“How close are we getting to putting gas in the same category as thermal coal?”

The question was asked by former NSW Premier turned business and climate professor, Bob Carr to a panel including some of the country’s highest flying fund managers from BlackRock, Cbus Super and Ellerston Capital at a UTS video conference on Wednesday.

“That’s the trickiest question of all: Gas, the transition fuel, and how long it will last,” responded Cbus Super global head of responsible investment Nicole Bradford.

While many investors are implementing strategies to divest or exclude thermal coal from their portfolios, Bradford said there were a couple of points to consider before treating gas in the same way.

She pointed to a pertinent May 2021 report from the International Energy Agency, a global body funded by industry, that maps the global energy transition to net zero emissions by 2050 under different scenarios.

The key takeaway from the report was that no new oil, gas or thermal coal developments are needed to transition the economy.

“So if you are looking to invest in any new assets or companies that are developing these assets, than this raises an absolute red flag.”

She said the stickier question is existing assets. It’s about applying climate risk metrics to decision making, which means considering the price on carbon, the ability of the asset to genuinely transition and the prospect of alternatives.

In the case of an existing gas pipeline, for example, she says green hydrogen could be a way to keep these pipelines in use in the new economy. 

Europe are still debating gas

Bradford noted that in Europe, where the world is looking for leadership in managing climate risk, they are still pondering over the gas question.

“They have a taxonomy that classifies economic activities as being green and brown, and they are still debating gas.”

“It’s a tricky one to form a view on in this point of time.”

As to how the industry super fund plans to navigate these tough investment decisions going forward, she says it comes back to the increasingly mainstream idea that “climate risk is investment risk.” Bradford pointed to the Australian Prudential Regulation Authority’s (APRA) recently released guidance to banks, insurers and superannuation trustees on managing the financial risks of climate change.

While not regulatory at this stage, the regulator’s draft guidance channels the climate risk expectations and obligations into the frameworks that it does regulate in organisations, such as governance and risk management frameworks.

“One of the key components is risk management, and what does that look like for a superannuation fund. Well, basically it’s identifying, assessing and managing these risks and part of that is understanding the companies and their assets we invest in. And, it also means engagement.” 

She noted that while divestment and exclusion attract a lot of attention, there are other levers investors use to manage climate risk.

“Usually, for us, [divestment] is the tool of last resort.”

A similar sentiment was echoed by the other panellists, BlackRock managing director, investment stewardship, Iris Davila and Ellerston Capital head of ESG James Taylor.

“One of the things we are asking businesses to do is show us your business plan, show us your strategy to get to net zero by 2050 under less than 2 degrees,” BlackRock’s Iris Davila said.

On thermal coal, BlackRock has made a commitment to divest from companies that earn more than a quarter of their revenue from coal (this only applies to the fund manager’s actively managed portfolios that it can directly control, which Davila says is why the company is still invested in the thermal coal businesses, such as Adani, because the majority of its equity holdings are held through index funds and ETFs that she says need to be influenced via engagement).

“There still is that bigger point as to divesting versus continuing to engage,” Davila said.

“Because you do not want a conglomerate to sell off a thermal coal plant to a private company, nor to a government. Think of Russia or something like that, where you really have no say.”

“So there is value to having these engagement conversation with these companies.”

In reference to International Energy Agency’s report about no new oil, gas or coal projects, she said this was “new information, that frankly, all investors are still digesting and trying to come to grips with.

“Particularly for some of these trickier sectors like oil and gas.”

She says this information will, however, inform questions BlackRock will ask companies around capital allocations. 

“We can’t say oil and gas closed tomorrow because we need to ensure a just transition. It’s not just immediate closure, we haven’t talked about workers, and the potential displacement of workers.

“This is all part of the conversation we are having with companies… so we can then assess these companies and say ‘look that company is taking these risks seriously, so we should allocate funds to them, versus ‘this company is not only not taking it seriously but has their head in the sand’ so we should maybe not invest in them and if we are investing in them we should think about their board of directors and start voting against them if they do not take investment feedback on board.”

Energy systems are complex

When questioned about Ellerston Capital’s response to the news that no new fossil fuel energy projects are needed from 2021 onwards, the company’s head of ESG James Taylor said the biggest issue is the complexity of energy systems which varies in each country.

“The reality is we need good policy around this as well and unfortunately in Australia we are sitting in a policy vacuum when it comes to energy policy.

“I put it to that if companies and capital was incentivised to invest in batteries and battery technology we might bring about the point at which we can take gas out of the complex quicker than the status quo we are in at the moment.”

He said a nuanced approach is necessary to achieve a just transition.  

“The same argument can be made for nuclear energy switch nuclear off where it exists, and energy systems don’t work. Switch gas off at the moment and here in Australia and the retail prices will probably go up and wholesale prices will probably be more volatile than they already are and we are going to get more outages within the system.

“It is very complex.”

As stewards of capital, Taylor said it’s about having productive discussions with companies involved in the energy value chain to drive shifts in capital allocation.

“Will we be happy to see huge amounts of capital going towards technology and system we think will be outdated in half the times the company think it will be outdated? Of course we won’t be happy about that, and we will try and bring about change in that thinking.”

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