Pension funds and other institutional investors are growing wary of an increasing "carbon risk" faced by coal and oil companies which confront a divestment movement that has gone mainstream and an uncertain future of climate-related regulations.
Investors managing some $2.6-trillion (U.S.) in assets have signalled their intention to shift focus away from fossil fuels, a report released at a United Nations climate session this week states. And resource companies will likely face more bad news later this fall when the international Financial Stability Board, under the leadership of Bank of England Governor Mark Carney, releases a seminal report on the risk that "stranded assets" – long-term investments that are rendered uneconomic – would pose to the global banking and pension system.
While oil companies have bigger, more immediate problems given the collapse in crude prices, changing investor attitudes are starting to hit coal-related firms across the globe, including Calgary-based utility TransAlta Corp. And oil sands producers in particular face similar pressure.
"The [climate-change] dialogue is scaring investors away from Canada and away from Alberta," Dawn Farrell, TransAlta chief executive officer, told an energy conference in Ottawa on Thursday. "If your stock price drops by 50 per cent, where do you get the equity to invest in new technology?" Since the New Democratic Party came to power in Alberta in early May with a promise of aggressive climate policy, TransAlta's share price has fallen from nearly $12 (Canadian) to close at $6.02 on Thursday.
Launched by U.S. environmental group 350.org, and patterned after anti-apartheid efforts, the divestment movement has become a force on North American campuses and among church leaders. Its impact has been seen as largely political as it sought to create opposition to the fossil fuel industry and support for investment in clean technology firms.
But the movement has grown into something much larger and more threatening to producers, as pension fund managers and other institutional investors are now questioning the long-term returns offered by coal and oil companies.
In a report released in New York this week, U.S.-based Arabella Advisors – which tracks institutional money managers – said some 436 institutions in 43 countries representing $2.6-trillion (U.S.) in assets have committed to divest from fossil fuel companies. That's up from 181 institutions representing just $50-billion in assets who had made that commitment last year.
"We're seeing more and more mainstream institutions citing climate risk as a factor" in investment decisions, said Arabella manager Ryan Strode. Those include the University of California endowment fund and the state's employee pension funds. Earlier this month, the chief investment officer for the University of California system announced it had sold $200-million in holdings in coal and oil sands companies, citing increasing risk from regulation and, in the case of coal, declining demand.
Pension adviser Keith Ambachtsheer hosted a discussion on carbon risk with some key institutional investors in Toronto this week. He said pension managers are increasingly determined to break out of short-term thinking and anticipate longer-term risks.
"As soon as you start articulating what you're doing as being a long-horizon investor, then climate change immediately kicks in as an issue," Mr. Ambachtsheer said. "Then you get into a different mode. Rather than it being an ethical thing, it now becomes a question of long-term income streams and cash flows. And if you put a $50 [per tonne] price on carbon, there are a whole bunch of cash flows that just stop."
Jane Ambachtsheer – Keith's daughter – is global head for responsible investing at Mercer LLC, a financial services company which released a report this summer on managing carbon risk in long-term investment. Mercer forecast which industries would win and which would lose under aggressive climate policies, and found coal and oil companies would see significant reductions in their annual rates of return over the long term.