Fossil Fuel Divestment

Summary

Local governments in the UK manage pension funds worth over £230 billion. £14 billion of this – over 6% – is invested in the fossil fuel industry.

Across the UK and the world, these investments are increasingly being challenged by the fossil fuel divestment campaign.

This briefing, which is extracted from this document summarises the arguments for divestment – both ethical and financial – and show how councillors can advocate for divestment and take action on climate change in your council and community.

The fossil fuel divestment movement calls for organisations, institutions and individuals to demonstrate climate leadership and divest – publicly sell your shares – from fossil fuels. It is the fastest growing divestment movement the world has ever seen.

Divestment aims to morally and politically bankrupt the fossil fuel industry. It has proven to be a powerful tool in movements past; an international campaign helped bring down the South African apartheid government. By divesting, we can break the hold of the fossil fuel industry over our political system, show our desire for, and create the space for action on climate change.

The call to divest local government pensions is also backed up by some powerful financial arguments – fossil fuel companies are increasingly recognised as risky investments, likely to become ‘stranded assets’, especially for long term investors like pension funds.

The movement for fossil fuel divestment began originally on university campuses, but it has quickly spread. More than 50 pension funds globally have now made divestment commitments, moving millions out of the fossil fuel industry.

Additionally, more than 70 city, state and county governments have pledged to divest or passed motions in support of divestment.

What is Fossil Fuel Divestment?

Divestment, simply put, is the opposite of investment.

While investment means buying stocks, bonds or other investments in order to generate financial returns, divestment is getting rid of particular stocks, bonds or investment funds. This could be for financial reasons, ethical reasons, or some combination of the two.

Fossil fuel divestment, therefore, is avoiding direct ownership of, or commingled funds that include, public equities and corporate bonds of fossil fuel companies.

The Movement

Fossil Free – the global fossil fuel divestment campaign – is the fastest growing divestment movement of all time.

Globally, institutions with assets worth over $3.4 trillion dollars have made divestment commitments. Here in the UK institutions including 20 universities, the British Medical Association, the Church of England, and two local government pension funds have made divestment commitments.

There are over 50 campaigns across the UK pushing for local government pension divestment, as well as over a hundred other campaigns targeting universities, faith groups, charities, health organisations and more.

The Ask

Pension funds managed by local councils in the UK collectively invest over £14 billion in fossil fuel companies. The Fossil Free movement asks institutions holding investments to resolve to:

    1. Immediately freeze any new investment in the top 200 publicly-traded fossil fuel companies
    Divest from direct ownership and any commingled funds that include fossil fuel public equities and corporate bonds within 5 years.

Additionally, you could also consider reinvestment asks – these consider how money currently invested in fossil fuels could be reinvested into clean energy, local infrastructure or other public goods. To find out more about reinvestment, check out the Reinvesting Pensions report from Community Reinvest.

Why Divest

The Ethical Case

Climate Change

“It makes no sense to invest in companies that undermine our future.”
– Archbishop Desmond Tutu

At the recent COP climate negotiations in Paris, world leaders agreed to ambitious (and necessary) goals to address climate change, keeping temperature increases to within 1.5 degrees. We know that it will not be possible to meet these goals while we continue to dig up and burn fossil fuels. Without bold action to keep 80% of fossil fuels in the ground, a changing climate will have devastating consequences for people, societies and ecosystems around the world.

By investing £14 billion in fossil fuel extraction, our local governments are profiting from climate change. As public bodies, local governments have a responsibility to work for the public good; they shouldn’t be financially and politically supporting the most destructive industry on the planet. Fossil fuel investments undermine existing local authority climate change mitigation and adaptation strategies and commitments.

The fossil fuel industry also shows no sign of attempting to change its behaviour to adapt to the risks of climate change. Although most major companies have now ceased to openly deny climate change, the industry still plows $100 million every day into exploring for new reserves and maintains that it will not be prevented from burning its existing reserves.

Political Influence

The fossil fuel industry exerts a huge influence over our political system.

For years they have used their immense economic power to pour money into lobbying against regulations intended to address climate change or to support political candidates who are weakest on climate action. Fossil fuel companies are handed subsidies by governments totalling nearly a trillion dollars globally.

Recent revelations have also revealed that the fossil fuel industry suppressed information and spread doubt and lies about climate change despite knowing about it for decades. Exxon Mobil are currently under investigation for misleading investors as a consequence.

