Investments in fossil fuels by council pension funds could become less valuable as the energy market transforms, warns a new report.
The 50 strong group of Nuclear Free Local Authorities (NFLA) says that investments in fossil fuels – including coal mines, oil wells, power stations and conventional vehicles – could lose their value when the world moves decisively to a low-carbon economy.
NFLA’s report examines divestment from oil and nuclear weapons and argues that fossil fuel reserves and production facilities could become what is known as “stranded assets”. This refers to companies’ coal, oil and gas deposits that may never be monetised as the world transitions away from its reliance on oil.
NFLA adds that “many funds” are actively investing in renewable energy alternatives with increasing success.
Strathclyde Pension Fund – which is under pressure to divest from fossil fuels – says these issues are “well understood” because fund managers already “balance a range of considerations” in deciding how to invest.
According to NFLA’s report, councils in the UK manage pension funds worth over £230 billion, with around £10 billion invested in fossil fuels. It cites research by Don’t Bank On The Bomb, as reported by The Ferret, which estimated that eleven funds in Scotland have £275 million in companies working on nuclear weapons.
The report notes that 75 per cent of councils have passed climate emergency declarations seeking “deep cuts in carbon emissions to ‘net zero’ over the next two decades”. It adds that the Treaty on the Prohibition of Nuclear Weapons (TPNW) means investments in companies involved in these “controversial weapons” should be “scrutinised and stigmatised”.
The nub of the debate, argues NFLA, is whether it is better to divest or challenge companies involved in fossil fuel and nuclear weapon production through a “pro-active ESG (environmental and social guidance) approach”.
The authors note that while some council pension funds have changed their policies and moved away from fossil fuel investments – including the Scottish Borders Council Pension Fund – others “insist internal challenge is working.”
NFLA came to a number of conclusions. It says that continuing investments in fossil fuels could risk assets being stranded in the near future as the energy market transforms “more swiftly than anyone could have expected.”
“Similarly, as the TPNW is accepted by more and more states, the risks of such assets becoming stigmatised could also become a factor as well,” the report said.
Councillor David Blackburn of Leeds City Council, NFLA UK & Ireland Steering Committee Chair, encouraged local authority pension funds to read the report. He added they should have an “open debate on balancing the need for sustainable returns” with an increasing desire that such returns “come from responsible sources of income.”
He said: “Once seen as a ‘niche’ discussion, council pension funds are rightly being challenged to justify their investments, particularly in the likes of companies involved with fossil fuels and nuclear weapons.
“NFLA welcomes the changes many pension funds have made to move away from such investments and increasing evidence that such ethical investment can still provide healthy returns for its members.”
A spokesman for Strathclyde Pension Fund said: “These issues are well understood by managers – who balance a range of considerations on a daily basis in deciding how to invest. As a case in point, over the last five years alone, exposure to the oil and gas sector through passive equities has reduced dramatically in percentage terms.”
Lothian Pension Fund (LPF), the second largest council scheme in Scotland with over £8bn in assets, has just published its new “statement of responsible investment principles”. It says that “climate change is undoubtedly one of the defining issues of our time” and that its commitments going forward include ceasing “primary investment in companies that aren’t aligned with the goals of the Paris agreement”
LPF’s chief investment officer Bruce Miller, said: “We’re very clear that our primary responsibility is to be able to pay the future pensions of our members, but it’s important to all stakeholders that we invest in a manner that the average member sees as fair and reasonable.
“While some of our members will have very strong views on particular companies or sectors, this document articulates how we aim to invest in a responsible manner on behalf of all members whilst not overly emphasising the specific ethical viewpoints of individual members, trustees and portfolio managers.”
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