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The intent of the divestment movement is to make the world a better place to live by withdrawing investment and capital from companies that fail to align with environmental, social and governance values to hinder their growth – and maybe even shut them down.
But this way of thinking can be flawed.
If there is not sufficient investor and public support then, divesting from shares in fossil fuel companies does not stop a single gram of carbon being emitted. Every time an investor sells a share, another investor must purchase it. This of itself doesn’t prompt companies to take action or reduce carbon emissions. Investors are simply moving money around to no effect, unless there are far more sellers at a given price than buyers. And we would lose a voice at the table as a shareholder and the ability to put resolutions to company AGMs.
Think of it like this – in Australia, we have people who believe the government should take more action on climate change, and people who think that they shouldn’t. If every citizen in Australia who wanted action on climate change decided to emigrate because the government isn’t acting fast enough, would that make the government more likely to take action? Arguably, it would actually make the problem worse, because the only citizens voting in elections would then be the people who don’t think action should be taken. It’s the same with divestments – we need shareholders in big companies to be concerned about climate change, and to base their votes at company AGMs on those concerns – not just to sell their shares to investors who don’t care.
Listed companies do receive funds when they sell shares through an initial public offering (IPO) – also referred to as ‘going public’ or ‘listing on the stock exchange’. But when these shares are then traded on the secondary market on the stock exchange between buyers and sellers, this does not change the initial capital that the company received through the IPO. Share prices go up and down all the time, with no effect on the company’s profits or emissions.
But share prices going up and down does have an effect on returns for our members, and outcomes for our members are the lens we look at everything through. We think some energy companies’ shares are priced too high, because governments around the world will eventually implement policies that will see fossil fuel use reduced. The longer this takes, the sharper and more abrupt the transition will be, with correspondingly larger losses to shareholders of these companies. Many investors aren’t recognising this yet.
Vision Super’s portfolio
To reduce the risks, including the risk of stranded assets, that will accompany a transition to a low carbon economy, our passive portfolios have a lower carbon intensity than the indexes they track. We have adopted low carbon benchmarks for international and Australian equities index portfolios and have also decreased the carbon intensity of our Australian corporate bond portfolio. This approach covers all emissions in the global economy, not just energy companies. Every sizable company has substantial carbon emission associated with it; directly, by its customers and suppliers, and by the infrastructure it relies on. We are proactively seeking ways to further reduce our exposure to climate risk and raise our exposure to companies adopting low carbon solutions. We have divested from tar sands and thermal coal, which are two of the worst contributors to climate change. We continue to look to divest from the most at-risk assets in more detail in accordance with the latest scientific consensus. We are also working on a detailed plan to achieve our published objective of being carbon neutral by 2030.
At the same time, we work actively with the companies we still invest in to improve the environmental, social and governance (ESG) choices they make. One of the ways we do this is to ensure that we actively participate in shareholder voting – a far more effective way to encourage those companies to change than simply divesting. We want to make sure that the companies that we invest in are doing their best to minimise their impact on the environment and to act ethically, so we exercise our shareholder vote. This gives us the opportunity to support businesses that are doing the right thing and oppose actions that will intensify climate change.
Voting and filing resolutions
In 2019, we co-filed a resolution on climate change at the BHP annual general meeting and we also regularly voted in favour of climate change resolutions at companies we own. We were also recognised for the second year running as one of Australia’s top funds when it comes to voting for climate resolutions [https://www.accr.org.au/news/vote-like-you-mean-it-preliminary-report-2020/]. If we own shares in companies, we’re able to use that vote to try to change their behaviour – that’s one reason why our approach is more nuanced than just divestment.
However, we do divest where we don’t believe that engagement can make a difference and where we think there is a material pricing risk. In addition to thermal coal and tar sands, Vision Super does not invest in controversial weapons such as nuclear bombs and cluster mines, or in tobacco. No amount of engagement will make cluster mines any less likely to kill civilians, or make a tobacco company’s products any less likely to kill their customers.
We have also divested from tar sands and thermal coal, two of the worst contributors to climate change – because we believe there is a material pricing risk.
When determining which companies we won’t invest in, we set a materiality threshold at 25% of revenue with a 5% buffer.
We don’t believe any fund can truly claim to be “fossil fuel free” while fossil fuels are integrated into the global economy. Some of the biggest customers of fossil fuel energy are technology companies, aerospace companies, transport companies, agriculture, and industrial companies – in fact any company connected to a transmission grid fed by fossil fuel energy plants. “Divesting” without thinking about demand as well as supply will not solve the climate crisis – we need to transition our entire way of life away from emissions production, and we will need to learn as we go. This is not easy, and will not be achieved by simply selling shares in some companies.
Vision Super has a comprehensive ESG policy which we use to guide our decision-making and to monitor the impact we have on communities and the environment. There’s a growing body of evidence proving that the consideration of ESG factors, when integrated into investment analysis and portfolios, improves long-term investment performance.
You can read more about how we manage climate risk in our annual Corporate responsibility reports, which is part of our Annual report (you can find it here).