Briefing for Councillors

Dudley Council are due on 18th February 2019 to debate the following motion:

Dudley Council recognises that:

1. Burning fossil fuels poses a serious risk to the stability of the climate upon which our well-being and economy depend.

2. Research demonstrates that up to 80% of the world’s proven fossil fuel reserves will have to remain unburnt if we are to have a reasonable chance of keeping global warming to less than 2 degrees Celsius, the globally agreed target for climate change mitigation.

3. Since 80% of fossil fuels must remain in the ground, the reserves of the fossil fuel industry risk becoming ‘stranded assets’ with little or no value – representing a substantial financial risk for those that invest in them.

4. West Midlands Pension Fund currently has over £490 million invested in the oil, coal and gas industries. This is environmentally and financially irresponsible.

5. To date, over 700 institutions representing over $5trillion in assets have committed to some form of divestment from fossil fuel companies.

In response to this Dudley Council pledges to:

A) Review its Investment Strategy and develop and implement a Responsible Investment Policy, which rules out new investments in Fossil fuel companies.

B) Call on West Midlands Pension Fund to divest from fossil fuels by mandating its representative on the Pension Fund Committee to call for the development and adoption of Responsible Investment policies which:

(1) Immediately freeze any new investment in the top 200 publicly traded fossil fuel companies;

(2) Divest from direct ownership and any commingled funds that include fossil fuel public equities and corporate bonds within 4 years;

(3) Set out an approach to quantifying and addressing climate change risks affecting all other investments, and

(4) Focus future investments on areas that minimise climate change risk.

The notes below serve to illustrate the points made in the motion

1. Burning fossil fuels poses a serious risk to the stability of the climate upon which our well-being and economy depend.

“Lack of action on climate change threatens to make the world our children inherit a completely different world than we are living in today. Climate change is one of the single biggest challenges facing development, and we need to assume the moral responsibility to take action on behalf of future generations, especially the poorest” Jim Yong Kim World Bank President, 2012

 

“We’re no longer talking about a situation where global warming is something in the future,” said Gavin A. Schmidt, director of the Goddard Institute for Space Studies, “It’s here. It’s now.”[1]

 

“Climate change is the defining issue of our time – and we are at a defining moment. We face a direct existential threat…If we do not change course by 2020, we risk missing the point where we can avoid runaway climate change, with disastrous consequences for people and all the natural systems that sustain us” Antonio Guterres UN Secretary General September 2018

What are the impacts of climate change?

We have already seen global warming of over 1°C.[2] This is resulting in increasingly severe impacts. 2019 has begun with heat waves in Australia and the polar vortex, which last week delivered bone-chilling blasts to the American Midwest and Northeast. Below are 10 of the most expensive climate-change driven weather events of 2018[3] ;

US Hurricanes Florence & Michael
California, US – fires
Europe – drought
Japan – floods June-July and Typhoon Jebi
Argentina – drought
China – July floods and Tropical Storm Rumbia
Australia – drought
Kerala, India – floods
Cape Town, South Africa – drought
Philippines & China – Typhoon Mangkhut

All of these disasters are linked with human-caused climate change. In some cases scientific studies have shown that climate change made the particular event more likely or stronger, for example with warmer oceans supercharging tropical storms. In other cases, the event was the result of shifts in weather patterns – like higher temperatures and reduced rainfall that made fires more likely – that are themselves consequences of climate change.

The UK Climate Change Risk Assessment Evidence Report 2017 National

Summary – England[4] states:

On Infrastructure: “Flooding poses the greatest long-term risk to infrastructure performance from climate change, but the growing risks from heat, water scarcity and slope instability caused by severe weather could be significant.”

On Health: “The CCRA Evidence Report highlights the need for additional action in the next five years in England to address the risks to health and wellbeing from heat, cold, and flooding.”

On Business: “Flooding and extreme weather events which damage assets and disrupt business operations pose the greatest risk to English businesses now and in the future.”

