Forty years ago, traditional energy stocks made up 28% of the Standard & Poor’s 500-stock index, and seven of the top 10 S&P stocks were oil and gas companies. Ten years ago, they made up 10.89%, five years ago 6.84%. Today, those stocks now account for less than 2.5% of the S&P’s value, and none are now listed among the S&P’s top 10. In April 2020, after 92 years, ExxonMobil was dropped from the Dow Jones. This was described by financial services firm Raymond James as a “sign of the times”.
It is abundantly clear that global energy systems are shifting, favouring renewables over fossil energy. A seismic shift in the energy sources for transportation is also under way. While new fossil fuel infrastructure projects continue to be proposed and built, the pace of this expansion is facing headwinds as the cost of cleaner alternatives continues to drop and in many jurisdictions is less expensive to build and maintain than fossil energy systems.
Recently the International Energy Agency, long a proponent of oil and gas expansion, released their new Net Zero, Paris-alignment energy pathway that clearly states:
“Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required”.
This is significant as the IEA pathways have been used by many oil and gas majors to justify expansion projects and increasing production and used by many institutional investors, banks and insurance companies as justification to stay invested in fossil fuel companies.
As more governments step up and raise their ambition to reduce emissions, the impact on fossil fuel companies continues to grow. Many of these companies are unable or unwilling to adjust to the growing change in energy systems and as a result their financial outlook, particularly in the long term, the same time horizon most pension funds take, is dimming.
Pension fund decision makers have a fiduciary obligation to consider risk when making decisions regarding their funds and investments. Given the growing financial risk facing fossil fuel companies, it is within one fiduciary responsibility, indeed obligation, to consider investments in fossil fuels as a sector and individually. To not do so, could be deemed a violation of trustees or custodians fiduciary duty.
Pension funds in North America are beginning to address the climate related risk in their portfolios by, in part, divesting from fossil fuels companies. Notable examples include:
- New York City is divesting 3 of its pensions from $4 billion in fossil fuel investments and is on track to complete this by 2023. Most securities will be sold by the end of 2021. The total value of these funds is over $175 billion
- New York State has divested from 22 thermal coal companies and 7 tar sands companies as part of its commitment to reach net-zero emissions by 2040. The $245 billion fund is in the midst of reviewing its remaining fossil fuel holdings including shale oil / gas companies, energy majors and pipeline and service companies by the end of 2024.
- Maine passed legislation requiring its Treasury and $16 billion pension fund to divest from fossil fuels in line with fiduciary responsibility by 2026
- Washington DC has already completed fossil fuel divestment for its $6 billion pension fund.
- Minnesota has divested its $65 billion state pension fund from thermal coal.
- Baltimore has legislated divestment of its $850 million pension funds by 2026.
If these jurisdictions can accomplish divestment while meeting their legal and fiduciary responsibilities, then there is little reason why other pension funds could not do the same.