Editor’s note: Contributing editor Imogen Rose-Smith, a longtime senior writer for Institutional Investor, continues her bi-weekly column, Institutional Impact, exploring the policies, practices and strategies of the largest asset allocators, including pensions, foundations, and endowments. As Imogen says, she’ll be “tracking what investors do, not just what they say.”
ImpactAlpha, Apr. 5 – The pace is accelerating for commitments by institutional asset owners to go fossil-fuel free or reach net-zero carbon emission goals. The drumbeat will only get louder this fall in the runup to COP 26, the UN’s global climate gathering, or Conference of the Parties, set for November in Glasgow.
Investors as well as climate activists would do well to closely scrutinize such commitments. Even leaving aside the debate over the efficacy of divestment as a climate strategy, the procrastination, and in some cases obfuscation, in purging fossil assets even from asset owners’ pursuing such a strategy undercuts the sincerity of their rhetoric.
Grains of salt
Take one of the most recent announcements, from the University of Michigan. The university’s regents last month said they would discontinue making direct fossil fuel investments, shift natural resources investments toward renewables, and stop investing in funds focused on certain fossil fuels. The university committed to make its $12.5 billion endowment net neutral by 2050.
The announcement no doubt counts as a signal of the political shift (see below). But as a new investment policy, it signifies relatively little. Michigan is promising not to make direct investments in companies “that are the largest contributors to greenhouse cases, currently defined as the top 100 public coal companies and top 100 public oil and gas companies” as compiled by Carbon Underground. This excludes commingled funds, and does nothing to prevent the university from investing in the debt of these companies.
One of the most ambitious-sounding pledges came from the $163 billion Ontario Teachers’ Pension Plan, which in January announced an intention to achieve net-zero greenhouse gas emissions in its portfolio by 2025.
“As a global pension plan, we will leverage our scale and influence to transition to a low-carbon economy and create a sustainable climate future,” Jo Taylor, head of the Toronto based plan, said in a statement. “With coordinated action, net zero by 2050 is an ambitious but achievable goal.”
Look closely at the Ontario Teachers announcement (and welcome to the arcana of climate accounting). The Scope 1 and Scope 2 emissions counted by Ontario cover only emissions for which a company or an investment is directly responsible (the stuff I burn, for example), or emissions a company is indirectly responsible for (that stuff that is burnt so that I can make my stuff). Not included are Scope 3 emissions, which come from a company’s supply chain and products (that stuff I sell or deliver that is burnt, for example, gas for cars).
Oil majors like Exxon have relatively low Scope 1 and 2 emissions, but are among the largest Scope 3 emitters. (By the way, this same focus on Scope 1 and 2, while ignoring Scope 3 is how the Keystone XL Pipeline can credibly claim zero-carbon emissions, while building and being a pipeline intended to deliver oil extracted from tar sands in Alberta.) “Net-neutral” or “zero- emission” investors could be invested in oil and gas, as well as Keystone XL, key players in the continued extraction and consumption of oil, coal, and gas.
Drama at Exxon
At the University of California, chief investment officer Jagdeep Singh Bachher told the investment committee of the university’s regents back in May 2020 that “as of today, the endowment, the pension, and all of our working capital pools are fossil free at the University of California.” In fact, Bachher said, “you could extend that to say that our $125 billion of assets are fossil free.”
Except, we know that the UC’s portfolios are nowhere near fossil-fuel free. As my former publication, Institutional Investor, pointed out, the pension plan still has exposure to oil and gas assets in its real assets portfolio. And as ImpactAlpha reports, the fund’s filings disclose continued direct ownership in shares of ExxonMobil, Enemy No. 1 of climate activists. The UC’s current position that its fossil fuel exposure is “de minimis” is an interesting way of admitting its CIO misspoke (full disclosure: I worked under Bachher for two years as an investment fellow in the UC’s investment office).
Very few institutions, except some standout foundation endowments such as the $1.3 billion Rockefeller Brothers Fund and the $120 million Wallace Global Fund – are truly free from fossil fuel. And even the Rockefeller Brothers do have, yes, de minimis fossil-related holdings, as they document clearly.
It is indeed hard to extract a multibillion institution from the clutches of the fossil fuel industry. Also, while the fossil fuel industry is in decline, investments can still be profitable. Shares in ExxonMobil are up 34% year to date, gains that the UC theoretically would have missed out on had it not been invested.
Another data set pushed out by the environmental community makes clear just how deeply entrenched fossil-fuel financing remains. Last month’s “Banking on Climate Chaos” report, from the Rainforest Action Network and the Sierra Club, shows that the world’s top 60 banks have financed $3.8 trillion on fossil fuel assets over the past five years. In 2020 alone, the banks underwrote $750 billion for the fossil fuel sector.
That debt is not just sitting around on banks’ balance sheets. It is finding its way into the capital markets, and into the investment portfolios of asset managers. Many of which are management assets for institutional asset owners including investors which claim to be fossil fuel free.
In other words, if the oft stated goal of the divestment movement is to de-capitalize the fossil fuel system, it’s not working. Energy companies are raising more, not less, money. And, while it is true that the credit rating agencies have started to downgrade companies in the sector owing in part to climate related risks, banks are not having problems finding investors to buy those securities.
The UC’s holding of nearly 34,000 shares of ExxonMobil, worth only about $1.4 million, will hardly play a role in the upcoming shareholder votes about the future of the oil company. Still, it would be far more useful to know how the UC’s investment portfolios stacked up relative to the Task Force on Climate-Related Financial Disclosures, or TCFD, reporting requirements, than the game of fossil fuel whack-a-mole that the university investment office is currently playing.
Winds of change
Also due for some scrutiny is the chest-thumping of environmental activists. Taking a victory lap, Bill McKibben, founder of the carbon divestment movement 350.org, argues in The Guardian that what changed at the University of Michigan was not the leadership, but the political and economic climate. The same leadership, McKibben points out, voted against divestment six years ago.
In the meantime, he writes, the university’s president, Mark Schlissel has “watched as flood after firestorm has racked the country; he’s watched as the Biden administration has come to power promising swift climate action; he’s watched as the youth climate movement has grown to the point where this is the issue that his potential students care about more than any other; he’s watched as the state’s most important company, General Motors, announced a move to end the internal combustion engine by 2035.”
And McKibben takes note, “He’s watched as his peers at the University of California – the other candidate for America’s greatest public higher education system – divested, not to mention Oxford, Cambridge, and so many others. And it all sunk in.”
The UC’s lack of clarity around fossil fuel holdings, even if they are de minimis, undercut the clarity of such messaging. All the more so when you take into account what other carbon emitters the $153 billion UC system might be invested in. We just don’t know.
For investors, the rhetorical bait and switch matters insofar as the risks of the carbon economy are dramatic and systemic. By not being transparent about how they are investing in the carbon economy, investors are not being honest, with themselves or with stakeholders, about the kinds of climate and carbon-related risks they are taking on.
The hijinks will continue as fossil fuel investment is considered a publicity and political issue, not a real investment risk issue. It’s time for activists to insist on complete transparency and not settle for headline-grabbing proclamations.
Imogen Rose-Smith is a contributing editor at ImpactAlpha. A longtime senior writer for Institutional Investor, she was most recently a fellow in the Office of the Chief Investment Officer of the University of California. Catch up on all of Imogen’s Institutional Impact columns: