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January news round-up

Written by Sara Giordano

UK eases pension rules over fossil fuels divestment

(The Guardian, 18 Dec): Pension schemes will be free to dump fossil fuel investments after government drops ‘best returns’ legal rules. The government will let £2 trillion workplace pension schemes divest from oil, gas and coal companies more easily, as they will be able to take investment decisions to fight climate change. Until now, pension schemes have been restricted by 'fiduciary duties' that effectively require schemes to seek the best returns irrespective of the threat of climate change. In an interim response to the Law Commission’s report into pension funds and social investment, the UK government has said it is ‘minded’ to change pension regulations to require scheme trustees to outline their policy on non-financial concerns in their Statement of Investment Principles. UKSIF, the UK Sustainable Investment and Finance Association, called it “another important step towards more robust investment strategies which consider financially material environmental, social and governance factors” (RI, 18 Dec). In the statement, the government says that the measures are not intended to support any "boycotts of certain countries or disinvestment from certain assets". In January, two Local Government Pension Schemes have put £150 million each into low carbon ACS funds. Southwark Pension Fund invested in a newly-launched BlackRock fund that reduces carbon exposure in equities, while the Environment Agency Pension Fund (EAPF) chose a low-carbon fund offered by Robeco. EAPF Pension Manager Craig Martin told Professional Pensions: “It is positive to see more managers launch funds using the ACS structure, growing the operational infrastructure in the UK, which is also leading to lower costs” (Professional Pensions, 22 Jan & Professional Pensions, 22 Jan).

Lloyd's of London will divest from coal over climate change

(The Guardian, 21 Jan): The world’s oldest insurance market follows other big UK and European insurers by excluding coal companies from 1 April. The firm decided in November to implement a coal exclusion policy as part of a responsible investment strategy for the central mutual fund that sits behind every insurance policy written by the Lloyd’s market. The new policy will apply to assets held in segregated portfolios, which account for 75% of Central Fund investments (press release here). Inga Beale, Lloyd’s of London chief executive, said: “That means that in the areas of our portfolio where we can directly influence investment decisions we will avoid investing in companies that are involved mainly in coal”. Lloyd’s of London has so joined a long list of insurers that have pulled back their coverage from coal over the past months, for a total amount of $20 billion (FT, 8 Jan).

Norway’s wealth sovereign fund cuts holdings in biggest CO2 emitters

(Reuters, 18 Jan): According to a survey conducted by Reuters on the top 150 corporate greenhouse gas emitters, the world’s largest sovereign wealth fund has reduced the proportion of its $1 trillion assets invested in these companies. The review showed that the proportion of their emissions attributable to Norway, based on the percentage of market cap it owns in the firms, fell to 0.74% in 2016 from 0.78 % in 2014. This was primarily driven by the Norwegian parliament decision in 2015 to ban the fund - which is itself built from oil and gas revenues - from investing in firms that get more than 30% of their business from coal. The fund has also recently sold out several companies, as part of its high-profile ethical investment agenda. Similarly, it has banned from its portfolios Evergreen Marine, Korea Line, Precious Shipping, and Thoresen Thai Agencies because of “risk of severe environmental damage and serious or systematic violations of human right” (FT, 16 Jan). Earlier this month, Norges Bank, manager of the fund, had recommended it be allowed to invest in private equity, replying to a request for advice from the Ministry of Finance (FT, 10 Jan). Norway’s oil fund has become one of the world’s largest investors, owning on average 1.5% of every listed company in the world. But it is seeking new ways to boost its returns by exploiting its long-term investment view. It is currently allowed to invest in listed companies only and buy stakes of less than 10%. This would represent a remarkable change in its strategy. In a letter to the Finance Ministry, Norges Bank, says that the risk associated with unlisted equity investments could be adequately constrained in the management mandate. According to the advice, it should be given permission to own more than 10% of an unlisted company, as it is allowed to do with unlisted property investments (see letter in pdf here). As part of the review, the ministry has also commissioned two consultancy reports from McKinsey and Inflection Point Capital Management (IPCM) on management costs and responsible management activities in other large funds (IPE, 15 Aug). The latter highlighted that institutional investors should prepare themselves for increased scrutiny of and scepticism about their responsible investment claims. The report states that investors experienced less pressure from stakeholders as a result of providing more transparency. Institutional asset owners are fully aware of increased stakeholder expectations, according to the report. “There is a desire, especially among those asset owners who are under continuous public scrutiny, to make sure they are able to stay ahead through transparency and dialogue,” the authors wrote (IPE, 10 Jan).