By divesting from fossil fuels, councils and other public institutions can collectively stigmatise the fossil fuel industry, challenging the power these companies hold over our planet, economy and politics, and call for action on the climate crisis.

Divestment Can Win

Successful divestment campaigns have been fought in a number of sectors with great effect. Nowhere was it more powerful than in the case of South African apartheid, where an international divestment effort played a major role in breaking the back of the regime and ending racial segregation.

By the mid 1980s a movement initiated by students saw 155 campuses, 26 state governments, 22 counties, and 90 cities divest from companies doing business in South Africa.

This, alongside the struggles of people within South Africa, played a key role in stigmatising apartheid and the government on the world stage, and ultimately led to legislative change.

The Financial Case

Stranded Assets

We know that the vast majority of fossil fuels need to stay in the ground to meet globally agreed climate targets. So any action by governments to limit carbon emissions will leave remaining fossil fuels reserves as ‘stranded’ assets in a “carbon bubble” – assets which can never be used. Funds which continue to invest in fossil fuels can expect to suffer considerable losses when this “bubble” bursts.

The financial risk is particularly high for fossil fuels which contribute the most to climate change, such as coal and tar sands. To limit this risk some pension funds have moved to exclude the most “carbon intensive” investments, such as the
Haringey Pension Fund.

The financial risks of fossil fuel investments are increasingly widely recognised. The Bank of England’s Governor Mark Carney stressed the risks in a speech in 2015:

“Take, for example, the IPCC’s estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels. That budget amounts to between one fifth and one third of the world’s proven reserves of oil, gas and coal. If that estimate is even approximately correct it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable.”

The risks of fossil fuel investments are even clearer when contrasted with the financial impact of climate change itself. If significant action is not taken globally to limit fossil fuel consumption and mitigate climate change, the impacts will wipe trillions from the economy and, therefore, the value of all assets.

Outperformance of ‘Fossil Free’ Funds

Crucially, a number of high profile reports have also shown that a ‘fossil free’ portfolio can give equivalent or even higher returns for investors.

    • A study of 1400 funds by the University of Edinburgh Business School concluded that funds invested in fossil fuels had performed worse than green funds over the last two years.
    • An S&P Capital IQ study which compared the performance of equities over the last 10 years concluded that a fossil free fund would have significantly outperformed fossil-fuel invested funds.
    MSCI, who run global indices used by 6000 pension and hedge funds, reached a similar conclusion based on data from 2010-2015.

There are plenty of mainstream funds which offer ‘fossil free’ options for reinvestment.

Risk and Volatility of Fossil Fuel Investments

The fossil fuel industry has consistently been among the most risky sectors in the global economy. A report from MSCI on fossil fuel investments concluded that divestment has the potential to reduce overall portfolio risk.

Because of their inherently volatile nature, fossil fuels are not a sound investment for pension funds which must perform well decades, not just weeks, down the line.

What’s Divestment Got to Do with Councils?

Where’s the Money?

Money in local government is held in several different places, and the money controlled by any particular authority will depend on the level of local government, the size, and the set-up of local government in the area. The vast majority of investments managed by local councils take the form of workers’ pension funds under stewardship, though councils will also have bank accounts and cash reserves.

Through these pension funds, local governments invest workers’ money in fossil fuels. These investments are usually managed on a day-to-day basis by an external fund managers, but investment policy is set by the pension fund’s administering council.

Research released in September 2015 revealed that local government pension funds invest over £14 billion in the fossil fuel industry through direct holdings in companies and through commingled funds. This is equivalent to just over 6% of funds on average, however this exposure varies greatly, with funds investing between 1.5% and 11%. Three-quarters of direct investment is in just 10 companies – including Shell, BP, and most major companies involved in coal mining.

Who Controls the Investments?

There are 100 local government pension schemes across the England, Scotland, Wales and Northern Ireland.

Pension funds are usually administered by ‘top tier’ local government such as county councils. However this isn’t always the case – in metropolitan counties, district/city councils administer the fund on behalf of others unitary authorities (e.g. West Yorkshire Pension Fund is administered by Bradford Council). Some counties also defer management of the fund to others (e.g. Lincolnshire County Pension Fund is managed by West Yorkshire).

London is also different as most boroughs run their own pension funds, but some are administered by London Pension Fund Authority (LPFA), which also holds its own separate fund.

