Climate change – a long engagement?

This article was first published on responsible-investor.com

Many investors will have been waiting for the expert panel review of the Norwegian Government Pension Fund Global (GPFG) to be released as they consider how their own investment institution deals with the issues of unburnable carbon and stranded assets. The thoughtful piece by the experts exploring the issues indicates where they see the stranded assets thesis being applied, and what reasons there are to sell certain assets. However, it does not constitute a rejection of stranded assets, and proposes that the fund may need a mechanism to exclude the most extreme high carbon companies. Carbon Tracker identifies the following key points from the analysis:

1. Investors have to act on this issue The fact that one of the largest institutional investors in the world saw fit to commission a panel to produce 71 pages of analysis sends a strong message that ignoring this issue is not an option. One of the striking aspects of the divestment campaign has been that the responses show few institutions are able to articulate how they are managing this type of risk. Each week sees more announcements of new strategies, products and research to try and address this issue, which is by no means a simple challenge.

2. GPFG has already recognised the financial case GPFG has sold out of 11 coal companies based on the likelihood that their business model was no longer sustainable. This suggests that there are already financial arguments for avoiding companies that have exposure to potential stranded assets. In this context, as Carbon Tracker has defined it, a stranded asset means a part of a company that will lose or destroy shareholder value, in response to changing market conditions. The recent announcement from E.ON that it would split its business into separate renewables and fossil fuel power divisions is a wake-up call that the old energy sector business models need to be challenged.

The exclusions policy of GPFG was set up to address corporates which caused extreme localised environmental damage. Given the historical relationship between corporations and carbon dioxide emissions established by work such as the , there is a clear causal relationship that can be used if the policy is updated to recognise impact at a global scale. The panel has rightly recommended that GPFG updates its exclusions policy to allow the most extreme companies be excluded on a case-by-case basis.