Back to the future as fossil fuels find fresh favour with investors
The outlook for avoiding catastrophic global heating looked bleak as the COP27 climate summit began this past weekend amid accusations of greenwashing levelled at Greenpeace, the world’s largest environment defenders’ group. Greta Thunberg, arguably the world’s highest-profile climate activist, is boycotting the event.
Complicating the prospects for progress at the annual climate conference, interest in oil and gas among institutional investors has increased as the energy crisis precipitated by Russia’s invasion of Ukraine continues to disrupt supplies and put upward pressure on fossil fuel prices.
“Energy pricing and the fossil fuel sector has been doing well,” Tomomi Shimada, lead APAC sustainable investing strategist at J.P. Morgan Asset Management, told AsianInvestor. “There are definitely investors who are riding on the current momentum.”
Shimada said that, despite its regressive appearance in the face of the escalating climate crisis, the uptick in fossil fuel investment was a complex phenomenon that would not necessarily result in the investment community backsliding on its professed environmental goals.
J.P. Morgan Asset Management
“There are different groups of investors looking at fossil fuels from different angles,” she said. “Some might be purely focused on returns, and some might be looking at them from more of a transitional or transition finance perspective, where they feel the importance of being invested in the sector and having more of the ownership and the narrative of where the sector will go from here.”
RETURNS UNDER PRESSURE
Alexander Chan, head of ESG client strategy for Asia-Pacific at asset manager Invesco, also noted a spike in investments in fossil fuels, including gas, but said that environmental, social and governance (ESG) investing had nevertheless continued to outperform investments in non-ESG sectors in certain regions.
He pointed out, however, that clean energy returns had come under pressure in recent times.
“Energy security concerns have led to a commodities spike and the inflationary environment, and that has resulted from rotation from growth assets into value and quality, and in a lot of previous climate technology plays, the challenge has been supply chains,” Chan said. “Raw materials shortages and China’s production being locked down because of Covid in the past year have also played a part, resulting in a somewhat tepid performance in clean energy investment over this cycle.”
He echoed Shimada’s view that the emphasis among investors was the transition to greener energy rather than simply abandoning engagement with the fossil fuel sector.
“ESG tends to be very exclusion-focused,” Chan said. “It also tends to be very thematic, in the sense of only looking at clean energy or looking at climate technology plays. That has now shifted to thinking about ESG as broad-based integration, and that also means focusing more on engagement and focusing more on transition plays.”
ENGAGEMENT TRUMPS DIVESTMENT
Andrew Gray, director of ESG and stewardship at pension fund AustralianSuper, said that transition goals were at the heart of his fund’s climate strategy, and that when it comes to reducing carbon emissions, engagement with the fossil fuel industry trumps divestment from it.
“We believe we can make a bigger impact on the transition to a decarbonised economy by engaging with companies to drive change rather than divesting from industries or companies, at which point we lose our influence,” he said.
John Livanas, chief executive of New South Wales pension fund State Super, said divestment was a nonstarter when it comes to driving carbon emissions reduction.
State Super
“Let’s assume we divest from companies engaged in fossil fuels tomorrow,” he said. “What does that mean? That means we sell our shares to someone else. But you’ll still have a company that’s producing oil and gas, just not owned by us.”
Shimada said: “Engagement is one of the limited number of tools we have in terms of making a real-world impact. If you divest from a company, what kind of impact does that give you?”
She said that recent flows of fossil-fuel capital out of public markets and into private markets, with their looser governance standards and relative insulation from the demands of environment-conscious investors, were to some extent a by-product of public-market divestment pressures that had made engaging with the industry more challenging.
“But there’s also a caveat,” she said. “Do we just rely on engagement? We don’t think that’s the case. It’s a multilateral approach that we think is required, not only encouraging through engagement, but we also need to allocate capital to companies providing solutions around decarbonisation – we need to be able to invest in that both from a private and a public market perspective.
“That’s exactly why we need to look into companies and see which ones are actually trying to make a meaningful change versus those that are not willing to change their corporate behaviour or their business model in the mid- to long term. We do that by understanding what the company’s core strategy is – not just what they’re saying around environment, but what they’re actually planning to do in the next few years, and what’s coming really, sincerely, from senior management.”
DIRECT INFLUENCE
Alexandre Chavarot, a strategic financial adviser to the Coalition for Climate Resilient Investment who lectures at Sciences Po and Cranfield School of Management, told AsianInvestor that investors could help to drive carbon emissions reduction by using their direct influence over corporate management.
“A link between senior executive incentives – whether it’s pay or promotions – and environmental objectives is quite relevant,” he said.
Livanas of State Super echoed the role that funds’ ownership of companies in the fossil fuels sector plays in getting them to toe the line on climate goals.
“Engagement with companies can be really, effective, and it has … resulted in some very significant and positive changes to some of the boards of very big companies in Australia,” he told AsianInvestor. “Large superannuation funds will need to maintain an investment in the top 50 companies on the ASX. This means your portfolio will have [mining companies] Rio Tinto and BHP. As superannuation funds grow, these investments are likely to be maintained over the next 10, 20, 30 or 40 years. In reality, therefore, you have to approach these companies like an owner, rather than a passive investor.
“When I talk to other CEOs, I find a commonality in the understanding that we’re all on the same journey to decarbonisation,” Livanas said. “But the sandpit within which we play has got to be, by definition, limited to the mission of our organisations – to make an investment return for our members.”