Fossil fuel divestment gathers momentum

More than 10,000 people have signed a petition calling on ABP, the $360bn Dutch pension fund, to drop its holdings of oil, gas and coal stocks, in a further demonstration of the momentum behind fossil fuel divestment.

Last week, the Church of England, one of the world's wealthiest religious institutions, decided to blacklist coal and tar sands investments in what was seen as a victory for campaigners seeking to make fossil fuels as unpopular as tobacco.

The debate over the merits of low-carbon investment strategies has intensified amid claims that more than half of the oil, gas and coal reserves of publicly listed companies are so-called "stranded assets" that cannot be used if the world is to avoid the worst effects of climate change.

ABP has promised to take a "critical look" at the influence of its investments on climate change. It follows in the footsteps of a number of other European pension funds, including Sweden's AP2 and AP4 and Norway's sovereign wealth fund.

Last month, the $1.2bn Syracuse University endowment became the latest US institutional investor to agree to reduce fossil fuel holdings. It joined a list of 23 US universities and college endowments, with combined assets of around $2.8bn, that have embraced divestment.

The result is that index providers and asset managers have experienced growing demand - at least according to them - for low-carbon investment products.

These range from strategies that exclude fossil fuel companies to those that exclude only coal-related stocks or those that focus on carbon risks.

Jane Goodland, co-head of sustainable investment at Towers Watson, the consultancy, says: "Issues such as carbon exposures and climate change need to be understood fully by investors before they start to commit capital. Low-carbon indices are an important development but it may take time before they reach critical mass."

Index providers are notoriously reluctant to reveal details of how much money is benchmarked against particular indices. This means gauging the appetite for index-based low-carbon strategies is problematic.

However, Gordon Morrison, a managing director at FTSE International, the index provider owned by the London Stock Exchange Group, says the fact that lawmakers in California are considering whether to require Calpers and Calstrs, the two US pension fund giants, to drop coal-related investments is "concentrating the attention of US investors".

Although only a small number of institutional investors have divested from fossil fuel stocks so far, Mr Morrison believes roughly 80 per cent are considering action.

FTSE launched four ex-fossil fuel indices in June 2014. Mr Morrison says it is in discussions with several US retail distribution networks about the possibility of creating retail investor-focused vehicles based on these indices.

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In October 2014, MSCI launched low-carbon indices, developed at the request of AP4, FRR, the French pension reserve fund, and Amundi, the Paris-based asset manager.

FRR and AP4 each provided €1bn of seed capital and Amundi hopes these commitments will grab the attention of other institutions.

Olivier Rousseau, executive director at FRR, believes carbon risks are mispriced. The MSCI low-carbon indices historically delivered a performance similar to conventional cap-weighted indices. "But the portfolio will outperform when governments really start to act," he says.

FRR is also working on plans to decarbonise its €2bn portfolio of smart-beta strategies.

"We believe we can reduce their carbon exposure by around 50 per cent and that the impact on returns will be negligible," says Mr Rousseau.

ETF providers have launched similar products but investor appetite for these has been mixed.

Late last year, BlackRock and State Street Global Advisors unveiled directly competing ETFs that track a different MSCI low-carbon target index from that employed by AP4 and FRR.

Instead of excluding fossil fuel stocks, the MSCI low-carbon target index used by the two ETFs overweights those companies with low carbon emissions (relative to sales) and low potential carbon emissions (per dollar of market capitalisation). It further seeks to limit any performance deviations from the conventional MSCI world benchmark.

"The low-carbon ETFs allow investors to remain engaged with fossil fuel companies, rather than excluding them from their portfolios" says Sarika Goel, an analyst at Mercer, the consultancy.

The two ETFs, which were provided with seed capital by the UN staff pension fund, had combined assets of $236bn at the end of March this year. Neither has attracted fresh investor inflows.

"Low-carbon strategies are still a niche [market] and it is hard to predict how many assets they will attract. But the debate is getting louder," says Ms Goel.

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