossil fuel executives.

“As part of this effort, 70 global investors with collective assets totalling $3 trillion (£1.85 trillion) made the first ever joint request to the world’s 45 largest oil, coal and power companies – including Exxon, BP and Arch Coal – to assess the financial risks that climate change and these other trends pose to your business plans.

“The investors, co-ordinated by Ceres and the Carbon Tracker Initiative, sent letters to the companies this fall requesting detailed responses by early next year.

“‘We would like to understand (the company’s) reserve exposure to the risks associated with current and probable future policies for reducing greenhouse gas emissions by 80 per cent by 2050,’ the investors wrote in their letter to oil and gas companies.

“‘We would also like to understand what options there are for (the company) to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in low-carbon energy sources or returning capital to shareholders.’

“Institutional investors must think over the long term, which means that we must take environmental risks into consideration when we make investments,” New York State Comptroller Thomas DiNapoli told The Associated Press in a statement. The state’s Common Retirement Fund manages almost $161 billion of investments.

Affordable capital for energy efficiency projects

Certainly more attention is now being paid to green investment with the World Economic Forum launching a tiered fund to provide affordable capital for energy efficiency projects. The aim is to draw together finance from development and commercial banks supported by equipment providers and international corporations. The WEF is now in the process of developing roadmap for delivery, with the first pilots targeted for Mexico and Russia, with ties to the G20.

The World Economic Forum has also put out a green investment report which says global investment in renewable energy has been rising. In 2011, it hit  another record; up 17 per cent on 2010 to US$ 257 billion. This represented a six-fold increase from 2004 and was 93 per cent higher than in 2007, the year before the global financial crisis.

But the report says there is still a lot of work to be done and there are still significant barriers to investment with the continuing economic crisis. Add to that those legacy fiscal measures such as fossil-fuel subsidies combined with the slow progress of international climate negotiations such as what we saw in Warsaw last week.

Green investment the only way to sustainable growth – World Economic Forum

Still, the World Economic Forum says green investment is now the only way to achieve sustainable growth. It cites an International Energy Agency warning that an unprecedented long-term shift in investment over the next few decades from fossil fuels towards a cleaner energy portfolio is needed to avoid dangerous climate change.

And, it says, we need to find new kinds of financial instruments to drive this trend.

“The investment required for the water, agriculture, telecoms, power, transport, buildings, industrial and forestry sectors, according to current growth projections, stands at about US$5 trillion per year to 2020.

“Such business-as-usual investment will not deliver stable growth and prosperity. New kinds of investments are needed that also achieve sustainability goals. Beyond the known infrastructure investment barriers and constraints, the challenge will be to enable an unprecedented shift in long-term investment from conventional to green alternatives to avoid locking in less efficient, emissions-intensive technologies for decades to come.”

Silicon Valley venture capital firm Kleiner Perkins Caulfield Byers has set up a $1 billion Green Growth Fund to invest in and support later-stage greentech ventures. The fund backs companies in a variety of technology sectors, including alternative fuels, renewable energy and low-carbon solutions for transportation.

Certainly the pressure is now growing on pension and superannuation funds, which are primarily focused on long term investment, to seriously look at climate change as part of their investment strategy.

For pensions funds, here’s a methodology

Share Action, a UK registered charity that promotes green investment, sets out the methodology pension funds should use to determine where the carbon risk is located.

“One important way in which pension funds can address climate risks is to reduce their exposure to high carbon, high-risk activities. This can be done through engagement or stock selection, and applies to equity investments, bonds, and property portfolios … As prudent fiduciary investors, pension funds should request that their fund managers assess the “stranded asset” risk in oil and gas companies project line-up. They should support calls for reduced capital allocation to high cost/low return projects in favour of returning money to shareholders or reallocation to less risky projects.”

Share Action recommends pension and super funds take the following steps:

  1. Develop a climate policy which identifies risks
  2. Develop an action plan with clear goals. That will allow the fund to measure the success of risk assessments and policies. It would also allow the fund to develop policies by, for example, setting targets to reduce portfolio carbon risk, by limiting exposure to high-carbon, high-risk activities and by investing in low carbon opportunities.
  3. Ensure fund managers and consultants understand these goals and report back to members on how the fund is managing climate risk.
  4. Engage with policy making bodies and discourage companies in which they invest from taking positions contrary to the funds’ best interests.

And while Tony Abbott is repealing the carbon price, his old boss former Liberal leader John Hewson (Abbott was his press secretary) is putting pressure on fund managers to fess up to their exposure to carbon intensive industries. This is all part of giving their investors the transparency they need to protect their money long term.

 “They invest about 55 per cent …  in climate exposed industries and only about two per cent … in low carbon intensive industries,” Hewson says. “They don’t have any easy way of managing that risk. They can’t lay it off in a derivative market, in the financial markets. They can’t insure the risk. In terms of financial consequences, it dwarfs the global financial crisis. It could have a phenomenal impact on the value of these companies. Those top one thousand [companies] control more than 50 per cent of all the listed companies on all the stock exchanges of the world. You think of the consequences of getting that wrong.”

And in Norway, the government is drawing up plans for its sovereign wealth fund to invest in renewable energy. As Giles Parkinson writes, the fund invests right now in listed equities, bonds and real estate.  “However, if the fund were allowed to expand its portfolio to include direct investments in assets like wind and solar plants and other infrastructure, this could potentially have a very significant impact on the total flow of capital to the renewable energy sector,’’ Parkinson writes.

With the World Bank putting billions of dollars into mitigation efforts in developing countries, the World Economic Forum’s tiered investment fund and the pressure on pension funds, we might be seeing a clear shift in investment strategy away from fossil fuels. It’s a case of just follow the money.

2 replies on “Green MashUp: why coal is the new tobacco for institutional investors”

  1. Dear Editor Perinotto

    By tapping this note I’m not sucking up to the Editor to whom I submit my Bathurst Burrs.

    I’m saying ‘Thank you”, to Mr Gettler for a very useful article.

    May the coal not be with you, Mr Gettler,
    Michael

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