We threw eight companies out last year, so it had a good impact in terms of behaviour. Ward: There is a difference between disinvestment and decarbonisation. Decarbonisation is about mak- ing more nuanced choices within sectors and then engaging with the companies that recognise there needs to be a change. They may be high carbon emitters now, but it is about what’s going to happen? What’s the direction of travel? It is a more forward-looking scenario. Varco: I agree on the basic economics for having less fossil fuel emitters in your portfolio, and it’s amaz- ing how to some extent the market is discounting this.
If an active manager bought a basket of energy equities at the low point of the oil price in March 2016 and rode it all the way up to the high point last October, the price of oil increased 155%. You would think that the manager who bought a basket of oil equities at that low point would be a hero but MSCI Energy underperformed MSCI World. That tells you that people are looking at the long-term risks. Williams: That’s what makes the engagement so crucial. It is not just a question of looking at green companies as opposed to brown. You are looking at companies that are making the transition, like a car company that might be switching to producing electric cars; you would want to own that. So you would want to exclude high-carbon companies, but what’s crucial is identifying the ones that are going to suc- cessfully make the low carbon transition. That is where engagement comes in because without robust engagement you are not going to be able to select the right companies to tilt your portfolio.
“We did some scenario work a while ago and looked at what would happen to our portfolio in a four-degree scenario; it’s not pleasant” Mark Thompson, HSBC Pension Scheme
Mark Thompson
May–June 2019 portfolio institutional roundtable: ESG 13
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