Pension funds and other institutional investors face new pressure to increase their focus on emerging risks triggered by exposure to what might become “stranded assets” of oil, coal and other fossil fuel companies.
Both economic issues and responsible investment motivations are driving attention.
Economically, 10% or more of the worldwide equity market value comes from companies in the business of fossil fuel extraction and production, raising concern among investors.
While pension funds have been grappling with the implications of sustainability, including climate change, “the issue of stranded assets specifically is a new angle,” said Craig Metrick, Denver-based principal and U.S. head of responsibility investment, Mercer Investment Consulting Inc.
“We think climate change risk is something that is worth considering and preparing for,” Mr. Metrick said.
“We absolutely think this (stranded assets) is a subject that won't go away,” said Roger Urwin, global head of investment content, Towers Watson & Co., London.
“There is an investment point at the heart of this” issue, Mr. Urwin said. “Funds that continue to own their market weighting in these fossil fuels will at some stage (risk) the potential for a diminution in value arising from the fact these (fossil fuel) reserves become unburnable because of public policy” restrictions on carbon.
The value at risk from a combination of unburnable reserves, lower demand and lower prices “would be equivalent to 40% to 60% of the market capitalization of the affected companies,” according to an HSBC report on oil and carbon.
Of $12 trillion in assets of combined U.S., U.K. and other regional public pension funds and university endowments, equity divestment of oil and gas companies could range from $240 billion to $600 billion, and about half that range for debt holdings, according to a report from the stranded assets program of the University of Oxford's Smith School of Enterprise and Environment.
Investors and their constituencies that have begun to act on the issue of stranded assets fall largely into two camps. One calls for engagement with companies, seeking to move them to align more to green energy sources. The other has campaigned to pressure asset owners to divest.
A group of 70 institutional investors led by Ceres — a coalition of investors, environmental groups and other organizations encouraging companies to address climate change and other sustainability issues — seeks discussions with fossil fuel companies on mitigating the long-term environmental impact of their energy resources. The group includes the California Public Employees' Retirement System; California State Teachers' Retirement System; New York State Common Retirement Fund; PMI Railpen Investments, which oversees the £18 billion ($29 billion) Railway Pension Trustee Co. Ltd.; and Scottish Widows Investment Partnership.