Download Climate change and energy sector investments

What is ABP’s approach to: … ?
Climate change and
energy sector investments
An important part of the new investment policy that we adopted at the end of
2015 is engaging with participants and civil society organisations on the way we
invest. As part of this process, we shall be presenting more information on those
investments that (some of) our stakeholders find problematical and also highlighting
particular themes in our investment practices. This will be done through position
papers published twice a year. This first position paper deals with the topic on
which we received the most questions in 2015: climate change and investing in
the energy sector. This position paper is accompanied by a technical annex that
provides more details and gives information about the sources we use for our
analyses. The paper and the annex are both published in English and Dutch.
December 2015
What is our attitude to climate change?
Climate change is one of the major threats
that the world needs to address at the moment.
Almost all scientists agree that the average
temperature on Earth is rising because of the
emissions of greenhouse gases, where CO2
is seen as the main culprit. For the human
population and for the natural world, climate
change has serious irreversible consequences,
the implications of which are still hard to quantify.
Therefore, ABP sees it as positive that at the
United Nations climate change conference
(December 2015) almost 200 countries agreed
to take measures to reduce the CO2 emissions.
Pension funds have a responsibility with regard
to combating climate change, not least because
climate change can have a huge impact on the
value of their investments but also, especially,
because they have to take a longer view.
Our youngest participants will not be drawing their
pensions until the closing decades of this century.
We want them to be able to enjoy retirement in a
world that is still a pleasant place to live. To help
in ensuring that this is so, we need everything to
be done in order to restrict global warming to well
below 2°C and to attempt to limit the rise to 1.5°C.
In addition, we as a pension fund invest in such
a way as to contribute to the sustainability of the
planet.
What is the role of the energy companies?
As people burn fossil fuels like oil and coal to
meet their energy needs, vast quantities of CO2
are released.
It is expected that the world will continue to
be reliant on these fossil energy sources for a
considerable time. Leading institutions, such as
the International Energy Agency (IEA), expect
renewables like solar, wind and hydro power to
meet no more than a third of our energy demand
even looking 25 years ahead. Companies can
reduce their climate impact by switching from coal
and oil to natural gas, which produces significantly
lower CO2 emissions. But they can also play an
important part by investing in renewable energy.
What investment choices are we making?
To minimise the risks we have spread our
investments across various sectors, such as
consumer goods, banking, media companies
and energy. As part of our new investment policy
we have agreed to focus in each sector on those
companies which are setting a good example
when it comes to sustainability and corporate
social responsibility. Over the next few years
we shall be divesting out of those companies
which fail to meet our standards. This also
applies to our energy companies.
What investments do we have
in the energy sector?
Our investments in energy producers, distributors
and reserves total 21 billion euros. The following
graph shows the breakdown of our energy
investments by fuel type or source. Beside it,
for comparison purposes, is a graph showing the
contribution made by the various energy sources
to global energy production. We invest relatively
little in coal and a great deal in gas and renewables.
APB energy investment breakdown (left) and global primary energy supply breakdown (right).
The icons represent: coal, oil, gas, nuclear, renewable, wood/charcoal.
12
%
5% 5
%
9%
%
21
1%
3
%
33
29
%
9%
41 %
5%
What do we expect of the business sector and the powers that be?
It is our belief that the energy sector has a significant part to play in combating climate change.
As a major investor we use our influence to contribute to the transition to a more sustainable energy
supply. For instance, we shall be investing five times as much in renewables (currently €1 billion) by
2020. We shall also be investing more heavily in companies that are taking action to reduce their energy
demand, for example by insulating buildings or using more efficient engines. Coupled with that, we shall
be engaging with other players who have an important role in combating climate change, with various
actions we expect from them.
All companies:
A 25% reduction in CO2 emissions of our
equity portfolio by 2020 (4,000 companies);
Annual reporting of CO2 emissions and plans for
further reduction (real estate and infrastructure);
Development of products and services that
provide the answer to the problems faced by
society and to environmental issues (we plan
to double our investments in this area from
€29 billion to €58 billion).
Energy companies:
An active response to tougher climate standards
(for example, by more efficient production
methods);
Switching as far as possible from coal and oil
to cleaner energy sources like gas and wind,
hydro and solar power;
Cooperation with investors like ABP that want
to invest more in renewables;
Safe production practices in order to prevent
industrial accidents and environmental
catastrophes.
Authorities and regulators:
Creation of a regulatory framework that allows
renewables to compete fairly with fossil fuels;
Discontinuation of fossil fuel subsidies;
Increase in the cost to companies of
their carbon footprint;
Creation of the security required for
long-term investment in sustainability.
Questions from participants
By far the majority of comments and questions from participants regarding responsible investment in 2015
concerned climate change and fossil fuel companies. In both emails and letters, a number of questions
were repeatedly raised.
Why does ABP invest at all
in fossil fuel companies?
To minimise the investment risk we spread our
assets across many different sectors. It is simply
safer to have a varied portfolio. If one particular
sector is doing badly, another sector will often
make up for that. It does not make sense for an
investor not to have any investments in a sector
that is vital to the world economy. Moreover, some
of the companies concerned are playing an active
role in the transition to a more sustainable energy
supply, and we want to support those that are.
Will we see poorer returns if tougher
climate standards are adopted?
It is impossible to say. That is why we always work
on the basis of various scenarios. Expert opinion
is that demand for energy will continue to increase
strongly in the years ahead. Hydro, wind and solar
power will only be able to meet a small proportion
of that demand. Alternative energy sources
currently account for only 5% of global energy
production. Even in a scenario involving more
stringent climate controls, no more than 30%
of the energy we use will come from renewables
in 2040. In addition, petrol and diesel fuel will
continue to be needed as automotive fuels for a
long time to come. Even by around 2050, no more
than 17% of the cars on the roads are expected
to be electric.
Is ABP not afraid of oil and mining investments
sharply losing value quite soon?
If governments were to take action now to limit
climate change, it is true that a proportion of the
existing known oil and gas reserves would have
to remain in the ground. The implications this has
for the oil companies in our equities portfolio are
probably limited. At the present rate of production,
these reserves will in any case be exhausted by
around 2030, when the world will still need
a great deal of fossil energy. At greater risk
are the state oil companies, some of which
have reserves of more than 70 years. We have
only limited investment in this area. For the coal
companies we invest in, it is a different story.
Tougher climate controls will mean they cannot
utilise some of their reserves. Generally, this is
already reflected in the share price. In recent
years we have also been running down our
investments in coal companies.
Why does ABP not invest more in renewables?
Not all the available assets satisfy our standards
with regard to risks, returns and corporate social
responsibility. Nevertheless, in countries with
a reliable government, large projects can yield
good long-term returns. Fortunately, there are
more and more of these projects. At the end
of 2015 we announced our intention to invest
an extra €4 billion in wind, hydro and solar
power over the next five years. That is a fivefold
increase compared with our existing portfolio
of renewables, which we have been building
up over 10 years.
Would it not be better for ABP to get out
of fossil fuels altogether?
Some people believe that selling all of our fossil
fuel investments would send a powerful signal
that we were taking climate change seriously.
In practice, however, the effect would be minimal.
Fossil energy companies would remain financially
attractive investments and other investors would
simply take our place. We might give a powerful
signal but we would lose our influence at the same
time. We believe we can do more on the climate
change front by continuing to invest in these
companies and encouraging them to become
more sustainable.