Decarbonising portfolios and the economy: getting real

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Decarbonisation. Although it may be a bit of a mouthful, the word is cropping up increasingly in discussions between asset managers and their clients. Whether they are major institutional investors, pension funds or trustees representing company savings plans, they are increasingly keen to address the topic and integrate climate issues into their investment decisions. This is not solely the result of regulatory measures. Folk have been waking up and smelling the carbon…

At a symposium organised on 9 June 2018 in the Vatican, Pope Francis, speaking to the heads of the leading oil and gas companies and other energy-related businesses, again referred to the issue.

In particular he called for “efforts to ensure fuller access to energy by less developed countries” and to diversify “energy sources and promote the sustainable development of renewable forms of energy”. In his 180 page intervention on the environment, published in June 2015, the Pope stated that “technology based on the use of highly polluting fossil fuels needs to be progressively replaced without delay”.

This wish comes up against an undeniable fact: unfortunately oil and gas still account for 50% of primary energy demand. Unless there’s a major change in current trends, global demand for energy, and particularly fossil fuels, primarily oil and gas, is clearly set to increase, despite a projected reduction in demand in OECD countries.

While the positive change in attitudes towards fighting climate change since COP21 is encouraging, questions still remain about walking the walk. That is, the human activities causing global warming do not appear to be changing. How should responsible investors respond to this conundrum? The idea that we can simply cease to invest in all fossil fuels without distinction is unrealistic. The question of “stranded assets” must be taken into account.

Evidence that it is being taken into account came in a speech by the Governor Carney of the Bank of England on 30 September 2015.

Mark Carney very recently addressed the topic again, repeating that transition risks triggering an extremely sudden repricing of certain assets could destabilise markets. Carney sums up the idea with a powerful turn of phrase: Success is failure. In other words, an energy transition that led to a sudden depreciation in valuations of carbon assets and extensive financial losses would jeopardise financial stability.

Fighting climate change and the reality of the oil industry

According to the International Energy Agency, oil and gas represent 32% of global greenhouse emissions and 54% of CO2 emissions. As a result, the oil industry is regarded by some as one of the main culprits in global warming. It comes under severe criticism regardless of the demand for oil from other sectors such as chemicals, transport and industry.

The 2015 Paris climate agreement, which aims to keep the temperate rise to “well below 2 degrees Celsius above pre-industrial levels”, implies substantially reducing CO2 emissions by 2040, pursuing the reduction beyond that date and achieving “negative emissions” in the more distant future.

Geoengineering solutions for capturing, transporting and storing the CO2 emitted by a factory (CCS for Carbon Capture and Storage) and those associating the production of bioenergies with the process (BECCS for BioEnergy with CCS) look promising, even though the research is still incomplete.

The next Intergovernmental Panel on Climate Change (IPCC) special report to be issued this autumn will particularly focus on negative emissions. But at the same time, we need to continue supplying energy. An energy transition is quite clearly the solution, not a complete stoppage in production.

Simply doing away with these sectors, which often weigh heavily in stock market indices, by simply ceasing to fund them, is overly simplistic.

This does not mean that efforts to decarbonise portfolios should be deemed irresponsible. It’s obviously not the case: “low carbon” indices and the dynamic Green bonds market are good illustrations that the decarbonisation trend is irreversible. At a time when we cannot do without the oil industry, an alternative to divestment consists in actively supporting its transformation, particularly through shareholder engagement, and reserving exclusion for the worst forms of energy production such as coal and oil sands.

Investors in action

Special situations demand exceptional decisions, like the one BNP Paribas made in October 2017 to end its relations with actors engaging primarily in the exploration, production, distribution, marketing or trading of shale gas and oil and/or oil from oil sands, and to stop financing gas and oil exploration or production in the Arctic. These activities are particularly harmful for the environment and lower impact alternatives do exist.

Going further, especially for major asset managers, shareholder engagement by exercising voting rights and support for companies in the oil sector is vital.

BNP Paribas Asset Management actively uses the leverage conferred by a vote at a company’s annual shareholder meeting to push for strong commitments from companies. In the energy sector, our approach is within the framework of the IIGCC (Institutional Investor Group on Climate Change) and in collaboration with other European asset managers.

In recent years, we have asked all the major European oil companies to lay out for us the extent to which climate issues have been integrated into their strategy and what sort of supervision the board of directors exerted on this subject. These constructive dialogues have contributed to raising awareness of these issues among European oil companies.

In December 2017, we joined the Climate Action 100+ initiative, the aim of which is to ask the 100 biggest emitters of greenhouse gas emissions to take concrete measures to reduce their emissions and to integrate climate issues into their business strategies. In addition, since 2017 we have excluded from our portfolios those petrol producers deriving more 10% of their production from oil sands. The environmental impact of shale oil is incompatible with our investment philosophy.

Taken together, these actions have convinced us of the necessity and utility of pursuing dialogues with issuers present in sectors at risk, and with shareholders, to encourage them to improve their business practices and climate-related performance.

This is a crucial aspect and means that oil companies must be able to continue to invest, above all in renewable energies. Given the sheer size of these entities in our economy, their investments represent considerable amounts compared to other corporate sectors.

Oil giants will also need to drive several strategies (for example by refocusing their portfolio on natural gas or branching out into renewable energy, energy efficiency and electricity) in order to swiftly and radically reduce the direct and indirect impacts of their activities on the climate and be able to adjust…

It is through technical progress made possible by investment that the demand for more low-carbon energy will be met, but definitely not through the immediate elimination of producers.

Over the medium and long term, there must be a significant scaling down of fossil fuel activities and a shift to more carbon neutral energy sources compatible with the goal of keeping the temperature rise to below 2 degrees Celsius by the end of the century.

To read more on sustainable responsible investment, click here.
Find out more on BNP Paribas Asset Management’s ESG campaign here.

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