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Funds uncertain on oil and gas path

Fund managers handling $10 trillion largely back emissions curbs
Funds uncertain on oil and gas path

The results of a new fund manager survey on oil and gas producers show there is increasing momentum for more climate-friendly investment but uncertainty about how to bring slow starters up to speed.

Influential players led by Institutional Investors Group on Climate Change and Climate Action 100+ have already started making changes to the resources sector, shown most recently by Equinor’s promise to link executive bonuses to emissions from 2030. Among the 39 managers to answer the UK Sustainable Investment and Finance Association (UKSIF) questionnaire, 86 per cent wanted oil companies to align their businesses with the Paris climate goals, which aim to return global emissions to 2 degrees above pre-industrial levels.

Majors have already started spending big on clean energy and started cutting their own emissions, but this might not be enough to keep in line with the Paris goals. According to a Global Witness report, 40 per cent of oil and gas production would have to go by 2030 to keep warming below 1.5 degrees celsius, seeing companies stop expansion capital expenditure completely.

This is after majors have already cut greenhouse gas emissions by 10 per cent between 2014 and 2017, according to a new Boston Consulting Group report. The UKSIF report said of the managers surveyed, 24 per cent thought oil and gas companies should wind down and hand planned capex back to shareholders. The respondents were a range of member and non-member funds of UKSIF who oversee $10 trillion (£7.7 trillion) in assets.  

Sarasin & Partners head of stewardship Natasha Landell-Mills said holding a company that had committed to winding down would theoretically be hugely positive for an investor.

“We've done a bit of internal work on this, [where winding down] effectively becomes an annuity stream, for an investor. That's certainly an attractive proposition," she said. “Having said that, it is possible that the oil and gas companies with that cash could redeploy it into clean energy.”

Ms Landell-Mills used Royal Dutch Shell (RDSB), which Sarasin holds in its Climate Active fund, as an example of the current clean energy investment levels. “Shell has a $25bn to $30bn capex budget, and $1bn to $2bn of that is going into clean energy, and the rest is going back into other existing businesses,” she said. “You would be needing an absolutely massive redeployment of capital into clean energy.”

Sarasin announced in January it would challenge annual reports and auditors that don’t mention the Paris goals and directors who don’t take climate change seriously. Ms Landell-Mills said her fund had been disappointed with Shell’s 2018 annual report because it did not explicitly commit to a strategy that fit with the Paris goals. Sarasin also has a three-year policy for resources companies ignoring the Paris goals, ranging from warnings in year one to activist votes and divestment in year three.

Not all fund managers have such a clear plan: the UKSIF survey found 57 per cent who wanted Paris goals to be considered in company plans did not have a plan to bring around a board that is not interested. BCG’s report about oil and gas dealing with the changing investment climate said the juicy dividends on offer from Shell and BP could be at risk even as demand continues to rise.

“According to the International Energy Agency, total oil and gas demand will increase by between 5 per cent and 14 per cent through 2025, depending on the aggressiveness of carbon reduction policies,” the firm said. “However, in an analysis of a group of eight international oil and gas companies, BCG found that planned production growth rates are on average about 10 percentage points above that level.”

BP (BP) for one has been expanding optimistically in recent years, upping its reserves 209 per cent in 2018 year on year through exploration and acquisitions. At the same time, the major has maintained a 30p per share dividend for the past three years, giving it a yield of 5.6 per cent. Shell was slightly ahead on this measure last year at 6 per cent.

Ms Landell-Mills said the problem with following short- and medium-term returns was that it was impossible to pick when a company’s fall might come. “Our starting point is if what the company does has a harmful impact on society, then it can't be a good investment opportunity long-term,” she said. “Sure, you may get nice dividend flows in the interim, but at some point it will get unstuck, and not everybody can get off the bus at the same time.”