Institutional investors re-considering their stakes in fossil fuels should engage with companies on the issue instead of divesting, whilst at the same time investing in the transition to clean energy, experts have argued.

Speaking at a recent F&C sustainability seminar in the Netherlands, Daan Spaargaren, sustainability policy adviser at institutional investor platform Eumedion, stressed that investors needed more clarity from traditional fossil fuel companies about their exposure to new climate policy.

“Transparency on the issue could have a significant impact on the business model of companies such as Shell,” he said.

“Because climate change is on the agenda at international organisations such as the UN and G7, both of which could set binding measures, climate policy is to become a real risk for investors.

“The expected high price of CO2 emissions will come at the expense of investment returns.”

According to Spaargaren, investors could contribute to energy transition through impact investing.

As a successful example, he cited the issuance of green bonds for this target by asset manager EDF Suez, “which saw institutional investors take up 63% of the issued paper”.

“And by investing in solar panels within its residential housing portfolio,” he added, “the €65bn metal scheme PMT created a fourfold ‘win’ position: fighting climate change, improving its portfolio, lowering tenants’ energy bills and providing employment for its participants.”

Vicki Bakhshi, F&C’s head of governance and sustainable investments, suggested that changing to “less exposed low-carbon index funds” could be an acceptable alternative to divesting fully from fossil fuels.

Among the fossil fuel-producing companies, some are much more exposed to carbon risk than others, she said, adding that gas was a “good transition fuel, compared with much more polluting coal and oil”.

“If a pension fund divested from fossil energy, it would not only lose its voice within the company but may also create an imbalance within its own asset mix, while increasing its risk profile for the short term,” Bakhshi said.

“A sudden and full divestment may also risk being at odds with the fiduciary duty towards the participants.”

 

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