On Natural environment and natural assets: “Climate change poses risks in England to soils, freshwater resources, natural carbon stores, marine ecosystems, farming, forestry, wildlife and habitats. More action is needed to manage these risks.”

On “The international dimension” : “Climate change will impact upon on water security, agricultural production and economic resources around the world. These impacts can in turn exacerbate risks from conflict, migration, and humanitarian crises abroad, with implications for the UK.”

2. Research demonstrates that up to 80% world’s proven fossil fuel reserves will have to remain unburnt if we are to have a reasonable chance of keeping global warming to less than 2 degrees Celsius, the globally agreed target for climate change mitigation.

How fossil fuel companies’ actions are making climate change worse:

● At Paris in December 2015, 196 nations agreed to hold global warming to “well below 2 degrees”, and to “pursue efforts to limit the temperature increase to 1.5 degrees”.[5]

● The UK Government said in December 2016 that “70-75% of known fossil fuels would have to be left unused in order to have a 50% chance of limiting global temperature rise to below 2°C.”[6]

● The Governor of the Bank of England has said that the action needed to keep to a 2°C goal “would render the vast majority of [existing] reserves “stranded” – oil,gas and coal that will be literally unburnable. ”[7]

Yet, fossil fuel companies are actively drilling for NEW reserves of coal, oil and gas over and above existing reserves; their actions are completely incompatible with staying within 2 degrees![8]

What are the financial reasons for divestment?

As well as ethical and security grounds for divestment, there are strong financial grounds for taking action, given the increasing risks posed by holding high-carbon investments.

“Climate change increasingly poses one of the biggest long-term threats to investments” Christiana Figueres, UNFCCC

On announcing Southwark’s intention to divest from fossil fuels Fiona Colley, chair of the Pension Fund, said:“The commitment to cut pension investment in fossil fuels long term….is a measured and carefully considered decision based not only on ethical practice and the council’s continued drive to reduce exposure to fossil fuels but also on reducing the financial risk of investing in traditional energy sources, which will ultimately become obsolete”.[9]

WMPF Pension board has a “fiduciary duty” – to act in the best interests of the fund’s beneficiaries. These “best interests” mean pension funds now need to assess and act on climate risks.

Helena Morrissey, chair of the UK’s Investment Association and chair of Newton Investment Management, said the interpretation of fiduciary duty as an obstacle to considering climate risks had been “turned on its head” and that the new view emerging was that fiduciary duty “may actually compel or at the very least encourage divestment in fossil fuels”.[10]

The tide is turning away from fossil fuels

The switch from fossil fuels to renewable energy is accelerating due to three factors:

● regulation to limit carbon emissions;

● the increasing competitiveness of renewables;

● and the growth of new technologies.

Combined, they pose a growing risk to fossil fuel investments.

The Governor of the Bank of England is just one[11] in a long line of financial heavyweights[12] noting the increasing risk that fossil fuel companies are overvalued, in a world where greater action on climate is inevitable.

● Impax Asset Management say: “there are strong indications that today’s prices of energy stocks do not account for the risk” of Government intervention to reduce fossil fuel pollution[13]

● Investment experts Mercers consider climate change: “A new investment risk that demands action by investors”[14]

● S&P Dow Jones Indices said in October 2015 on stranded assets that “while the moral argument is compelling, there is strong evidence that the financial risks cannot be discounted either”[15]

● For the period 2015-2016 across the UK, Local Government Pension Funds lost £683 million in the coal slump. (Platform)[16]

4. West Midlands Pension Fund currently has over £490 million invested in the oil, coal and gas industries. This is environmentally and financially irresponsible.

How much is invested in fossil fuels?

WMPF Local Government Pension Fund (LGPF) holds investments of over £490 million in coal, oil and gas companies[17]. This is a large amount of money which could be reinvested to help our area.

