Investors looking to decarbonize their portfolios through divestment should consider other options before simply cutting company holdings.
Assets owners speaking on a panel Tuesday at Pensions & Investments' WorldPensionSummit said focusing solely on carbon emissions was not the desired course of action to ensure responsible investing.
"We have never been divestment fans," said David Hickey, portfolio manager and ESG lead at the Lothian Pension Fund, Edinburgh, which had £7.5 billion ($9.7 billion) in assets as of March 31, adding that divesting could mean selling a company stock to a buyer that "doesn't care" about the level of emissions that company is generating. "That's not the action of a responsible owner," Mr. Hickey said.
Companies are not affected by divestments, he added.
Investors need to understand that buying a share in a company means the investor owns the right to a dividend and the right to a vote at that firm's annual general meeting. "What you are not doing is providing new capital to that company," Mr. Hickey said. Owning a company and funding it are two different things, which is why divestment is not the optimal tool.
Instead, Lothian has a different mantra, based on how capital flows work: "Engage your equities, deny your debt." For anything bought in the secondary market, "you engage with the company." For anything bought through the primary market — "that is new capital, be it equity raising ... any new bond issuance — if you are not Paris (Agreement) aligned ... you're not getting our money, basically. We are not going to subscribe to any new issuance. Because that is funding, that is new capital," Mr. Hickey said.
Mr. Hickey urged investors to look at whether they can take on the same mantra and say, "we are going to stop providing new capital to companies that are involved in operations that we are against."
"To not buy something is quite easy," he added.
Kirsty Jenkinson, head of sustainable investment and stewardship strategies at the $257.9 billion California State Teachers' Retirement System , West Sacramento, agreed with Mr. Hickey. Before the COVID-19 pandemic, the pension fund would see petitions calling on the pension fund to divest fossil-fuel companies, Ms. Jenkinson said.
"The divestment debate is certainly not going away yet," she said.
But Ms. Jenkinson added that the pension fund is conducting "transition readiness" assessments of the companies it holds across different asset classes in its portfolio. That exercise needs to be asset class by asset class because what it means to be "transition-resilient" in fixed income is different than for private equity or equities, she said. "We're trying to go step-by-step through each asset class to build this understanding. It means including new data, (and) it means new ways of thinking about portfolio analytics," she added.
"We want to invest more in climate-related solutions because we think they are going to be really good investments," Ms. Jenkinson said, adding that the pension fund wants to identify companies that will provide these solutions.
Speaking on a separate panel, Ben Caldecott, director of the Oxford Sustainable Finance Programme and strategy adviser for finance for the 26th U.N. Climate Change Conference of the Parties, known as COP26, said that to implement the objectives of the 2015 Paris Agreement, its rulebook — which details how the agreement will operate in practice — first needs to be finalized. COP26 will take place in Glasgow, Scotland, in 2021.
Commitments by institutions need to be transparent and measurable before COP26 takes place, Mr. Caldecott warned.
"The last thing we need is another big summit where lots of institutions make a bunch promises that you can't compare" or for which they can be held accountable, Mr. Caldecott said.