Published on 17 November 2018

CSR

Fossil energy: do the investors has to make a choice between dialogue and divestment ?

For investors around the world, coal is no longer good press. It is difficult for banks, insurers and well-established pension funds to keep this global warming symbol in their portfolios. Should divestment now expand to other polluting energy sources or should dialogue with companies be strengthened to improve business practices? Such is the dilemma for of a growing number of investors.

To combat climate change, NGOs like 350.org advocate for divestment from companies in the oil and gas sector. But is this always the right solution?
@350.org

In 2017, €123 million of coal assets were divested by French institutional investors, according to a study by Novethic (1). In total, 70% of corporate investment portfolios are affected by climate exclusions. This dynamic is far from limited to just France and coal: “fossil fuel divestment has become a global phenomenon,” said 350.org.

Last September, the NGO counted nearly 1,000 institutional investors who joined the movement. Their weight is starting to have an impact: they represent more than $6 trillion in assets under management, which is 120 times greater than four years ago.

In France, one of the last institutional investors to have taken the plunge is Ircantec, a supplementary pension scheme for non-full-tenure staff (2). After being stigmatised by NGOs for financing fossil fuels, the pension fund decided to divest strategically, targeting oil and gas company investments deemed "integrated" and "non-compatible with a 2°C trajectory".

Shareholder engagement, a rising dynamic

Even if divestment has a strong media impact, its effect is "limited" to the production of fossil energy itself, says Vincent Dufief, Head of Investor Relations at Total: "When an investor sells a share...another buys it!" And sometimes they are bought by investors less diligent about ESG (environmental, social and governance) criteria, Dufief said.

Alongside divestment - and reinvestment in green energy - engagement and shareholder dialogue is growing to encourage companies "to do more and do it faster in the face of enormous challenges", said Laetitia Tankwe, adviser to the President of Ircantec.

One of the most advanced coalitions on the subject is Climate Action 100+. It brings together more than 300 global investors, and requires more transparency and 2°C strategies for the world's 100 largest greenhouse gas emitters. "Pushing companies in the right direction" is a question of "duty" and "responsibility", says Nadine Viel Lamare, Head of Sustainable Value Creation for AP1, a large Swedish pension fund and member of the initiative.

Dialogue: more effective than divestments?

It is also a matter of efficiency, affirms Total, which is among list of targeted companies for Climate Action 100+. "For a CEO, the shareholder remains a key stakeholder, and this is especially true for ESG issues. Dialogue is effective, both for transparency issues on climate risks and climate strategies, governance and also for business," said Dufief.

Patrick Pouyanné, CEO of Total, who spoke at the 2018 Positive Investors Forum organised by Novethic on 6 November, agreed: "Dialogue with responsible investors is beneficial to our group, and this year, Total's Board of Directors spent an hour addressing the way in which we answer ESG-related questions.

"When we backed out of coal, a profitable model, to focus on new, smaller, renewable energy and energy efficiency businesses, it was difficult.  We needed investors who supported us in the things we do well," said Anne Chassagnette, Environmental and Societal Responsibility Director at Engie. Otherwise, the company could be at risk.

However, Chassagnette noted that the shareholders themselves must also be consistent: "between the Black Rock letter asking us to commit to the long-term common good and lack of investor feedback, questions and concerns are rarely the same...if present at all".

Such a silence has encouraged companies to ask investors to challenge them more. "Write us!” was the cry made by corporate sustainable development and finance directors to their investors at the Positive Investors Forum, organised by Novethic.

Béatrice Héraud @beatriceheraud 

(1) 173 shades of reporting, a climate and ESG reporting analysis

(2)  Ircantec is the compulsory supplementary public sector pay-as-you-go pension scheme for non-full-tenure staff and public authorities. On 9 October, 2018, it decided to "divest from oil and gas sector bonds" and to withdraw shares from specialised companies in the sector as well as "non-European integrated companies whose capital expenditures are not compatible with a trajectory 2°C ".


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