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Financial concerns driving broadening of fossil fuel divestment

Pension funds have formed part of a “second wave” of divestment from fossil fuels, to which investors representing some $5trn (€4.7trn) of assets under management have committed, according to a report.

Released on the occasion of the one-year anniversary of the international climate change agreement reached at a UN conference in Paris last year, the report takes stock of the state of play and trends as concerns divestment from fossil fuels and what the future may hold.

Produced by Arabella Advisors, which advises on philanthropy and impact investing, the report said the scope of global fossil fuel divestment had doubled over the past 15 months, with institutions and individuals controlling nearly $5.2trn in assets pledging to divest.

The $5trn figure does not represent sums divested or pledged for divestment but assets held by the institutions making the commitment.

It is double that of 15 months ago, according to the analysis.

The figure breaks down into 688 institutions and 58,399 individuals across 76 countries.

The types of institutions divesting are “more diverse than ever”, according to the report, with no single sector representing more than one-quarter of commitments.

“The sectors that initially propelled the movement – universities, foundations and faith-based organisations –continue steady growth, accounting for 54% of new commitments made,” it said.  

“However, as large private and institutional asset holders recognise the reputational, financial and legal risks of remaining invested in fossil fuels, divestment has spread to new sectors, including large insurers, pension funds and banking institutions.”

According to a breakdown by type of investor, faith-based organisations and philanthropic foundations account for the largest share of commitments, with 23% each, followed by local government (17%), educational institutions (14%), pension funds (12%), non-governmental organisations (6%), for-profit asset managers (3%) and healthcare institutions (2%).

Different types of institutions will have been involved in different “waves” of divestment and for different reasons, according to the analysis by Arabella Advisors.

“The divestment movement was sparked by mission-driven institutions acting out of a moral imperative to confront the climate crisis,” it said.

“This initial phase was followed by a second wave of divestment driven by financial concerns about economic risk from stranded fossil fuel assets.”

The Paris Agreement “bolstered the economic arguments underpinning divestment” and “reinforced the movement’s moral argument”, it said.

Fiduciary duty ‘compels’

A changing interpretation of the implications of fiduciary duty for investors’ fossil fuel exposure could ignite a third wave of divestment given the growing recognition of the risk of (further) impairment of fossil fuel assets, according to the report.

“The emerging view that fiduciary duty may actively compel divestment of fossil fuels has the potential to pressure financial managers and institutions that once argued their fiduciary roles acted as a barrier to consideration of climate risk,” it said.

The point about fiduciary duty was also made by Helena Morrissey, chair of the UK’s Investment Association and chair of Newton Investment Management, who spoke at the report’s London launch event – which was connected with a press conference in New York at the same time.

Morrissey said the interpretation of fiduciary duty as an obstacle to considering climate risks had been “completely turned on its head” and that the new view emerging was that fiduciary duty “may actually compel or at the very least encourage divestment in fossil fuels”.

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