BHP to exit World Coal Association over climate policy

(FT, 19 Jan) (The Guardian 23 Jan): BHP Billiton, one of the world’s biggest coal miners, has plans to withdraw from the World Coal Association (WCA) due to differences with it over climate and energy policies, as well as the limited benefit it gets from membership of the industry association. The company is also considering withdrawing from the United States Chamber of Commerce (USCC) due to the organisation’s criticism of the Paris climate change agreement and its opposition to carbon pricing. BHP declared it would remain a member of the Minerals Council of Australia (MCA) despite differences on climate policies, given the benefit it derives from membership. But it would ask the MCA - which receives 17% of its overall subscription revenue from BHP - to refrain from advocacy on policy issues that differed from the miner’s public positions. “While we won’t always agree with our industry associations, we will continue to call out material differences where they exist and we will take action where necessary, as we have done today,” said Geoff Healy, BHP’s chief external affairs officer.

Oil & gas companies are responding to growing concerns about climate change and sustainability

Pioneer Natural Resources, one of the largest US-based oil producers, released its first-ever sustainability report (full report in pdf here) that analyses how the company would fare in a carbon-constrained world (Axios, 21 Dec). "Recognizing this is an important issue for many of our stakeholders, we decided to go ahead and tackle it, and that's why it's in our inaugural report we put out this year," said Mark Berg, an executive vice president at Pioneer Natural Resources. ExxonMobil, the world’s largest listed oil group, will allow shareholders to meet members of its board, in order to keep investors informed about its business (FT, 20 Dec). The board has indeed decided, “where appropriate, to engage directly with key shareholders”, said a representative of the company. The move follows Exxon’s decision to bow to a shareholder vote calling for it to report on the potential impact of climate policy on its business. The move follows Exxon’s decision to bow to a shareholder vote calling for it to report on the potential impact of climate policy on its business. Moreover, Occidental will issue a Climate Risk Report in 2018 after a shareholder proposal last year gained more than two-thirds of shareholder support (The Street, 15 Dec). Shell has agreed to buy First Utility, a Britain-based provider of electrical power and natural gas (NYT, Reuters, 21 Dec). The acquisition of First Utility, which has about 825,000 residential customers, shows the company is committed to its pledges to increase its investment in renewables and halve carbon emission by 2050. The deal emerged after a four-year relationship between the supplier and Shell, through which the Anglo-Dutch oil company provides all of First Utility’s wholesale gas and power. The price paid by Anglo-Dutch Shell was not disclosed, but sources said it was about £240 million (The Mail on Sunday, 24 Dec). The deal is expected to unlock Shell’s ambitions to tap the growing demand for clean energy and play a leading role in the roll-out of electric vehicle charging. Mark Gainsborough, head of Shell’s New Energies division, said the innovation arm would double its investments next year to $ 2 billion (£1.5 billion) to deepen its presence in the growing electricity market (The Telegraph, 21 Dec). Meanwhile, the oil giant has agreed to acquire a stake in a US solar company, 12 years after exiting the sector. “With this entry into the fast-growing solar sector, Shell is able to leverage its expertise as one of the top three wholesale power sellers in the US, while expanding its global New Energies footprint,” Marc van Gerven, Shell vice president of solar, said (Reuters, 15 Jan).

Legal & General Investment Management (LGIM) has launched a new fund aimed at protecting investors against the financial risks of climate change

(FT Adviser, 23 Jan). The L&G Future World Equity Factors Index Fund will have a “climate tilt” aimed at reducing exposure to companies with worse-than-average carbon emissions and exposure to fossil fuels. It will also seek exposure to companies that seek to generate revenue from low-carbon assets. The fund will track a FTSE index, the FTSE All-World ex CW Climate Balanced Factor Index. “We are on the path to a low-carbon economy and companies that fail to respond to this reality present a risk to investors’ portfolios”, said Anton Eser, CIO at LGIM. "We strongly believe that companies who behave more responsibly with respect to climate make better investments in the medium to long term”, added Honor Solomon, head of retail at LGIM.

Corporates not adequately prepared for new climate disclosure calls

(Business Green, 19 Dec): South Pole has recently published a report on corporates’ drivers, preparedness and plans for TCFD disclosure. According to the report, almost two thirds of corporations recognise the first mover advantage of early adoption of the recommendations, but less than one in ten have decided on a disclosure strategy. 4 in 10 respondents believe TCFD will enable companies to better understand physical and transition risks associated with climate change but only a quarter of the corporates they represent have created scenarios to understand how these risks affect their business (full report in pdf here).

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