Institutional investors are calling on companies to act now, says the IIGCC’s Stephanie Pfeifer
Uncertain fossil fuel demand, emerging technologies, falling renewable costs and policy interventions are shaping a new landscape in favour of low-carbon energy sources. Renewable energy already produces 22% of the world’s electricity, and this is expected to rise rapidly. An energy transition is taking place, especially in the power sector. And it’s entirely possible new patterns of urbanisation and technology breakthroughs could enable oil demand to peak in the timeframe required to meet the 2 °C target.
In the face of this transition, investors are concerned the business plans of some oil and gas companies are not sustainable over the longer term. Investors are especially concerned by spending to develop new fossil fuel reserves, which rely on consistently high fossil fuel prices, rising demand and supportive policies.
It is estimated that more than 60% of the world’s reserves must stay in the ground to avoid dangerous climate change. In light of this, the Bank of England recently warned investors could suffer “a huge hit” from a move to alternative energy sources and stronger action on climate change. Impacts from market shifts are already being felt. More than $200bn (€189bn) in projects have been cancelled or delayed since the start of 2014, according to research firm Sanford C Bernstein.
In response, investors are calling on companies to act.
A coalition of 50 institutional investors has co-filed shareholder resolutions asking BP and Shell to disclose more information about how they could participate constructively in the transition to a low-carbon economy. Other institutional investors are expected to declare their voting intentions ahead of the BP and Shell AGMs in March and April. This action runs parallel to an engagement programme being undertaken by global investors that are challenging fossil fuel companies worldwide about their future business plans.
These investors have been pressing senior executives face-to-face on a series of issues, guided by a new set of expectations, set out at the end of last year in a paper published by the global investor groups called Investor Expectations: Oil & Gas Company Strategy. They have been asking the largest fossil fuel companies to disclose how high the price of oil needs to be for their most expensive projects to break even, to “stress test” their business models against a range of future scenarios, and to ensure consistency between their public positions on climate policy and lobbying undertaken on their behalf.
The risks to a ‘business as usual’ approach by fossil fuel companies will only grow. By the end of this month, leading countries will submit the emissions pledges that will contribute to a global climate agreement in Paris in December. The UN has placed significant emphasis on the role of non-state actors in helping deliver this deal and drive the low-carbon transition. Many investors have made it clear where they stand. Three hundred and sixty-five investors with assets totalling $24trn have now signed a statement calling for stronger climate policies, a global deal, carbon pricing and an end to fossil fuel subsidies.
And as well as engaging with companies and pushing policymakers to act, investors are actively decarbonising portfolios. From divesting some fossil fuel company stocks, to tilting portfolios away from carbon-intensive sectors and pursuing “best in class” strategies, investors are taking a variety of approaches to reduce climate risk. They are also investing in new low-carbon opportunities.
A fossil fuel-dominated future would result in fundamental threats to the global economy. Faced with this prospect, investors believe fossil fuel companies can do more to manage the risks of climate change and contribute to a low-carbon future. Through engagement and allocation decisions, investors are determined to deliver a sustainable – and low carbon – future.
Stephanie Pfeifer is chief executive at the Institutional Investors Group on Climate Change, which represents more than 100 European investors with combined assets of €10trn