Burning off fossil fuel investments

Be afraid. Be very afraid. That’s the message to companies involved in the exploration, extraction and production of fossil fuels following the sudden snowballing effect of funds announcing divestments from these industries just this week.

Investment bank UBS says in a new report that, following a series of meetings with clients, it sees the fossil fuel divestment campaign as significant and potentially effective.

“Many of those engaged in the debate are the consumers, voters and leaders of the next several decades. In our view, this single fact carries more weight than any other data point on the planet for this issue,” UBS said in the report out of London.

In just one week, more than $40 million has been earmarked to be pulled out of target companies.

The latest mandates from three key sectors of the Australian institutional investor landscape – university, local government and church funds – have decided to opt out of some or all of their coal and fossil fuel related investments.

So far, the dollar amounts are modest. But they may multiply as the divestment movement gains momentum.

In the past week, the Australian National University has said it will sell its stakes in seven resource companies after a student-led campaign that lasted several years. While press reports have bandied about the $1.1 billion total value of the ANU’s investment portfolio, it is actually selling a total of $16.025 million worth of shares, or 5.5 per cent of the Australian equities component of its entire portfolio.

At the weekend, the Anglican Diocese of Perth said it would switch its investments from fossil fuels and towards renewables instead. The Uniting Church has taken a similar stand.

The New South Wales local council employees’ super fund, Local Government Super, says it will sell $25 million of shares in companies that derive over a third of revenue from coal mining or coal-fired electricity generation, including AGL Energy and Whitehaven Coal.

Last month, HESTA, the super fund for health and community services with $29 billion in funds under management, announced it is progressively implementing a restriction on investments in thermal coal, becoming the first major Australian super fund to do so across all of its investment options.

So while each super fund’s investment decision will have a negligible impact on any single resource company’s share register, this appears to be the start of a structural shift out a sector based on ethical investment principles.

“There is a massive increase in public scrutiny from the members of super funds and the clients of financial advisers,” said Simon O’Connor, chief executive of the Responsible Investment Association Australasia.

RIAA is the peak industry body for responsible investors, claiming some 160 members that manage a collective $500 billion and include the country’s 50 largest super funds.

In some ways, this is a logical progression from the trends towards conscientious consumption (fair-trade coffee, free-range eggs) as well as the move by super funds out of other ethically dubious investments in gambling or tobacco. University endowment funds in the US such as the one run by Stanford and more than 30 cities including Seattle and San Francisco have made such ethical calls.

Figures from the RIAA show that 16 Australian super funds divested a total of $1.2 billion from tobacco stocks over a two-year period.

Ten years ago, fund managers argued that pulling out of tobacco would be costly and interfered with modern portfolio theory. Now, advisers at Mercer believe that the key argument for super funds to divest out of a sector is connected with the reputation of the fund.

The risk is that the super fund will be perceived to be disconnected from their members’ attitudes if they continue with status quo investment practices.

When UniSuper refined its approach to its $1.4 billion sustainable investment options last month, it added alcohol, gaming, weapons and companies involved in fossil fuel exploration and production to its screening of tobacco, as exclusions from its funds.

While it is too early to aggregate industry figures from the fossil fuel divestment campaign, it’s clear that companies are feeling the pressure to respond.

The Minerals Council has set up a committee to develop low emissions technologies for fossil fuels.

Sandfire Resources, one of the companies to lose ANU as an investor, has threatened to sue the advisers behind the decision, according to media reports.

“It’s basically a Pandora’s box,” one fund manager told me. The question is whether investors wanting to take the ethical high ground avoid pure-play fossil fuel producers, explorers, and/or mining services companies. Or is it companies with a certain threshold of revenues from these activities? What about diversified miners?

He added, with a note of cynicism, that it is “easy to make these investment decisions” with coal prices where they are now. Investment returns are unlikely to be damaged by such decisions taken at the low point of the cycle.

But for the longer term, there is a greater issue at play. Australia’s superannuation system holds around $1.8 trillion in funds, and about 40 per cent of the super savings are managed by investment managers.

If domestic institutional investors, pressured by their members, systematically withdraw from certain sectors over time, those companies will have a diminishing pool of domestic capital on which to rely. And that may create an opening for investors from other countries, with different thresholds and different long-term goals, to move in.