Pension fund makes case for divestment, against backdrop of increasingly positive climate policy across major markets.
Dutch pension fund PME defended divestment as an effective investor response to the slow pace of decarbonisation in the energy sector at Morningstar’s Sustainable Investing Summit 2023.
Speaking at the event, Daan Spaargaren, Senior Responsible Investment Strategist at PME, said although divestment is a blunt tool, the pension fund has witnessed its effectiveness in fostering dialogue with investee firms in hard-to-abate sectors.
He noted that some companies had come “crawling back” to the table post-divestment in a bid to encourage the fund to re-establish a stake.
Eight years since the Paris Agreement was adopted, the energy transition remains “stuck”, according to Spaargaren. He said the fact that fossil fuels still account for the lion’s share of the global energy mix raised concerns about progress towards addressing the climate crisis.
The global energy mix is composed of roughly 17% renewables, representing an increase of just two percentage points from 2015 levels.
According to the Energy Institute’s ‘Statistical Review of World Energy’ report, global energy demand rose 1% last year, with record renewables growth doing little to shift the overall dominance of fossil fuels, which still account for 82% of supply.
Spaargaren also referenced a recent Financial Times op-ed that labelled the current state of the energy transition as a “period of climate stuckness”.
“This lack of progress is also evident in the interactions with fossil fuel companies,” he said, noting even if oil, gas and coal companies are transparent and have long-term policies in place to reach net zero by 2050, these factors alone are insufficient in reducing greenhouse gas (GHG) emissions.
“Nothing is going on, nothing is moving,” he added.
“When you visit the Climate Action 100+ website, you’ll notice that out of 171 fossil fuel companies, only one managed to score positively on the most crucial indicator: concerning investments aligned with the Paris Agreement,” he said.
“This conclusion was drawn after several years of engaging in discussions with the fossil fuel industry,” he said, underscoring the need for more “substantial and immediate” actions to combat climate change.
In response, PME has divested from fossil fuel investments and redirected the funds towards the energy transition by focusing on solar and wind projects. Other pension funds to have divested from the oil and gas sector include ABP, the Church of England Pensions Board and the Church Commissioners.
“Many of [oil and gas] companies are not aligning with the necessary pathways to address climate change,” said Spaargaren, adding that this realisation led PME to develop a new investment strategy.
Instead of solely excluding certain industries, he explained, this new investment approach aims to create a more inclusive strategy that screens companies based on ESG criteria. This screening process has allowed PME to shortlist 250 companies in the process of transition.
PME supports the pension interests of almost 350,000 employers and employees in the metal and technology sector. The pension fund manages approximately €51.9 billion (US$54.4 billion) in AUM.
“Turn a blind eye”
Valentijn van Nieuwenhuijzen, Global Head of Sustainability for Public Investing at Goldman Sachs Asset Management, took a more optimistic view of the state of the energy transition, despite not disputing the statistics highlighted by Spaargaren.
“It’s essential to consider the significant developments that are taking place in the energy sector,” said van Nieuwenhuijzen, adding that next year will mark a “historic moment” as global investments in renewable energy surpass those in fossil fuels.
“This milestone is a clear sign of substantial change, and it’s closely tied to initiatives like the EU Green Deal and US Inflation Reduction Act (IRA),” he said. “These efforts are genuinely transformational.”
The rollout of the IRA has seen tax credits quickly introduced, which van Nieuwenhuijzen said will have “profound implications” for crucial components in the energy transition, such and the scaling up of technology and infrastructure needed to support carbon capture utilisation and storage (CCUS).
He acknowledged that much of this progress is happening in the private markets, but it’s likely to mature and become accessible to public markets over time.
This transformation makes it challenging to “turn a blind eye” to the traditional energy space, he said, adding that there was a growing commitment from the sector to deploy capital.
“CA100+ numbers reveal that there’s still room for improvement when it comes to green investments, and this is the area we should focus on,” he said, adding that companies that take a lead in green capital expenditures tend to experience “significant market rewards”.
However, while Europe and the US are making “notable strides”, van Nieuwenhuijzen said that investors must not overlook positive developments in China and India.
“Both are among the world’s largest economies and are undergoing significant changes,” he said, noting that China has taken a global leadership position in the renewable energy value chain, with the adoption of electric vehicles on an exponential growth trajectory.
“It is my belief that we are in a better position than it may seem, with rapid changes occurring at an impressive speed. Investing in this dynamic landscape is becoming more complex but also more rewarding.”