What can West Midlands Pension Fund invest in instead?

Plenty of mainstream alternative investment options exist which have no or very low fossil fuel investments.[18]

One example is fossil-fuel free indices, which can equal or perform better than indices with fossil fuels in them. For example, over the last 5 years the fossil-fuel free indices from FTSE, Standard and Poor and MSCI have each out-performed the same index with fossil fuel companies in them.
In November 2016 , Legal and General set up a new fossil-free index, its Future World Fund,[19] into which HSBC have invested £1.8 billion. This fund tracks the above FTSE Climate Balanced index.
MSCI, who run global indices used by 6000 pension and hedge funds, found that investors who divested from fossil-fuel equities would have earned an average return of 13% a year since 2010, compared to the 11.8%-a-year return earned by “conventional investors.”[20]

Other examples of reinvestment opportunities beyond shifting into low-carbon indices are set out by Community Reinvest/Platform .[21]

“Pensions can be harnessed to drive the energy transition, create local jobs and support local innovation. Pensions can be more effectively put to work by creating and retaining value in local economies, while establishing new community ownership models. The long term nature of pension investments allows for the support of infrastructure essential in reducing inequality and meeting climate commitments.”

5. To date, over 700 institutions representing over $5 trillion in assets have committed to some form of divestment from fossil fuel companies.

Precedents: who is divesting?

As of January 2019 1000 + institutions whose assets total over $8.05 trillion have made divestment commitments.[22]

The 1000th institution to divest was the Caisse des dépôts et consignations (CDC), which manages France’s public sector pensions, savings, and investments worth €173 billion (USD $196 billion). It recently announced that from 2019 it will no longer invest in companies that generate more than 10% of their business from coal.[23]
In 2018 ; Ireland – the first country in the world to legislate fossil fuel divestment of its $10 billion sovereign pension fund.
New York City committed to divest its $200 billion public pension funds while investing two percent of total assets in climate solutions, sued the world’s largest publicly traded fossil fuel companies and founded a global network to support other cities to divest .

UK Pension Funds:

In October 2015, the £2.9 billion Environment Agency Pension Fund said it would divest 90% of its coal assets and 50% of its oil and gas stocks by 2020,saying this was in line with keeping below 2 degrees, and meeting the fund’s fiduciary duties.[24]
In November 2015, South Yorkshire Pension Fund announced it would divest from companies focused on coal and tar sands.[25]
In September 2016, Conservative and Labour councillors in Waltham Forest unanimously voted to divest the pension fund from fossil fuels within 5 years.[26]
In December 2016, Southwark pension fund announced it would divest from fossil fuels. [27]
March 2018 Monmouthshire County Council and Derby City Council both passed motions calling on their pension funds to cut ties with the fossil fuel industry – backed by councillors across the political spectrum. Derby and Monmouthshire joined 13 other UK councils – from Sheffield to Stroud, Brighton to Birmingham – in calling for divestment from their pension funds.[28]

Other UK institutions:

Over one third of UK universities have made fossil-fuel divestment commitments[29]
The British Medical Association has divested from fossil fuels[30]
The Church of England has divested from coal and tar sands[31]

Summary

● There are sound ethical and financial reasons to divest from fossil fuels.

● There are precedents for divestment from fossil fuels by Local Government Pension Funds.

● Divestment and reinvestment could provide a substantial amount of funding for necessary development of Low Carbon technologies and infrastructure spending in the West Midlands area.

Should you require further details on any of the issues touched upon here please do not hesitate to contact us at

DivestWMPF@gmail.com

Regards,

The Divest WMPF team

[1] https://www.nytimes.com/interactive/2019/02/06/climate/fourth-hottest-year.html?module=inline

[2] Over pre-industrial levels. https://www.climate.gov/news-features/understanding-climate/climate-change-global-temperature

[3] https://www.bbc.co.uk/news/science-environment-46637102

[4] ASC (2016) UK Climate Change Risk Assessment 2017 Evidence Report – Summary for England. Adaptation sub-Committee of the Committee on Climate Change, London.

