Engagement versus divestment: why it’s not always as simple as it sounds when tackling climate change

Super Informed
Investments
17 Nov 2020
4 min read

 

Divesting from companies exposed to fossil fuels is often considered a simple way to act on climate change.

However, a blanket divestment policy to avoid companies due to their exposure to fossil fuels isn’t the only approach to encourage climate action, nor is it as effective as it sounds, writes Sybil Dixon, UniSuper Senior Investment Analyst.

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As Australia’s largest superannuation investor in sustainable investments, we have an important role in shaping how the companies we invest in respond to and address the threat of climate change.

In the last decade, climate change has become more visible and personal for all Australians, as we grapple with recent devastation caused by bushfires, drought, and flooding. Super funds, as major investors, have an important role to play in shaping how the companies we invest in respond to and address the real threat of climate change.

With more than $8 billion in funds under management across ESG-themed investment options, we know many of our members are passionate about environmental, social and governance (ESG) issues, particularly climate change. In theory, divesting from companies exposed to fossil fuels would mean they lose valuable capital and are forced to stop their operations. But in practice there are always others willing to invest, so the financial impact of divestment is lost.

Instead of divesting immediately, we use our position to encourage, support and agitate for change as we work towards meeting our targets of net-zero absolute carbon emissions in our investment portfolio by 2050 and for all of our Australian portfolio companies to have emission targets by the end 2021.

Companies considered part of the problem can create climate change solutions

We believe all Australian companies have a responsibility to support the decarbonising of our economy. Some of the greatest opportunities for change will come from companies currently considered part of the problem, but this doesn’t come without challenges.

Some industries are yet to determine the technology needed to best decarbonise their product. Steel manufacturers, BlueScope, are committed to decarbonising their products and are monitoring a range of transformative emerging technologies. However, they don’t expect that technologies, such as hydrogen DRI (direct reduced iron), oxygen-rich smelt reduction and molten oxide electrolysis, will be commercially available in the next 10 years.

BHP is another large Australian company that’s publicly committed to transitioning to a low carbon footprint, producing many of the minerals required for a low-carbon world. If BHP divested their fossil fuel assets it would make them appear ‘greener’, but it could lead to worse environmental outcomes if the new owner chose to delay closure and rehabilitation of their mines and oil fields.

Using our ‘seat at the table’ gets results on climate change

We’re in a privileged position where our voice resonates and matters. We take this privilege extremely seriously and use our voice to encourage, support and agitate for change as we all work towards meeting our Paris Agreement commitments.

Our investments team has discussed climate change in more than 130 meetings with companies so far this year.

As a result of our (and other investors’) engagement with companies in our portfolio, 80% have now set emission targets compared to just 45% in 2018.

This significant increase reflects active investor’s demands for more transparent reporting and a plan to move towards decarbonisation. These decisions are often made following pressure from employees, investors, customers and the community.

It’s extremely pleasing to see more companies making long-term commitments on sustainability issues. This is why having a strong voice at the table is so important. Divesting would mean no voice, no sway, and no productive way forward.

We partner with climate change and responsible investment peak industry bodies

To ensure a consistent voice and to further push for change, we work with the Australian Council of Superannuation Investors, Investor Group on Climate Change and Responsible Investment Association Australia among others to drive environmental, social and governance (ESG) initiatives.

In 2018 we were one of the early signatories to Climate Action 100+, an investor-led initiative targeting engagement with the top 100 greenhouse gas emitters in the world.

We’ve also recently partnered with Climate League 2030, working towards reducing Australia’s greenhouse gas emissions by 230 million tonnes by 2030.

Divestment of companies is certainly an option, and one we’ll choose if a company, in our view, doesn’t move fast enough to ensure their business will thrive in a decarbonised world. However, we strongly believe divestment isn’t the only solution as we look to proactively address climate change and focus on building a sustainable future for Australia.

Our sustainable path to 2050

We’re committed to achieving net zero absolute carbon emissions in our investment portfolio by 2050, in alignment with the Paris Agreement.

Aligning with the Paris Agreement reinforces our long-held commitment to incorporate environmental, social and governance (ESG) factors into all our investment decisions.

Sustainable and environmental investment options

If you want to avoid investing in fossil fuel exploration and production, consider our sustainable and environmental investment options.

None of these options invest in fossil fuel exploration and production sectors, weapons, gambling, alcohol or tobacco.

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