(Bloomberg) — Institutional investors in Europe are increasingly dumping oil and gas stocks from their portfolios, saying the move will reduce the risk of being left with stranded assets and financial losses.
Most read from Bloomberg
The latest to do so is PFA, Denmark’s largest commercial pension fund with about $110 billion in assets under management. The investor has just sold its $170 million stake in Shell Plc based on an assessment that the company’s capital expenditure on renewables is worryingly low.
“There was a clamour for them to get more involved in the transition,” said Rasmus Bessing, head of ESG investing and co-chief investment officer at PFA. “But especially in the last year or so, maybe a bit more,” Shell has indicated that it wants to “go in a different direction,” he said.
A Shell spokeswoman referred to a comment by Chief Executive Officer Wael Sawan at the company’s annual general meeting on May 21, when he said shareholders had “strongly supported” the strategy. “Our focus on performance, discipline and simplification allows us to invest in delivering the energy the world needs today and helping build the low-carbon energy system of the future.”
Click here for Bloomberg data on Shell’s net-zero trajectory.
Other institutional investors are also losing patience with oil and gas holdings. Stichting Pensioenfonds ABP, Europe’s largest pension fund with about $550 billion in assets under management, said in May it had sold all its liquid assets in oil, gas and coal — a portfolio worth about $11 billion. It has said it plans to divest another $5 billion of less liquid fossil fuel assets.
In France, new sustainable investing requirements mean asset managers carrying the label will have to cleanse their portfolios of an estimated $7.5 billion in fossil fuel assets. This development affects companies such as TotalEnergies SE and Shell.
In the UK, both the Church of England Pensions Board and the Church Commissioners for England, which together manage about $17 billion in assets, announced last year that they would blacklist oil and gas companies.
Sweden’s AP7 fund, which manages more than $100 billion, has an exclusionary policy targeting a range of oil producers, including Saudi Aramco and India’s Oil and Natural Gas Corp. It has blacklisted Exxon Mobil Corp.
AkademikerPension, a Danish pension investor, shed the last remaining oil and gas stakes in its $20 billion portfolio at the end of 2023 and is now divesting companies that provide equipment and services to fossil fuel producers.
For now, the impact on returns from such divestments is “neutral to slightly positive,” says Troels Børrild, head of responsible investments at AkademikerPension.
But looking ahead, there is transition risk “and that will materialise for a number of companies,” Børrild said. “It’s not priced in at the moment,” but as regulation takes its toll, low-carbon portfolios are poised for “even more positive” risk-adjusted returns, he said.
A number of major banks are taking similar steps. The European Union’s largest lender, BNP Paribas SA, has stopped underwriting conventional bonds for the fossil fuel industry as part of a broader crackdown within the group on oil and gas financing. Credit Agricole SA, another major French bank, said it was taking similar steps in early June.
The development comes at a particularly tense time in the financial sector’s relationship with fossil fuels. On Wall Street, banks are increasingly being targeted by angry protesters demanding an immediate exit from oil, gas and coal financing. Wall Street has responded by warning that such a move would be economically irresponsible.
CEOs including Barclays Plc’s CS Venkatakrishnan, Citigroup Inc.’s Jane Fraser, JPMorgan Chase & Co.’s Jamie Dimon and Goldman Sachs Group Inc.’s David Solomon have insisted that the financial sector cannot turn its back on oil and gas turn. customers.
Just this week, Venkatakrishnan characterized all calls to quit fossil fuels “cold turkey” as unrealistic. KKR & Co. founder Henry Kravis recently accused climate protesters of not understanding the economics of the energy transition.
Even within the realm of climate nonprofits, there are now notable advocates of embracing some of the most polluting assets. These include Climate Arc, which is backed by hedge fund billionaire Chris Hohn. Other backers include Nicolai Tangen, a former hedge fund manager who now runs Norway’s $1.7 trillion sovereign wealth fund, as well as Generation Foundation, which was founded alongside Al Gore’s Generation Investment Management.
Critics of exclusionary policies argue that fossil fuel companies can simply turn to less scrupulous financiers, with less chance of any green involvement. They also note that it is important to distinguish between gas — which even found its way into the EU’s green taxonomy — and coal and oil, which have much higher CO2 emissions.
Meryam Omi, CEO of Climate Arc, says too many investors shy away from the “dark part” of climate finance. In other words, the financial sector needs to focus on the highest-emitting sectors to effectively deliver a low-carbon energy transition, she says.
Bessing notes that PFA still owns oil companies whose transition plans it considers credible. This also applies to TotalEnergies.
Not everything TotalEnergies does is perfect, but unlike Shell, the company “has set a target to increase capital spending on clean energy to 33% by 2030, which is what we have asked for,” he said.
“If I had the resources, I would work with more oil and gas companies to move them further into the green transition,” Bessing said.
As things stand, it is clear that even if PFA were to end all its exposure to fossil fuels, “the world will not become greener,” he said.
–With assistance from Alastair Marsh.
Most read from Bloomberg Businessweek
©2024 BloombergLP
