30 Mar 2020
Is your money fuelling climate change? How to understand investment in fossil fuels.
Did you know that the financial products you have may be contributing to the climate change problem?
Perhaps your savings account or mortgage is with a bank that’s lending to new coal mines or your retirement savings are fuelling the expansion of off-shore gas drilling?
Fortunately, just as you can choose free-range eggs from happy chickens, you can select responsible or ethical banking, super and investment products that are tackling the climate crisis, rather than contributing to it.
So how do you know if your investments are ‘exposed’ to fossil fuels and if so, by how much? Responsible Returns provides one solution, helping you conduct a search of products that match your values and interests.
There are different ways that investors think about fossil fuels, which also informs how the Responsible Investment Association Australasia (RIAA) certifies all the investment products that are listed on Responsible Returns:
‘Exclusions’ or ‘negative screens’ refer to an investor’s decision to fully or partially exclude certain companies and/or sectors from their investment portfolio. There are three areas for consideration:
- Type of involvement
Companies can be involved in fossil fuels in different ways. Most investors that ‘claim’ a fossil fuel screen, either fully or partially exclude companies focused on the exploration, extraction or production of coal, oil and gas. Others also exclude companies included in power production and fossil fuel distribution and sales (pipelines, petrol stations and gas retailers). Some go further to exclude companies providing services, such as engineering consulting, infrastructure development, finance and logistics to companies involved in fossil fuels. Exclusions may also apply to financial products issued by countries, including government bonds and cash. Some investors exclude countries that have not aligned with the Paris Agreement on climate change.
- Category of involvement
There are different fossil fuel categories such as coal, oil or gas, further broken down into sub-categories such as thermal coal, oil shale & tar sands. All products certified by RIAA and listed on Responsible Returns must specify which categories and sub-categories are screened from their investment. Some investors will look at whether a company has exposure to activities deemed as necessary. For example, alternatives exist for thermal coal power stations, such as solar and other renewable energy sources. Yet in order to produce steel, we still require metallurgical coal.
- Degree of involvement
Investors may choose to apply a 'full' or 'partial' negative screen to fossil fuels.
A full exclusion means that the fund has zero exposure to any fossil fuels; type, category or degree.
A partial negative screen can mean a few things:
i) The investor has a full exclusion of one or more (but not all) of the different fossil fuel categories;
ii) The investor allows a percentage of company revenues to be generated from fossil fuels. As an example, if the investor’s investment parameters allow up to 10% of revenue to be generated from thermal coal production, then BHP Group Ltd could be held in the investment product as (at the time of writing) it generates approximately 3.5% of revenue from thermal coal production; or
iii) The investor allows some exposure via an underlying investment/s of a company. For example, Washington H. Soul Pattinson & Co. derives approximately 89% (at the time of writing) of its revenue from fossil fuel exploration and production through its subsidiary, New Hope Corporation Ltd. As in the example above, if the investment parameters allow up to 10% of revenue to be generated from thermal coal production, then Washington H. Soul Pattinson & Co would not be an allowable investment, as the revenue generated, through its subsidiary, exceeds the allowable threshold.
Some funds, such as Russell Investments Low Carbon Global Shares Fund, don’t focus solely on excluding specific companies, but instead they select companies so that the total portfolio has lower greenhouse gas emissions intensity or significantly less exposure to fossil fuels. This is a good way of starting to decarbonise your investments, however, you may still have exposure to fossil fuel miners or carbon heavy companies in your investments.
Investing in solutions
An increasing number of funds invest in companies that contribute positively to climate change solutions, such as through renewable energy power generation, energy efficient property and sustainable land management practices.
Many large investors, super funds in particular, continue to invest in companies involved in fossil fuels, but they engage directly with the companies to influence their practices including changing their activity so that the companies continue to profit in a carbon-constrained future (an example of this is AGL which owns Australia’s largest coal-fired power station but also is one of the largest investors in renewable energy. AGL has a plan to make future profit from its fossil fuel assets minimal and produce net zero emissions no later than 2050).
What steps can I take?
Science tells us that we need to halve global greenhouse gas emissions by 2030 to avoid the worst impacts of climate change. This means stopping new and scaling back the output of mines, oil wells and gas fields. It also means starting to decommission existing coal and some gas power stations and replacing electricity network capacity with renewable energy and storage.
Given most of us have retirement savings means we invest; choosing a super fund which aligns with your level of ambition to be part of a cleaner future is a great place to start.