By: David Harris, head of sustainable investment
Ireland has become the first nation state to ban its sovereign wealth vehicle, the $8 billion Ireland Strategic Investment Fund, from investing in companies with significant exposure to fossil fuels. Norway, with its $1 trillion SWF, has been considering similar moves, and others may not be far behind. Further, a number of large pension funds including CalSTRS and CalPERS have been taking action to divest from thermal coal, and New York City’s pension fund has also committed to become fossil fuel free. The World Bank, meanwhile, has also decided to cease financing upstream oil and gas, in addition to thermal coal, after 2019.
In the case of Ireland, the divestment will happen “as soon as is practicable” rather than immediately. Some fossil fuel exposure will continue in the fund—which had already begun reducing exposure to some fossil fuel-heavy companies before the law was passed—through hedge funds and exchange traded funds.
The divestment route is an intuitive way to address carbon exposure in portfolios, but it’s not the only option and represents the end of a spectrum. Through our work with asset owners around the world we are seeing a range of other approaches being adopted by investors seeking to minimize carbon exposure.
More asset owners are engaging with companies in carbon intense industries, such as oil and gas, to catalyze changes to their business models and consider the transitions required to address climate risks. For example, one leading effort has been the Transition Pathway Initiative, a global initiative of asset owners in collaboration with FTSE Russell (as TPI's expert data partner) working alongside the Grantham Institute of the London School of Economics, and the Principles of Responsible Investment. Since the launch in January last year, the TPI has now grown to have over £7 trillion in AUM behind the initiative.
FTSE Russell has also seen clients adopting more nuanced and holistic approaches that alter weights by tilting exposure to climate risks, and seek to capture the broader industrial transition to a green economy such as the rise of new green industrial sub-sectors.
The performance of indexes aligned with both the divestment approach and the divest-invest approach show that each of these approaches has outperformed their respective parent indexes over the past five years.
Ireland’s decision, along with the growing numbers taking action, indicate that for many asset owners, the divestment dilemma is no longer about whether to address the investment implications of climate change, but how to do so.
For more information on FTSE Russell's integrated approach to climate change risk, please see our FTSE Global Climate Index Series.
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