As asset managers come under mounting pressure to adopt environmental, social and governance (ESG) principles, divestment has become an issue they can no longer ignore. This week, ABP, one of the biggest pension funds in the world which manages €528bn of assets on behalf of Dutch civil servants and teachers, announced its decision to stop investing in oil, gas and coal producers and to offload its holdings in fossil fuel companies worth more than €15 billion.
The move gets to the heart of a debate rippling through the financial sector: should investors divest or engage with problem companies? The issue has taken on a new significance ahead of next week’s COP26 climate summit in Glasgow.
For ABP, it represents a significant change of course. In June, its chairwoman Corien Wortmann said ABP would formulate more ambitious goals to contribute to the Paris Climate Accords, but that directly exiting fossil fuel investments was not the solution to environmental concerns. In fact, at Shell’s AGM in May, ABP declined to support a resolution by activist group Follow This calling for a more ambitious reduction in the company’s carbon emissions, even though it was backed by some other institutional investors.
Wortmann says the turnaround has been triggered by the recent UN Climate Panel report showing that stronger action is needed to prevent global warming reaching an unacceptable level and ABP wants to contribute to these efforts. It is also possible that representations from pension fund members and employers have also played a role, while protests by lobby groups are likely to have played a less significant part. Climate action group Fossil Free last month launched a lawsuit against ABP seeking a ruling on whether the pension fund needed to divest from fossil fuels to align its investment policy with its promise to adhere to the Paris climate agreement.
But the divestment announcement shows that ABP has now lost patience and concluded that its role as a shareholder does not give it enough scope to push fossil fuel companies to speed up their decarbonization strategies. “We see insufficient opportunity for us as a shareholder to push for the necessary, significant acceleration of the energy transition at these companies,” said Wortmann.
ABP’s decision to exclude fossil fuel investments from its portfolio therefore marks the end of a process of engagement aimed at persuading companies to accelerate their decarbonization plans, and it should be noted that this has its costs.
Firstly, on the financial side, although ABP does not expect the move to have a negative impact on returns, a 2021 paper in the Journal of Financial Economics found that companies with exposure to carbon risk generated additional returns for their shareholders. That is, carbon risk is priced and lessening the exposure to carbon might impact returns.
Secondly, there is also the possibility of downward pressure on the stock price of the stakes that are sold because of the scale of ABP’s investments (the decision to spread the sale of its position until Q1 2023 could also be seen as a way of addressing this contingency).
Last, and even more importantly, is not clear that the withdrawal from an oil company’s shareholder base of an investor with a strong sustainability reputation will help solve climate change. Selling shares to another owner may just mean passing the baton to other, arguably less responsible investors. ABP has a strong reputation for sustainability. Giving up its role as a shareholder will deprive the fund of the chance to exert influence on the companies in its investment portfolio.
Despite all these risks, I believe ABP’s move represents a meaningful signal that could have a major positive impact if it is picked up and followed by others. It is very difficult for one investor (even of the size of ABP) to move the needle on sustainability, but when it is followed by others in the industry, then companies can start to feel the heat and the movement can lead to real change.
Interestingly, the day after ABP’s announcement, hedge fund Third Point, which has built up a large stake in Shell, called for the oil major to be split into separate entities to improve its performance and enable it to invest more aggressively in decarbonization. This may or may not be a coincidence, but it also follows activist investor Engine No. 1’s success in installing three directors on the board of Exxon Mobil as part of a drive persuade the company to reduce its carbon footprint.
Only time will tell whether ABP’s move will bring the desired results and lead to wider change, but I hope that ABP’s bold move will act as a catalyst for momentum towards a changing attitude to fossil fuel producers among institutional investors.
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