Fund managers worth $10.2 trillion urge oil firms to align with Paris Agreement goals

Fund managers worth $10.2 trillion urge oil firms to align with Paris Agreement goals

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Oil companies will cease to be attractive investments unless they quickly adopt low carbon business models that support the Paris Agreement's climate targets, new findings from a major survey of 39 fund managers responsible for $10.2 trillion of assets worldwide suggest.

The shock findings are the result of a survey carried out by the U.K. Sustainable Investment and Finance Association (UKSIF) and the Climate Change Coalition charity. They lay bare the scale of rising investor concerns over the long term viability of high carbon companies, and suggest increasing investor pressure on oil firms to shift away from fossil fuels is set to intensify.

Fully 86 percent of respondents to the survey called on oil firms to align their businesses with the Paris Agreement's goals, with nearly half calling to policies consistent with a 1.5 degrees Celsius global warming pathway, while the remaining 43 percent called for a 2 C target.

Only 18 percent said they believed oil companies would remain good investments if their businesses are still focused on fossil fuels in five years' time, although 68 percent indicated such companies still would be worth investing in if they adopted Paris-aligned strategies.

Moreover, just under a quarter of fund managers in the survey said they did not see oil companies as good investments in any timeframe.

Looking forward, over two-thirds — 67 percent — said they wanted oil companies to switch their investment to support the low carbon transition in a way consistent with the Paris targets, while 24 percent cited a preference for oil firms gradually winding down their businesses and returning cash to shareholders.

A number of leading oil majors recently unveiled plans to step up clean energy investment and develop strategies compatible with the Paris Agreement. However, critics have argued the promised strategies look like they will be narrowly focused on emissions from their direct operations and largely will ignore emissions from the fuels oil majors provide, meaning they will still be exposed to "stranded asset" risks as economies decarbonize.

The new survey follows a report last week by Global Witness which estimated oil and gas companies altogether have earmarked $4.9 trillion towards new oil and gas fields in the 2020s, but that none of this spending would be compatible with limiting global warming to 1.5 C. Such oil and gas exploration would blow a hole in the Paris Agreement targets, while also leaving the industry exposed to stranded assets, the study warned.

Meanwhile, the survey findings also suggest fund managers are putting investments at risk by failing to align their portfolios with Paris Agreement targets, as only 21 percent of respondents said they have a policy to do so across all of their funds.

Simon Howard, chief executive of UKSIF, said the writing "is on the wall" for oil firms that do not support global efforts to combat climate change and which fail to rapidly transition their businesses to low carbon.

"The investment community recognizes that these will make increasingly risky investments," he said. "But most fund managers need to do much more to protect asset owners, and asset owners more to protect savers, by driving oil companies to change. Both should publicly commit to aligning investment portfolios with the Paris targets and managers should make more fossil free investment products available. They should also coordinate their engagement policies and give them real teeth by setting oil companies deadlines and spelling out the consequences if they fail to take action."

Two weeks ago, Bank of England governor Mark Carney alongside governor of the Banque de France, François Villeroy de Galhau, penned a joint open letter warning the global financial sector that meeting the Paris targets required a "massive reallocation of capital" and that companies failing to transition to a low carbon economy "will fail to exist."

Elsewhere, the survey highlighted rapid changes in investor sentiment over the past year, with only 12 percent of fund managers indicating they do not have a policy to engage oil companies on climate change, down sharply from 41 percent in a similar survey last year.

However, while investors are taking a more proactive stance in their efforts to force high carbon companies to mitigate climate risks only 18 percent have set deadlines for oil companies to take action, and 57 percent have not yet decided what action to take if oil companies fail to meet their demands, the survey found.

Moreover, the poll suggests many fund managers are struggling to keep up with rapidly growing demand for fossil fuel-free investment strategies. This year 80 percent said client interest in low carbon investments had grown in the last 12 months, compared to 71 percent last year and 54 percent in 2017.

However, respondents reported only slight growth in the proportion of low carbon funds on offer, according to UKSIF.

Tim Manuel, head of responsible investment at Aon UK, welcomed the survey findings, which he said showed asset owners were increasingly prepared to hold fund managers to account for their action or inaction on climate risk.

"Fossil fuel companies can play an important and positive role in the transition to a low carbon economy, and it is vital that investors use their voice to highlight the importance of this issue, and to support companies' efforts to evolve their business models to meet the challenge," he said. "Asset owners can benefit by setting clear goals and deadlines for how they expect fund managers to engage with companies, and for the circumstances where exclusions should apply."

As investors and fund managers begin to cool towards the oil companies that for so long have been a keystone of their investment strategies, high carbon industries can expect pressure on them to develop credible decarbonization strategies to ratchet up still further.

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