Time’s up for fossil fuel funding

Margaret TaylorThursday 9 April 2020

The carbon divestment movement has forced serious consideration of the rights and wrongs of financing fossil fuel. But, with demand for energy still rising, the answers are far from simple.

The expression ‘pinstripe mafia’ hardly conjures images of elite law firms with serious reputations built over decades. Yet, those were precisely the words environmental activist movement Extinction Rebellion used during its protest in the heart of legal London at the end of February. A firm that provides its advisory services to an oil company is, says Extinction Rebellion co-founder Gail Bradbrook, part of a ‘pinstripe mafia’ enabling a ‘system which is killing life on Earth’.

Calls to divest

Law firms are not the only businesses to face such accusations. The legal profession has only recently caught the attention of climate activists.

The financial sector, on the other hand, has long been in their sights, with the divestment movement gaining traction due to the work of groups such as 350.org. Founded by a group of US-based university friends and active since 2008, 350.org initially focused on raising awareness about climate change. But, since 2012, it has been running a campaign designed to force financial institutions to divest from their fossil fuel investments. As the organisation puts it: ‘If it is wrong to wreck the climate, then it is wrong to profit from that wreckage.’

Eight years later and with the climate crisis now firmly fixed at the top of the global agenda, those institutions have been forced to take note. In January, BlackRock, the world’s largest fund manager with over $7tn of assets under management, made a vow to make sustainability core to its investment approach. It will do this by, among other things, selling its holdings in polluters such as thermal coal producers and launching new products that screen out fossil fuels.

Given the traction gained by Extinction Rebellion, 350.org and high-profile activists like Greta Thunberg, BlackRock is unlikely to be the last company to tread this path. US bank JPMorgan Chase, for example, recently announced that it would stop lending to coal companies and financing oil and gas projects in the Arctic. While the organisation said it would continue to fund oil and gas projects around the world, it has also signalled its willingness to take further action according to client demand.

Barclays Bank, which has come under intense pressure from investors to stop funding fossil fuel projects, could face a shareholder revolt at its annual general meeting in May if it does not agree to stop lending to such businesses. A resolution urging it to cease doing so has been added to the meeting’s agenda and big investors including fund managers Jupiter Asset Management, Amundi – the Church of England’s investment arm – and 4.5 million-member UK pension scheme Nest have all vowed to give it their backing.

Green agenda

Charlie Kronick is Senior Climate Advisor at Greenpeace UK. He feels BlackRock and JPMorgan Chase are not going far enough, but are at least showing there has been a shift in attitude that can be put down to the efforts of the divestment movement. ‘The divestment movement has been hugely significant,’ he says. ‘It’s catalysed a change in the narrative and is emblematic of how people are looking differently at the relationship between finance, fossil fuels and climate change, and how all those things relate to each other.’

And it’s having a significant impact on the way investment houses are positioning themselves for making future investments. Indeed, Lora Froud, Newsletter Officer of the IBA Asset Management and Investment Funds Committee, says the heightened awareness among individual investors about what their money is being used for is leading to significant change in the way asset managers are thinking about their funds.

Demonstrators protest against Barclays Bank’s involvement with the fossil fuel industry outside the bank’s branch in Bristol, UK, December 2016. Keith Ramsey/Alamy.

‘There’s always been an emphasis on screening out anything to do with tobacco or gambling, but there’s been less focus on products that are going to have environmental or social benefits,’ says Froud, who is also a partner at London-based Macfarlanes specialising in regulated funds and asset management. ‘In the case of the retail funds sector, over the past 18 months we’ve definitely seen many of our clients launching funds that are not just screening out those ‘sin’ investments but are going a lot further and making investments that are trying to make a change from an environmental, social or governance perspective.’

Energy dilemma

Back in January, Larry Fink, Chairman and Chief Executive Officer of BlackRock, said that ‘in the near future – and sooner than most anticipate – there will be a significant reallocation of capital’ as a result of the climate crisis. There will be only so much these funds can do, though, if the exploration and production giants can continue to attract investment on a massive scale. Not everyone shares Fink’s appetite to divest, however. Alix d’Anglejan-Chatillon, Diversity and Inclusion Officer of the IBA Asset Management and Investment Funds Committee, notes that in Canada fossil fuel companies are still very much on the investment agenda.

‘Globally you see major banks pulling out of Canadian tar sands, but the reality of the Canadian market is that fossil fuel divestment has not gathered the same steam as in other countries because Canada is largely a resource-based economy,’ says d’Anglejan-Chatillon, who is also a partner at Canadian law firm Stikeman Elliott. ‘Financial institutions and public-sector pensions are heavily invested in these industries and it’s not easy just to yank out the cash. They are also facing the reverse backlash of the Alberta government threatening to withdraw cash from institutions that refuse to invest in the Alberta oil sector.’

Earlier this year, Jason Kenney, the Premier of Alberta, said his provincial government was looking at the possibility of setting up an organisation to fund oil and gas projects if other forms of finance dry up. Oil sands have long been seen as the dirtiest of the dirty energy sources and, with the Canadian government’s National Inventory Report last year reporting that the sector produced more carbon pollution than the provinces of Quebec and British Columbia combined, investors are increasingly reticent to be associated with them. Yet, from Kenney’s point of view, Alberta’s oil sands hold the key to its people’s prosperity and for that reason the sector should be supported.

‘This province will not be shut down,’ he told broadcaster CBC. ‘We will not leave in the ground assets that represent $10tn of value on global markets. We will not be the only of the major energy producers in the world to choose poverty over prosperity.’

