Thursday, 8 October 2015

To divest or not to divest from fossil fuels? This is one question being asked currently by super funds and their members as part of the wider climate change discussion. Although perhaps more accurately, funds are asking whether framing this question in binary terms is the most effective way to think about it.

At face value, divesting from fossil fuel exposed assets seems like a logical way to manage the investment risk of moving to a low carbon economy and to contribute to a reduction in carbon emissions. From a pure investment perspective there are risks both ways. Divesting from fossil fuels in a material way would likely pay off should the demand for these assets experience a sharp and sustained decline beyond that currently envisaged. But if the timing of a decline in price differs from the investor’s decision to no longer hold these assets, there may be an opportunity cost.

But the motives of course are not purely financial. Some believe that there exists a moral imperative to consider the environmental impact of the continued, widespread global reliance on fossil fuels. Historically and currently the world’s energy mix is dominated by coal and oil.

While there does not currently seem to be clear consensus on any one clear way to mitigate the investment risks associated with adapting to low carbon economies, there does appear to be consensus that this move will likely be a transition occurring over time. The path this takes and the pace at which it occurs will likely be driven by global policies and the price and availability of renewable energy sources.

The objective of the UN Climate Conference taking place in Paris in December is to reach, for the first time, a universal, legally binding agreement to enable a collective approach to combating climate change effectively and to boost the transition towards resilient, low-carbon societies and economies.

This is a key step and many view the outcome of this meeting as likely being a series of national emissions reduction commitments to limit global warming to a certain level rather than a single global carbon policy.

For some investors, this can create risks and opportunities and a fiduciary duty to understand the potential nature of the risk in the short, medium and long term. So is it possible to continue to invest in carbon assets while effectively managing the risks associated with these assets and playing a role in the adaptation to a low carbon global economy?  Some view divestment as a last line of defence and but one of the tools available to investors in managing a systemic risk like climate change.

So what can a fund like QSuper do? Well there are several things.

  • We can objectively consider the economics of the wider climate change discussion and consider how we may factor in the associated financial risks as part of our investment process; this is how QSuper manages any other investment risk.
  • For members that are interested we offer the QSuper Socially Responsible investment option1 which excludes companies with more than a 20 per cent exposure to the most emissions intensive forms of fossil fuels.
  • As an institutional investor, albeit but one actor on the broader global stage, we can consider how we can effectively direct the weight of our influence where appropriate over the assets we hold and within the broader system in which we operate.

Our policy in this area has been building incrementally and we’re still in the early stages. But this is how we’re thinking. And this is something we can brief you on as we go forward. As members of this Fund we’d be interested to hear your views.

 

1. The QSuper Socially Responsible investment option invests in the Responsible Investment Leaders Balanced Fund, which is managed by AMP Capital Investors.

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.

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