CFG continues to lead the debate on ethical investments and net zero. In this article, Patrick Trueman from James Hambro & Partners considers the issue of divestment and what difference it's making.
It is easy to feel frustrated at the seemingly slow pace of change towards net zero. Climate change is the most serious threat faced by humanity and yet we are still not even close to being on track to limit temperature rises to 1.5°C above pre-industrial levels.
At the current rate of carbon dioxide emissions, temperatures could increase by as much as 4.4°C by the end of the century, which would be catastrophic. It's no surprise that some investors want nothing to do with businesses they feel are most culpable.
Divestment isn’t a new phenomenon
Divestment as a policy tool is clear cut and straightforward and it might be the only option for organisations whose charitable purpose is clearly at odds with the operations of the business. But if the goal is to bring about a shift towards a more sustainable net zero economy, is it always the best option? We feel the case for engagement remains strong.
Harnessing the power of voting
Shareholders have important rights and can express their views through voting, a key fiduciary duty for asset managers. By working together, shareholders can send a very clear signal to management and, if they are dissatisfied, can demand a resolution at the company annual general meeting (AGM).
There are now a number of NGOs working to coordinate shareholder efforts demanding the adoption of credible net zero strategies. The Say On Climate initiative launched by stewardship group As You Sow, introduced a resolution at Boeing’s AGM last year, calling on the company to deliver a credible plan for net zero greenhouse gas emissions by 2050. Backed by 91% of shareholders, the company promised to comply.
Judged on headlines alone, the campaign for fossil fuel divestment appears to have been successful. However, the underlying detail is less compelling. Many investors have committed only to a gradual divestment over a significant period of time. In other cases, divestment is very limited, focused only on the worst offenders such as coal miners or oil sands.
Has divestment brought about measurable change?
It's hard to find data supporting the case that divestment has materially reduced equity valuations thereby limiting access to capital to finance fossil fuel extraction. There are still plenty of buyers and this is unlikely to change in the medium term.
Even if the scale of selling does materially reduce the price of fossil fuel companies, there is every chance they will simply be bought by private capital, merely shifting the problem elsewhere. Between 2020 and 2022, private equity firms purchased $60bn of oil, gas and coal assets. Privately held, there is less disclosure, visibility and accountability on efforts to reduce the environmental impact of these companies.
Follow the money
Restricting energy companies’ access to equity markets does not address the significant financing derived from banks and the debt markets. This has led to pressure on banks who lend to energy companies to restrict their lending and debt financing.
Mark Carney, the former governor of the Bank of England, established the Glasgow Financial Alliance for Net Zero, recognising the need for banks to implement their own net-zero strategies. Pressure from shareholders has risen in recent years and a number of banks have faced climate-related shareholder proposals. In 2022, HSBC was forced to agree to new climate related pledges in the face of shareholder pressure.
It's not just the fossil fuel companies
Transitioning to a genuinely sustainable world is going to require wholesale change across the entire economy. Fossil fuel companies are obvious targets but given the enormous importance of energy they need to be part of the solution.
Heavy industry is believed to be responsible for around 22% of global greenhouse gas emissions, whilst transport accounts for another 24%. Net zero requires all companies to adapt and change. Investors have a crucial role in ensuring this transition is front and centre of the minds of all management teams and the boards they report to.
So, what can charities do?
Charities can take a proactive approach to supporting the move towards net zero by engaging with their investment manager to gain assurance that they have a clear commitment to stewardship.
At James Hambro & Partners, we are signatories to the UK Stewardship Code which sets a high bar for the integration of stewardship and environmental, social and governance (ESG) factors into investment decision making.
We welcome dialogue from our clients on the approach we are taking. After all, tackling the climate crisis will require concerted pressure to act and engage from everyone.
You should not act on this content without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made or given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.