Market Views: Should investors ditch or engage fossil fuel entities?
The landscape of environmental, social, and governance (ESG) investing continues to evolve as climate change accelerates and societal demands for responsible stewardship intensify.
With net-zero targets in sight, asset managers are often forced to contend with a pressing dilemma: cleanse their portfolios of fossil fuel heavy companies or leverage their status as investors to campaign for change from within?
Typically, divestment supporters argue that withdrawing capital from industries primarily responsible for carbon emissions sends a clear market signal, aligning investment strategies with global sustainability targets.
Conversely, the growing proponents of engagement contend that maintaining stakes in these companies provides an avenue to advocate for change, potentially reshaping operations to be more sustainable and ethical in the longer term.
AsianInvestor asked asset management professionals to delve into the practicalities, ethics, and long-term implications of each approach to explain how they make the call to divest or to engage.
The following responses have been lightly edited for clarity and brevity.
Tomomi Shimada, lead APAC sustainable investing strategist
JP Morgan Asset Management
Divestment leaves investors with limited or no influence over a company's future behaviour and direction.
In this sense, for companies where we have identified climate as a material risk, we prefer to remain invested and effectively engage with them in a constructive manner.
For example, whilst engaging with energy sector companies, we believe it is critical to discuss about their decarbonisation targets as well as broader aspects of their decarbonisation strategy, such as establishing a forward looking investment strategy including disclosures of ‘green capex’.
Focusing solely on limiting the supply of fossil fuels will push supply to producers/geographies with potentially lower standards or cause demand-supply imbalances.
As an active manager, we always strive to invest in companies that are better positioned to manage environmental risks and capture the opportunities that the low carbon transition presents.
Engagement also helps us monitor and comprehend the evolving landscape in carbon transition. In cases where, despite prolonged engagement, our concerns may have not been addressed, we may undertake the forms of escalation, including reduction in holdings or divestment, if we feel that is in the best interests of our clients after exhausting all opportunities for engagement.
Nicole Lim, ESG investment manager of Asia fixed income
abrdn
Framing divestment and engagement as a dichotomy is often counterproductive to sustainable investing objectives, nor does it represent the process asset managers typically adopt when assessing investments.
Fund managers should assess companies individually.
A high-emitting energy company today could evolve to be an enabler for the energy transition.
Investors must also assess a company's decarbonisation plans based on their credibility and effectiveness. Consistent engagements with these companies are a cornerstone for such assessments.
Engagements also serve as a platform for active investors to shape corporate behaviour on climate-risk management. Engagement is more powerful for an effective energy transition compared to a broad fossil fuel divestment approach.
Divestment is often a tool of last resort – considered only if the position no longer aligns with an initial investment thesis, or where foreseeable progress is not possible.
The transition to a low-carbon economy requires large amounts of capital, which is mostly expected to come from the private sector. This is especially true for fixed income investors, who provide large amounts of long-term capital that finances Asia’s infrastructure and supply chains.
Beyond having a seat at the table, continued engagement and investment provides much needed access to capital for the energy transition.
Investors who are focused on real-world emissions reductions, and not “paper decarbonisation”, often prefer to stay invested in the transition.
Facilitating a just and orderly transition requires asset managers to engage with the high-emitters of today.
Especially in Asia, engagement backed by a nuanced understanding of local contexts can be particularly impactful in steering companies towards a more sustainable future.
Norbert Ling, ESG credit portfolio manager, fixed income
Invesco
Engagement is a must-do toolkit for ESG fixed income investors working to achieve real-world carbon emissions reductions.
For the world to decarbonise, high-carbon emitting companies will need to transition their business operations and decarbonise. This is a key investment opportunity within climate solutions and climate transition.
Investors could engage with these companies to set long-term climate-related targets, alongside clear intermediate targets as part of its climate strategy.
This should be accompanied by the transition plan, appropriate governance framework and also monitoring/reporting mechanisms.
In order to identify priority companies for these engagements, we apply our proprietary net zero framework to portfolio holdings.
As bondholders, investors are able to play a critical role in how to finance the capital structures of fossil fuel-heavy companies without having direct access to proxy voting.
To support transition, the use of the sustainable labelled bond market as an avenue to supply the capital required. Climate transition needs more financing, not less.
Lastly, beyond stranded asset risk, climate resilience of the company operations is also increasingly important. It is essential for investors to work with stakeholders in capacity building within climate adaptation.
Michael Herskovich, global head of stewardship
BNP Paribas Asset Management
BNP Paribas Asset Management uses both the engagement and divestment strategies with fossil fuel companies and consider whether both actions are appropriate or complementary.
We have a series of sector policies that commit us to excluding particular activities, such as companies involved with unconventional oil and gas.
But we will only exclude the worst offenders and we aim to engage with oil and gas companies to encourage them to establish and strengthen long term plans and targets towards sustainable and low carbon business models.
We use escalation measures for companies that have not set up an ambition to achieve net-zero greenhouse gas emissions by 2050 or sooner, underpinned by credible decarbonisation strategies and intermediary targets, by voting against reelection of directors or discharge of the board.
Divestment is used as the last escalation measure, when companies do not have credible climate commitments nor realistic transition plans and when engagement makes little sense.
But engagement should not be limited to fossil fuel companies: It is crucial to engage with oil and gas sector clients on the demand-side to reduce fossil fuels consumption and help the energy transition.
We also engage with public policy makers and play an active role in advocating for net zero aligned policy, in order to achieve net zero ambition.
Yi Shi, client portfolio management and engagement specialist, thematic equities
Pictet Asset Management
Divestment isn’t the silver bullet for decarbonisation.
This approach, primarily based on pressuring fossil fuel companies through stigmatisation, has shown limited success in incentivising these companies to transition away from fossil fuels.
Divestment from traditional energy companies is akin to tossing our garbage into our neighbours’ backyard – it doesn’t solve the issue.
We shouldn’t get lost in the trees of divestment or engagement with traditional energy companies. Instead, we should focus on the forest – investing in clean energy transition at a systemic level.
For instance, Pictet Asset Management’s Clean Energy strategy invests in solutions providers in the clean energy ecosystem – renewable energy supply, energy efficiency, grid infrastructure, and enabling technologies.
Rather than investing in traditional energy firms, we select and steward companies that are accelerating the clean energy transition.
Energy transition is a complex and uneven journey, driven by energy costs, supply security, and the urgency to combat climate change.
With falling renewable energy costs, rising needs for energy independence amid regional conflicts, and growing climate awareness, investing in clean energy goes beyond divestment and accelerates our transition towards a low carbon economy.