From d’Anglejan-Chatillon’s point of view it is that conflict between creating jobs and sustaining livelihoods on the one hand but contributing to the climate crisis on the other that Canadian investors are having to wrestle with.

8-year-old Max joins the climate strike. Thousands of pupils walk out from lessons to protest in Westminster as part of the Youth Strike 4 Climate / Fridays For Future. Similar strikes have taken place in Australia and in European countries such as Belgium and Sweden. February 2019. Guy Corbishley/ Alamy Live News.

‘We are very much at a tipping point globally and BlackRock has said that sustainability and ESG (environmental, social and governance) investing will be at the forefront of its investment approach,’ she says. ‘It’s easier for them to do that because the level of assets under management they have is so significant that they can shift assets to special investment portfolios that have various sustainability objectives. It’s more difficult for Canadian banks and asset managers who have to contend with the reality of a resource-based economy that is transitioning. There are many jobs at stake.’

Moral complicity

For those at the forefront of the divestment movement, the very real danger climate change poses to humanity makes all other considerations pale into insignificance. Eliminating fossil fuels in order to save the planet has come to be seen as a moral imperative (see box: Ecclesiastical divestment: a question of morality). Yet Marco Bollini, Chair of the IBA Corporate Counsel Forum, notes that with energy demand from the emerging economies set to grow, acting according to a set of moral principles will never be as easy as it may seem.

‘In the next few years, energy demand will continue to grow,’ he says. ‘This is mainly due to the fact that there will be more people and the emerging economies will develop. In this framework alternative and renewable energies will have an increasingly important role to play, but they can’t immediately replace hydrocarbons or fossil fuels in all sectors because there are technological and economic limits. In the long term the energy sector in general will face two challenges: an increase in the world’s population but at the same time the increase to the world’s temperature must be kept below two degrees. Investors should keep in mind these facts when deciding what to do. Just saying you’re not investing any more in companies developing fossil fuels is not an immediate answer for everything.’

For Professor Mike Hulme, a climate change specialist at the University of Cambridge, this is key. While on the one hand there has to be a recognition that the world must wean itself off the most polluting fuels, on the other it has to be accepted that eliminating fossil fuels before there are enough replacements would wreak havoc with people’s lives. ‘We need energy and the predicament that climate change presents all of us with is that we’re all deeply implicated in the changes that are happening to the planet,’ he says. ‘Our personal consumption is only one aspect of it. There’s our reliance on food products that are transported half way round the world. Every aspect of our lives is bound up to a greater or lesser degree with the changes to the earth’s atmosphere. We can’t escape moral complicity.’

Engagement matters

This sense of moral complicity could hold the key to how investors could go about dealing with the question of divestment. If fossil fuel companies know they have to take urgent action to help curb emissions – and the oil majors have agreed to align their businesses with the reduction demands laid out in the Paris Agreement -- investors should continue to use their influence to achieve that, rather than punishing fossil fuel companies for not being there yet.

For Kronick at Greenpeace, engagement is key. Though he doesn’t accept that any further exploration should take place, he says that unless large investors use the influence they have over energy companies, there will be no imperative for them to change. ‘There are more than enough fossil fuels to take us way beyond all the targets, but at the same time the global banking industry is making trillions of dollars available to the oil and gas industry,’ Kronick says. ‘They have got to stop. They have to pivot away from exploration and that’s where divestment and engagement comes together.’

‘There’s a lot investors can do before they sell out: they can vote against directors, auditors, remuneration,’ adds Kronick. ‘That’s the first step to show they’re serious about engagement as engagement without consequences is meaningless.’

‘Companies are not moving anywhere near quickly enough,’ he concludes. ‘The timeframe is imposed by the climate, not by civil society, and carbon emissions have to reduce by about 45 per cent in the next decade. People argue about ways to do that, but in the absence of carbon-sucking unicorns the allocation of capital has to be towards low-carbon sources.’

Kronick’s scenario envisages a point where the cash invested in fossil fuel companies can be redirected from partially transformed businesses into lower-carbon alternatives. From Bollini’s point of view, though, it will be worth continuing to back the big oil and gas players because, ultimately, they have the know-how and the cash to make considerable contributions to the new energy mix.

‘To develop the technology and to make the investment necessary for this transition requires knowledge and financial capability and energy companies are well-equipped to move forward towards this transition,’ he says.

Future proofing

The question is whether advisory businesses, including law firms, will be able to hold their nerve with these clients in the meantime.

Though Extinction Rebellion’s February protest outside the offices of leading London law firms ultimately passed off peacefully, the fear of being implicated in the climate crisis – of being marked out as part of the ‘pinstripe mafia’ – is making those throughout the business world jittery. One of those firms declined to comment for this article, while the energy head at another high-profile international firm provided a comment extolling the virtues of the green energy and decarbonisation projects his clients are involved in, but did not want his name or that of his firm to be mentioned. Another international firm whose energy practice spans across Asia, Africa, Australia, Europe, the Middle East and North and South America simply ignored requests for comment.

It’s difficult for these firms to cut ties with their energy sector clients given they generate huge amounts of income. They can also be viewed as having a role in ensuring the energy transition is a success.

‘The long-term ambition is to move the world’s economy away from oil, coal and gas; that will take at least 50 years, if not longer,’ Hulme says. ‘We need oil and gas to provide many of the energy sources that the world’s population are morally entitled to demand, and we’ll want to maintain an orderly transition, not a cliff-edge transition. We have to recognise the deep entanglement of modern life with all facets of production and consumption that are contributing to climate change. If you want moral purity you’ll never get it.’

Margaret Taylor is a freelance journalist and can be contacted at mags.taylor@icloud.com