SPF Engagement Strategy: Not Enough to Solve Climate Crisis

Written by Zivile Mantrimaite, climate justice campaigner

On August 31, 2015, Strathclyde Pension Fund committee rejected Glasgow City Council’s proposed resolution on fund’s divestment from fossil fuel industries. The feasibility of such act was reviewed and dismissed on grounds of engagement, stating that active engagement with fossil fuel companies will address the subject of climate change in more efficient way. Corresponding to this, Fossil Free Strathclyde campaigners have released Report on Engagement Limitations When Tackling the Systemic Issue of the Fossil Fuel Industry’s Connection to Climate Change: Case Study for Strathclyde Pension Funddemonstrating that engagement is ineffective as a solution to limit the impacts of climate change and comply with recently internationally agreed climate targets.  

We summarize our key findings below and advise the Strathclyde Pension Fund committee to review its engagement strategy and re-consider divestment option in order to truly battle the climate change.


Strathclyde Pension Fund (SPF) is a signatory of the United Nations Principles for Responsible Investment (PRI), which holds its managers accountable for investing into environmentally, socially and governmentally (ESG) aware corporations or to engage with companies and strive to improve their practices. Since 2012, SPF entrusts this commitment to GES (Global Engagement Services), the European Union’s leading provider of engagement services – engaging with different companies on behalf of their investors. Strathclyde Pension Fund Committee claims that climate change and its impacts have been highly incorporated in their Responsible Investment Strategy, with 14% of annual engagements related to climate change, 12% of which were made directly by GES to energy companies on behalf of the fund. Additionally, the fund follows a direct engagement approach by building alliances with other investors such as Local Authority Pension Fund Forum (LAPFF), ShareAction and Carbon Action.

Although, the aforementioned approaches did achieve some corporate change at certain levels – examples of which will be presented below – the engagement process with fossil fuel corporations is generally invalid due to several reasons:

  • The financial crisis faced by fossil fuel industries that is generated by stranded assets and the ‘carbon bubble’ cannot be addressed through engagement. As financial risks of investing into fossil fuels are emerging and becoming clearer every day, the managing body of Strathclyde Pension Fund has the responsibility to fulfill its fiduciary duty to its members and to make prudent decisions regarding the level of risk it exposes them to.

 

International recognition of climate change and the limited carbon budget have not put fossil fuel companies at ease. The IPCC (Intergovernmental Panel for Climate Change) reports that to have at least a 50% chance of  meeting the agreed 2ºC target, no more than 1120 GtCO2 can be emitted. The claimed fossil fuel reserves, on the other hand, correspond to 2860 GtCO2, which is more than double the global carbon budget, creating widely recognised concept of the ‘carbon bubble‘. Subsequently, the industry is already confronting economical issues, and exposing its shareholders to great financial risks, which cannot be resolved through engagement. The IEA (International Energy Agency) scenario for stranded assets estimates 304 billion USD of non-recoverable investments by 2035. More recently, Peabody, the largest coal company in the world, in which Strathclyde Pension Fund has invested over £136 thousand, has filed in for bankruptcy. With the current crash of coal industry and the dramatic drop in oil prices, the fund has already lost £26 million and is still exposed to future risks. 

 

  • Although engagement may improve the practices of fossil fuel corporations, it is inadequate to prevent them to carry out their core activity of producing fossil fuels, which is the main driver of climate change and the main concern of many shareholders. Moreover, as argued by Carbon Tracker Initiative, engagement and divestment from fossil fuels are intimately linked when meaningfully addressing the issue of climate change: ‘true engagement needs the pressure created by divestment. Engagement without divestment is like a criminal legal system without a police force.’

 

Since the Mexico Gulf incident, through LAPFF and GES, the fund has been lobbying oil corporations such as BP, Rio Tinto and Shell to strive to improve their practices and prevent future incidents. Even though this is an admirable move and GES or alliances of other investors can pressure giant oil, coal and gas corporations to extract its product in more responsible way (preventing oil spillages, improving worker’s rights, etc.), this kind of engagement cannot prevent multinational giants from conducting their core business, and thus cannot address the main issue of climate change – continuing to rely on greenhouse gas producing fuels while the global carbon budget is increasingly tightening.
Understanding this, large foundations such as the Rockefeller Family, the Norwegian Sovereign Wealth Fund and AP4 (Swedish Pension Fund), started demanding from oil giants such as ExxonMobil and Shell that they recognise the threat of climate change and transform their industries by investing into renewable energy. More recently, because of the lack of positive response, the aforementioned foundations took the decision to completely or partially divest– proving once more engagement to be ineffective and divestment to be the rational choice.

 

  • Although globally recognised, climate change is still denied by most of the fossil fuel corporations, which leads to disapproval of governments’ set targets to reduce impacts of climate change and do not cross critical 2ºC target. This is leading to the expansion of the industry and further wreckage of the environment, rather than a step back and aim to change its practices.

 

In the last year, 674 billion USD were spent  by the top 200 oil, gas and coal companies on exploration for new reserves, under the assumption that ‘the world will fail to limit global warming under 2ºC’- openly casting doubt on the seriousness of governments’ decisions to limit the impacts of climate change. In 2015, this approach was further illustrated with Chevron’s rejection of its shareholders’ pledge to restructure its capital to dividends rather than the further exploration of resources.
In 2013, a collective of 70 of the world’s biggest investors, with more than a $3 trillion of assets in total, asked 45 of the world’s top oil, coal, gas and electricity producers to assess the financial risks, that their shareholders are exposed to as a result of their stranded assets. The responses received were similar – corporations did acknowledge the importance of climate change, but claimed that none of their current or future reserves will become ‘stranded’.<…> Moreover, in 2014 Shell stated: “we do not believe that any of our proven reserves will become stranded – this is because we do not see governments taking the steps now that are consistent with the 2ºC
scenario”.
Recent research reveals that the biggest oil companies Exxon and Shell, together with trade lobbying groups, annually spend 115 million USD to undermine international climate change legislations. <…> In the run up to the UN Climate Talks in Paris in 2015, Shell alongside with BP, Statoil, Total and Eni openly addressed EU policy makers to oppose their suggested renewable energy strategy. This was followed by numerous reports and consultations from Shell aiming to remove renewable energy and energy efficiency targets from the
EU’s agenda, proving once more that while investors are engaging and attempting to improve the green credentials of fossil fuel companies, the same corporations are simultaneously seeking to halt or slow down international agreements and national legislations.

 

Following financial and ethical arguments, as well as past experiences outlined above, we conclude that engagement as a tool to stop oil, gas and coal companies from profiting from their core activity – which is what is driving the climate change issue – and to make them socially and financially accountable to their shareholders is inherently flawed and cannot be implemented.

Full Brief can be found and downloaded here: https://fossilfreestrathclyde.files.wordpress.com/2016/04/spf-engagement-brief.pdf

 

 

 

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