Why UK Lawmakers are Finally Waking up to Climate Change Risks for Institutional Investors

Ed Gillespie


Twenty years ago I was involved in making a short provocative film about UK pensions investments, the thrust of it was that the vast majority of people had little or no idea where their money was invested. Begging the question ‘If you’re investing for your future security and quality of life, perhaps you should be aware if your investments might be directly undermining your future security and quality of life’. In particular we were interested in investments in fossil fuel businesses and the direct relationship between them and the carbon emissions that drive climate change.

Not least because this seemed totally aligned with what we might call ‘progress traps’, where our pursuit of further progress through historical means creates circumstances and impacts that fundamentally erode our potential for future progress. Anthropogenic climate change is a sharp example of this, whereby our access to relatively cheap, available and abundant concentrated energy in the form of our fossilised ancestors powered the extraordinary industrial revolution, that transformed the world around us in unprecedented ways. And yet the burgeoning accumulation of carbon dioxide in the atmosphere as a result of this combustion is now threatening to at best halt progress as we might understand it, and at worse unravel our progress to date. Successful future progress therefore relies heavily on a rapid transition to renewable energy.

The good news is this revolution is well underway, but it is still not happening fast enough if we are to transition to a sustainable world in which climate change is limited to well within two degrees, or ideally well within the 1.5 degrees agreed at the historic Paris Summit at the end of 2015.

Considerable water under the bridge since has meant a gradual but persistent shift in the cumulative pressure on pension fund trustees, and other investors, to be more transparent about the climate risks associated with their portfolios. And this week Mary Creagh, Chair of the UK’s Environmental Audit Committee said “We want to know what pension funds are doing to safeguard people’s pensions from the financial risks of climate change”.

This is a direct request that comes on the back of a series of recent challenges. In January 2017 Larry Fink, CEO of the world’s single biggest investor fund Blackrock ($5T+ in assets), had his much publicized ‘Darth Vader’ moment in his annual letter to the CEOs of the businesses he invests in, encouraging them to publicly state their own analysis of their climate risk exposure, challenging those reluctant to do so that he and Blackrock were ‘patient investors, but not infinitely patient’. Fink followed up in this year’s letter with a further challenge that the best performing companies usually have a clear sense of social or environmental purpose.

Building on the expanding divestment movement for institutitional investors, that has already taken $6T out of fossil fuels, and which was joined by the New York City Pension Funds plan to divest £5B in over the next five years, plus the shareholder movement that compelled oil major Exxon Mobil to announce at the turn of the year that they too will report on the climate risk of their business going forward and it is clear a rather powerful message is being sent.

This should come as no surprise to anyone. At present there are far more fossil fuel reserves already listed on global stock exchanges as valuable assets that we can actually burn if we wish to keep climate change under control. Some, like Carbon Tracker, argue it’s as much as five times more. Whatever the precise figures it’s clear we’re in systemic denial, and we simply cannot burn all that we already have, which makes further prospecting for new reserves look willfully blind and reckless. And still many of our institutional pensions are invested in these businesses.

There’s a good historical reason for this. These businesses were reliable ‘bankers’ historically, a solid, predictable foundation providing often generous and welcome returns. That is now changing. And it’s changing with a pace that the big fossil fuel companies are struggling to cope with. Which is why investors are having to wake up to the fact that the way they made money for their pension holders over the last 25 years will certainly NOT be the way they make money for the next 25.

At present the ‘unburnable carbon’ of potentially stranded assets is estimated at a potential bubble of $22T. That dwarfs the sub-prime bubble that devastated the global economy a decade ago. And right now global fossil fuel business is playing ultimate high stakes poker with our future, with every company claiming that they can burn all of the reserves they currently have, which is palpably false, and any more that they might prospect for, which is almost insane!

There are going to be huge losers, that’s for sure. Coal is struggling to compete, and Saudi Arabia sitting on the world’s biggest, cheapest and most easily accessible oil reserves is essentially turning on the taps to sell what oil it can, while it can, at whatever price it can get and pushing other marginal reserves such as shale, Arctic and deep water oil into unprofitability in the process. And pension funds unenlightened to these changes could face massive losses.

The solution is simple. Assess your climate risk now. Calculate what degree of climate change your portfolio is delivering, and if it’s over 1.5 degrees it’s time for some radical change. We have transitioned our energy system wholesale before when the context has changed. We used to hunt and burn whale oil to light our homes and streets. The complementary suite of different maturing renewable energy technologies, from solar, through wind – both onshore and offshore, and wave and tidal are now emerging as a credible,viable, integrated energy future. It’s time to stop trying to predict the energy system of tomorrow, and to begin actively investing in it. The planet and your pension depends on it.

Posted by Ed Gillespie

Ed is the Co-founder of Futerra, a celebrated slow traveller, author, serial green entrepreneur and investor.

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