More than 1,500 pension funds, universities and other organizations around the world have announced that they will divest from fossil fuel assets, doubling from five years earlier and underscoring the surge in sustainable investing.
These institutions have roughly $40 trillion in assets under management. The threat of divestment is one way to pressure corporations into addressing environmental, social and corporate governance issues. Divesting also shields holdings from the ESG risk of the asset values dropping when other investors pull out.
The city of New York announced in late December that three public pension funds are divesting a total of $3 billion in securities related to fossil fuel companies. Two of them have already pulled out a total of $1.9 billion, with the 260 targeted companies including such big names as Exxon Mobil, Russian energy group Gazprom and German chemical company BASF.
The third fund has already divested more than $1 billion and plans to finish unloading another $1 billion or so this quarter. Investment in such targets as renewable energy and green real estate is being stepped up. The goal is net-zero greenhouse gas emissions in the funds’ portfolios by 2040.
Boston enacted an ordinance in December to bar the U.S. city from investing in any company deriving more than 15% of its revenue from fossil fuels. All funds will be withdrawn from the industry by 2025.
Dutch public pension fund ABP will stop investing in fossil fuel producers. So will CDPQ, which manages public pension funds for the Canadian province of Quebec. Both plan to put more money into renewables.
As of the end of December, 1,502 groups had announced they would partly or fully divest from fossil fuel companies, according to figures from international environmental organization 350.org and elsewhere. The count is up by 195 from the end of 2020 — the biggest rise in three years.
While insufficient fossil fuel development has been blamed for tight energy supplies worldwide, the data shows that decarbonization has picked up steam among investors.
This comes amid a sense of urgency to slash greenhouse gas emissions. Participants at the COP26 climate summit in Glasgow this past November reaffirmed the need for efforts to limit the rise in global average temperature to 1.5 C above preindustrial levels.
Toward this end, there should be no new oil or gas fields approved for development beyond projects already committed to as of 2021, according to a report from the International Energy Agency.
The Glasgow Financial Alliance for Net Zero’s 450-plus financial institutions across 45 countries seek net-zero emissions in their lending and investment portfolios by 2050, for example. Their more than $130 trillion represents 40% of the world’s financial assets.
Having committed to decarbonize their portfolios, financial groups are increasingly deciding against putting money into companies with low environmental consciousness.
The risk to investment performance is also fueling these trends. COP26 produced an agreement on a “phasedown” of coal power. Lower fossil fuel demand would hit earnings at related companies, possibly depressing their stock and bond prices.
Some argue that pulling investment funds from fossil fuel companies will not lead to a global decrease in carbon emissions, since the businesses themselves will still exist. But market pressure to lower emissions has been increasing along with investors moving to exit from the sector.
Global stock prices, including emerging markets, have climbed 80% or so since the end of 2016. And although oil prices have risen around 40%, global energy companies as a whole have sunk more than 10%.