More institutional funds across the globe are taking action on fossil fuel divestment because of the argument that holdings in carbon-intensive industries could eventually become worthless stranded assets.
Oil-rich Norway’s government, for example, has instructed its sovereign funds, designed for its nation’s generous welfare state, to divest from coal. The Rockefeller family, whose fortune is based on oil, has also pushed for divestment from the conventional energy sector. The movement has even affected the food industry: The New York State Common Retirement Fund pushes companies such as ConAgra and ADM to change their palm oil sourcing policies, as production of that commodity has ties to deforestation and, therefore, climate change risks. But according to a United Kingdom-based NGO, much more needs to be done on this front, especially when it comes to the protection of future pensions.
The Asset Owners Disclosure Project (AODP), the mission of which is to shield the owners of assets such as securities, stocks and bonds from climate change risks, recently released its Global Climate 500 index. This organization annually surveys the 1,000 largest assets owners, most of which are pension funds, but also include sovereign wealth funds, insurance companies, philanthropic foundations and university endowments.
According to the AODP, these funds together manage over $52 trillion, but less than 2 percent of those securities are low-carbon assets. And here in the U.S., where many analysts say pension funds are still on shaky ground in the wake of the 2008-2009 financial crisis, at least 117 funds with about $4.6 trillion in assets have taken little or no action on addressing what the APDP says are significant climate change risks.
A cursory glance through the list reveals how many of the funds' approaches toward managing their climate risks are based on geography and, of course, the resources supporting those economies. The AODP evaluates these funds’ efforts focused on managing climate change related risks based on what these organizations have publicly disclosed. Analysts with the AODP then grant each fund a rating from AAA down to D; those organizations that have not taken any action on what the AODP says are five key criteria are marked with an “X.”
Pension funds throughout Canada, for example, have done nothing, in AODP’s view, to nudge their holdings away from carbon-intensive industries; this is hardly surprising considering Canada’s massive oil sector, even though the country’s economy, and budgets, have taken a hit the past year because of low energy prices. Funds across the Middle East, including several in the United Arab Emirates, have also taken no action, and the same with Switzerland, where it can be assumed oil money has found a safe haven.
But for the AODP, the danger is in what could happen to pension funds, which will be a critical financial lifeline for millions in industrialized countries where the population of retirees is surging. A few pensions systems, such as those in New York and California, have diversified their holdings and have scored what the AODP says is its top, sterling rating. But many state pension funds in the U.S. have taken little action, or have a “D” rating, and others have done nothing.
Of course, this could all change on a dime if oil prices suddenly skyrocket again, and oil companies then in turn enjoy heady profits. But while we can only predict that energy prices prove to be unpredictable, the truth is that coal is on the decline, renewable energy investments are surging worldwide, and electric vehicles are growing in popularity despite cheap oil prices.
Only 24 of these largest 500 funds have at least an A rating, so more week needs to be done in the AODP’s view.
“Climate has now firmly moved from an environmental issue to a financial and economic one. The two largest pools of capital in the world are pensions and insurance, who both have long term horizons and are incentivized to address this risk,” said Julian Poulter, CEO of the AODP, in an emailed statement to TriplePundit. “But currently they are both trapped by short term markets, and the AODP Index shows which ones are breaking free from the shackles of those markets and taking matters into their own hands. The leaders in the index are now reshaping the views of their peers and those in the markets.”
Image credit: Dreyfuss Blackford
Leon Kaye has written for TriplePundit since 2010, and became its Executive Editor in 2018. He's based in Fresno, CA, from where he happily explores California’s stellar Central Coast and the national parks in the Sierra Nevadas. He's lived in South Korea, the United Arab Emirates and Uruguay, and has traveled to over 70 countries. He's an alum of the University of Maryland, Baltimore County and the University of Southern California.