You can find out who administers all the local government schemes via the LGPS website.

Pension fund investments are usually managed on a day-to-day basis by an external fund manager, but investment policy is set by the pension fund’s administering council. The pensions committee act as de facto trustees of the fund and so are accountable to fund members – those whose pension is part of the fund.

Is Divestment Legal?

Fiduciary Duty and Divestment

It is widely accepted, as stated by the government, LGPS, and Nigel Giffin QC in his 2014 opinion on this issue, that an administering authority owes fiduciary duty to the members of its pension scheme.26 When considering action on investments, board and committee members’ first responsibility, therefore, is to ensure the long-term interests of fund beneficiaries.

However, this approach does not preclude taking action on irresponsible companies.

A Local Government Association (LGA) legal opinion concluded that, “the precise choice of investment may be influenced by wider social, ethical or environmental considerations, so long as that that does not risk material financial detriment to the fund.”27

A wider review of fiduciary duties was produced by the Law Commission (England & Wales) who stated that “the primary aim of an investment strategy is therefore to secure the best realistic return over the long term, given the need to control for risks”. The Law Commission concluded “there is no impediment to trustees taking account of environmental, social or governance factors where they are or may be, financially material.”

The Law Commission and the LGA both found that environmental concerns may also be taken into account as a non-financial factor so long as there is there is no “significant impact on returns” and “trustees have a good reason to think that scheme members would share the concern.”

A number of pension funds have taken action to exclude irresponsible companies within the existing legal framework. For examples of this, see ‘Case Studies’.

Implementing Existing Policy

Pension Fund, have signified their commitment to such an approach by signing the United Nations Principles for Responsible Investment.

For example, the London Pension Fund Authority (LPFA) states in its investment principles; ‘we wish to encourage environmental, social and corporate governance best practice in the companies in which we invest, as we believe this will deliver the best long term returns.” It goes on to say that “the LPFA will use its influence as a large institutional investor to encourage responsible long-term behaviour.”

This policy frames responsible investment as a process of engaging with companies about their environmental and social responsibility record.

Why Not Engage?

However, years of investor engagement with the fossil fuel industry have not delivered a sustainable energy industry, and many companies’ environmental performance has worsened. A report from Ceres highlighted that the fossil fuel industry has made minimal progress towards sustainability or even transparency, despite shareholder engagement. At the 2016 Exxon Mobil AGM, for example, none of the shareholder motions concerning climate risk were successfully passed.

‘True engagement needs the pressure created by divestment. Engagement without divestment is like a criminal legal system without a police force.’
– Carbon Tracker

Responsible investment policies would deliver stronger results if funds made explicit a willingness to exclude individual companies and industries from its portfolio should they fail to meet minimum standards. Companies must know that exclusion is an option if engagement is to have a major effect – this was reflected in Aviva’s recent policy on climate change in which they pledged to divest from companies not making ‘sufficient progress’.

Furthermore, for oil, gas and coal companies, fossil fuel extraction is their core business and are unlikely to be encouraged to change their whole business model. This makes investor engagement an inadequate tool for protecting from the risks of the carbon bubble.

What Can Councillors Do?

What councillors can do to advocate for divestment as a councillor depends on whether the council administers a pension fund or not.

However, if your council doesn’t control the fund, there’s still plenty you can do. Councils and councillors are in a relatively unique position in relation to pension funds – as fund members (your pension is in the fund), employers in the fund (council workers will all have their pensions in the fund), and often as fund administrators. Furthermore, some (but not all) councils hold investments themselves – not as part of a pension fund.

If Your Council Doesn’t Control A Pension Fund

  1. Meet with finance officers. to find out if your council has any direct investments (outside of the pension fund), and if yes, whether any of it is invested in fossil fuels.
  2. Discuss divestment with other councillors to gain support.
  3. Put in a divestment motions to full council calling on the council to freeze investment in fossil fuels and divest within 5 years and calling on the pension fund associated with your council to divest (see appendix for an example of a motion) .
  4. Push to update the council’s. ethical investment policy to include fossil fuels, or – if there is no such policy – add ethical considerations to the Treasury Management Strategy (see appendix).
  5. Get in touch. with Fossil Free UK to discuss next steps and how to apply pressure to the pension fund as well.

For case studies references and additional resources, please check out the PDF from which this page was created.