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Going Up In Smoke: Divest Or Gamble?

Local councils are pouring billions into fossil fuel companies, backing the industry that is contributing to climate change at the same time as they undermine their own zero carbon targets. The financial support is being given directly, through the Local Government Pension Scheme (LGPS) that currently invests about £16 billon in fossil fuels.

The LGPS has more than five million members, and is administered through 88 pension funds known as administrative authorities. Each pension fund is typically controlled by a Local Authority with councillors sitting on pension committees as the strategic decision makers. A recent report by ShareAction and UNISON (the public services union) found that climate change has been recognised as a material risk by less than one third of the administrative authorities, and only one-in-ten referenced reducing exposure to fossil fuel investments in response to the risk. And yet it is financially misguided to invest in companies dedicated to finding and burning more oil, gas and coal. They are putting future pension benefits at risk for LGPS members, as these companies are themselves at risk from the speed of our transition to a low-carbon economy.

The current reserves of all the fossil fuels companies – the oil, gas and coal deposits they have already claimed for future extraction – represent potential future emissions of 2,795 gigatons of carbon dioxide. (One gigaton is equivalent to one billion metric tons, if you can wrap your mind around such a gargantuan figure.) However, research by the Potsdam Institute calculates that to reduce the risk of exceeding two degrees Celsius global warming to a one-in-five chance, the maximum future emissions over the forty years from 2010 to 2050 are 565 gigatons of carbon dioxide. This is our “carbon budget” – the maximum amount of carbon that can be released into the atmosphere while keeping a reasonable chance of staying below a two degrees Celsius temperature rise. As Bill McKibben, founder of 350, points out:

“The thing to notice is 2,795 is five times 565. It’s not even close. What those numbers mean is quite simple. This industry [oil and gas] has announced, in promises to shareholders, that they’re determined to burn five times more fossil fuel than the planet’s atmosphere can begin to absorb.”

Literally for our own safety, most of the fossil fuel reserves banked by oil and gas companies should remain underground and not be extracted and burned in the future. However, the fossil fuel companies have little financial incentive to lead this change in any meaningful way while investors continue to credit these reserves on their books as assets worth trillions of pounds.

In moving decisively towards a low-carbon economy, un-burnable reserves and production facilities will become stranded assets that cannot be used to make future profits. If the current valuation of companies producing fossil fuels bursts suddenly, rather than gradually deflating over decades, investors such as LGPS that retain fossil fuels in their portfolios will be hurt. The difficulty is that no one can predict with any certainty how soon the carbon bubble will burst.

Only one-in-five of the administrative authorities have specifically outlined approaches to investing in low carbon alternatives, despite government proposals last year giving pension fund trustees the green light to divest from environmentally damaging fossil fuels and to reinvest in green alternatives if it meets their members’ wishes. At the time, the Department for Work and Pensions (DWP) backed up its proposals by expressly stating:

“Our proposed regulations are intended to reassure trustees that they can, and indeed should, take account of financially material risks, whether these stem from investee firms’ traditional financial reporting, or from broader risks covered in non-financial reporting or elsewhere.”

Financial self-interest – and the fiduciary duty of administrative authorities to seek the best returns for LGPS members in the context of the threat of climate change – is a powerful argument to divest. So too is the requirement to take action consistent with the zero carbon objectives of local councils. Waltham Forest Pension Fund was the first scheme in the UK to divest from all fossil fuels, taking this leadership position back in September 2016, and others have followed since. These progressive councils are not alone, joining a growing list of public institutions from universities to the Church of England that are cutting their unequivocal financial support for the fossil fuel industry.

In the early days of divesting from fossil fuels, campaigners thought the biggest effect would be to rob fossil fuel companies of their social licence, treating them in the same way as tobacco companies. As time went on, though, it became clear that divestment was also putting more tangible pressure on the industry. When Peabody, the world’s biggest coal company, announced plans for bankruptcy in 2016, it counted the divestment movement as one of the reasons for its problems. Now the contagion seems to be spreading to the oil and gas sector, where Shell for example has announced that divestment should be considered a “material risk” to its business. Do not be fooled by industry lobbyists; no one knows when this carbon bubble will burst.

Divesting from fossil fuels is one big action that local councils can take against climate change, without big cost. It sends a strong and immediate signal to constituents that positive action is being taken to address the climate emergency. Not least, it reassures thousands of LGPS members locally that their pension fund is being de-risked and remains in good hands.

Image courtesy of John Gerrard, “Western Flag” (Spindletop, Texas), 2017.

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