ESG Feature – Divestment v engagement
viability of their model. With that, we can fundamentally avoid those companies which do not recognise climate change or do not have a transition plan. “As an active manager, due diligence is crucial to helping us avoid the players we do not believe will benefit from a material change in the industry’s outlook.”
Hot air For Mark Wade, head of sustainability research and steward- ship at Allianz Global Investors, starving fossil fuel companies of capital will not assist the transition to a low-carbon economy. “The industry has cut costs to make them more resilient in a lower oil price environment,” he says. “A lot of companies that were breaking even at $50 a barrel now operate at $30. “In the wrong hands these assets can be run for cash with lim- ited capex to generate significant returns.” To back this up he points to the percentage of North Sea assets in private hands has risen significantly to 30% from 8% during the past 10 years. “The problem with divestment, especially with the current oil price, is that they can finance themselves easily, they can be run for cash and you are not solving the fos- sil fuels problem.” To transition to a low carbon economy, brown companies have to become greener. “You get the best sustainability rate of return if you can get high emitters to cut back,” Wade says, adding that investors need to persuade such companies to
invest in new technologies and support them on their way to a transitional path. “If that fails, then the question is, should you divest?” he says. “A couple of years ago ESG was about identifying idiosyncratic risk, today it is about making an impact,” Wade says. “So more people are asking if divestment as a starting point works.”
Side effects Solving climate change is not just about banning coal. Creat- ing alternative sources of energy by using the sun, wind and biofuels as well as technologies that remove carbon from the atmosphere are part of the challenge. For Childe, there is one industry that could use its profits to develop such innovations. “Oil and gas companies can provide the significant capital that is needed for such technologies,” she says. Such an opportunity to create sufficient capacity to stop using oil and gas to power the world would be lost if investors opt for divestment over an engagement strategy as many governments are unable to foot the bill. “One of the concerns with a climate- first approach is that divestment could lead to unintended con- sequences, such as losing your voice as a shareholder,” Childe says.
Divestment should be a last port of call as there can be unintended social consequences.
Mark Wade, Allianz Global Investors
Aside from missing the chance to influence some of the world’s biggest polluters, a divestment strategy could have side effects. “Divestment should be a last port of call as there can be unin- tended social consequences,” Wade says. “If you look at certain fossil fuel regions, like certain US states or particular geogra- phies globally, to suddenly kill an industry without a regenera- tive policy or investment plan could mean achieving climate goals to the significant detriment of social goals in specific communities. “So, you need to have a transition programme where you take coal away but develop new technologies to even out the social goals,” Wade says.
The price of divestment
Another drawback of divestment is that asset managers might have to work harder. Pension schemes have to regularly gener- ate a certain income to pay member benefits. If not, they may be forced to sell assets. The issue is that oil and gas companies are typically huge dividend payers. Indeed, BP yields 4.6%. So, does divesting from large oil and gas stocks mean sacrificing return?
“It is a short-term view that investors could miss out on income,” Burger says. “We work to understand the total value of an investment.” Burger points to the tobacco sector as an example. “For 10 years, the value to the underlying investment has been the div- idend, otherwise those stocks’ returns would have been flat.
26 | portfolio institutional | June 2021 | issue 104
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