[5] UNFCCC, 2015. Adoption of the Paris Agreement. http://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf

[6] http://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Commons/2016-12-09/56871

[7] Mark Carney, 29th September 2015. Breaking the Tragedy of the Horizon – climate change and financial stability

[8] eg see Shell’s scenarios’ incompatibility with 2 degrees at

https://unearthed.greenpeace.org/2015/07/20/factcheck-are-shell-bp-serious-about-climate-action/.

[9] https://www.jpe.com/news/esg/uks-southwark-pension-fund-to-shed-fossil-fuel-investments/10016662.article

[10] https://www.ipe.com/news/asset-allocation/financial-concerns-driving-broadening-of-fossil-fuel-divestment/10016638.article

[11] Mark Carney, Bank of England, 29 September 2015. Breaking the tragedy of the horizon – climate change and financial

stability. https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability. See also accompanying report by the

Prudential Regulation Authority, 2015. The impact of climate change on the UK insurancesector. http://www.bankofengland.co.uk/pra/Pages/supervision/activities/climatechange.aspx.

[12] http://www.pionline.com/article/20170126/ONLINE/170129886/hackney-pension-fund-to-reduce-fossil-fuel-equity-exposure

[13] Impax Asset Management, 2016. Carbon risk for investors: Building a “Smart Carbon” portfolio.

https://www.impaxam.com/sites/default/files/white-paper-Carbon-Risk-For-Investors.pdf

[14] Mercer www.mercer.com/insights/focus/invest-in-climate-change-study-2015.html.

[15] S&P Dow Jones Indices, October 2015. Carbon Efficiency: A Strategic Look, page 14.

[16] http://platformlondon.org/p-pressreleases/uk-local-council-pensions-lose-683-million-with-coal-crash/

[17] https://gofossilfree.org/uk/fuellingthefire/

[18] For example Blackrock Developed Equity ex Fossil Fuel Fund, Alliance Trusts Sustainable Futures Funds, First State Asia

Pacific Sustainable Fund, Schroders Global Climate Change Fund; plus Legal & General has developed a low carbon fund for

the Environment Agency Pension Fund. These examples do not constitute investment advice.

[19] https://www.theguardian.com/business/2016/nov/07/lg-launches-fund-to-invest-in-new-ftse-climate-index

[20] https://www.msci.com/documents/10199/d6f6d375-cadc-472f-9066-131321681404

[21] http://communityreinvest.org.uk/wp-content/uploads/2016/03/Reinvesting-Pensions.pdf

[22] http://gofossilfree.org/commitments/

[23] https://gofossilfree.org/wp-content/uploads/2018/12/1000divest-WEB-.pdf

[24] Environment Agency, 2015. Policy to address the impacts of climate change.

https://www.eapf.org.uk/~/media/document-libraries/eapf2/climate-change/policy-to-address-the-impacts-of-climate-change.pdf?la=en. October.

[25] Pensions Age, 2015. South Yorkshire Pension Fund to divest from ‘pure’ coal companies.

http://www.pensionsage.com/pa/south-yorkshire-pension-fund-divests-from-pure-coal.php Nov 23rd

[26] https://www.foe.co.uk/news/local-campaign-group-helps-make-divestment-history

[27]http://www.businessgreen.com/bg/news/3001193/southwark-council-pension-fund-promises-to-divest-from-fossil-fuels

[28] https://gofossilfree.org/uk/two-more-councils-back-divestment/

[29] https://peopleandplanet.org/blog/2017-08-17/fossil-fuel-divestment-state-sector

[30] https://www.medact.org/2014/news/uk-doctors-vote-end-investments-fossil-fuel-industry/

[31] https://www.ft.com/content/7ef8522a-ef54-11e4-a6d2-00144feab7de