News / 2 February 2020

How to become a fossil-free investor

The world has to stop using fossil fuels, but investment in the sector continues unabated. Investors of all kinds, including banks, insurance companies and pension funds, are hesitant about making the change to sustainable energy and are not sure where to start. In the autumn of 2019, together with the DivestInvest Network and Sustainable Energy (Denmark), Both ENDS published a report entitled ‘Managed Decline of Fossil Fuel Businesses’. The report describes five criteria to test whether companies in the fossil sector are actively taking steps to wind down their fossil activities. The criteria are helping investors to choose investments that are in line with the Paris goal of restricting global warming to a maximum of 1.5 degrees Celsius. We spoke to Lars Jensen, Senior Analyst at Sustainable Energy and lead author of the report.

“This report helps investors to assess to what extent fossil fuel companies are already engaged in the energy transition”, Jensen tells us. “They can then decide to divest their shares in companies that do not meet the criteria. And they can specify clearly in their policies that they will only reinvest in fossil companies when they do meet the five criteria.”

The five criteria that companies in the fossil sector have to meet are:

1. No lobbying for policies that reduce the probability of the 1.5°C goal.
2. No exploration spending.
3. No approval or acquisition of new fossil fuel infrastructure or projects.
4. A clear plan for wind down of fossil fuel extraction.
5. Remuneration policies that support managed decline of fossil fuel extraction.

If you write a report like this, you must have been involved with this material for many years

I began just as a climate concerned participant in a pension fund. I’m an economist and worked in Denmark as a civil servant. It wasn’t until 2014, when I saw an item in the news on television about a fossil fuel divestment campaign in my pension fund, I asked myself the question: “What are those campaigners doing to my money?” So I visited the Danish campaign website, which had a link to CarbonTracker’s seminal 2013 stranded assets report [now obsolete], which is why I became especially curious about the relationship between investment and climate change. I registered for a newsletter and later became a volunteer with the campaign that had made the website. In that period, I came into contact with Both ENDS and we decided to work together.

And now it’s become your full-time job

Eventually, I was given the opportunity to turn my interest into my work, as there aren’t many economists occupied with the financial side of divesting from the fossil sector. The question we were concerned with at Sustainable Energy was ‘what would I do if I woke up one day and found I was the director of an oil and gas company?’ In other words, how would I make sure my company made the change to sustainable working? We didn’t have a good answer, so we made a start on the five criteria, as a sort of road map for the fossil sector.

But you aim mostly at shareholders and investors in the sector. Shouldn’t fossil companies themselves be changing course radically?

Yes, in theory, but the only example of a company that has really done that is Danish Oil and Natural Gas. They have gone over completely to sustainable business and become a world leader in the field of offshore wind energy. They’re now called ORSTED and are the only example of company that has dared make the transition. The normal discourse of oil and gas companies is that the world needs oil and, especially, gas.”

How much impact do you think that the five criteria will have? Do you think that investors will use them?

“There has traditionally been a discussion between whether it is better as an investor to withdraw from the fossil sector or try and change the companies you invest in from the inside. We are saying now that if you believe as a shareholder that you can change things in a company, you can use the five criteria to say ‘I’m not going to invest in your company until you meet these criteria’. If you don’t believe you can really change a company, you can sell your shares, put it on the blacklist and look for companies that do meet the criteria. The criteria can be used for both a ‘divest’ and an ‘engage’ strategy. We will know for a year or so whether investors really do use them. Of course, I hope so.

Who has to initiate the change?

The supply of energy has to be fossil-free. Energy companies will continue to exist in a fossil-free world. If Shell sells me green electricity that I can use to drive my car, that’s a good business model. That change must be given a boost by those who have the formal power, and that is the shareholders in the fossil industry – the investors. If they say ‘we don’t want our money to be invested in the extraction of new oil and gas’, the directors of oil and gas companies will have to take notice. Pension funds and other investors have not only the money but also the formal power and influence as shareholders to push a company in a different direction.

What is necessary to persuade oil and gas companies to change course?

It really isn’t in the interests of shareholders to continue to invest in the fossil sector. If you change direction in the right way – by that I mean making the change gradually – it will make money. Most oil and gas fields have a useful life of 10-15 years. What comes after that is not reflected in the current share price. The route of gradual winding down that I describe in this report will take 20 years. By the time the last oil and gas fields that are now in use have been depleted, companies could have nearly completed the transition. So they don’t need to stop all fossil activities immediately, but can do it step by step. It is up to investors to persuade them to do that.

I hear that fossil extraction would no longer be profitable in the long term anyway

Oil and gas companies should indeed realise that continuing with fossil extraction constitutes a serious business risk: there is more and more legislation on climate, and they need to anticipate that. The fossil lobby is focusing all its efforts on stopping that legislation, but that is a lost cause in the longer term. They would be better advised to make sure they are ready for the future. And investors like pension funds can play a role in that by exerting pressure.

Do consumers have a role to play in persuading pension funds to move towards fossil-free investments?

Yes, pension funds do listen to their participants. It is their money after all. On the other hand, they do have to make money on their investments and they still believe that fossil investments are necessary to ensure the necessary return. That’s why it is very important that pension fund participants continue to draw attention to the long term and to the profitability of investing in sustainable energy. It will take some time, but pension funds will eventually withdraw their investments more and more from the fossil sector.

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