With the upcoming COP26 Climate Change Conference in Glasgow, the pressure on pension funds to green their investment portfolios increases. At the same time, the debate on fossil investments is intensifying. But what is the best roadmap: exclusion or engagement? Pension fund PME chooses option 1, while asset manager PGIM explicitly favours option 2.
PME: disinvestment logical
Daan Spaargaren, responsible investment strategist at PME, the first Dutch pension fund to divest itself of all fossil investments, calls the decision to divest a “logical next step in the fund’s climate policy”. The released assets will be invested in companies that promote the energy transition, according to Spaargaren.
“Engagement cannot be a justification for remaining invested in certain companies. We have not seen enough results from our engagement efforts with oil and gas companies in recent years,” he says.
According to the strategist, many polluters react too slowly and still lack a sense of urgency. “The clean energy ambitions expressed by fossil companies are about the next decade, not this one, when we all know that the biggest steps need to be taken now. There is no time to lose.”
PME’s portfolio clean-up heralds an era when companies will be judged more harshly on the credibility of their transition plans. In the absence of a future-proof business case over a period of ten years, the engagement factor is no longer a reason to keep a company in the portfolio, according to the pension fund.
PGIM: Excluding the sector solves nothing
Anna de Jong, head of Benelux and Scandinavia at PGIM Fixed Income, takes the view that excluding companies and thus refraining from engagement is a bad thing. She said the carbon footprint of investment portfolios is at the heart of many discussions PGIM, one of the largest US asset managers in the world, has with clients in the Netherlands and the rest of Europe.
In fixed income, de Jong said, divestment has a direct and immediate effect on the issuer’s bond spread, making future capital raising immediately more expensive.
“However, divesting individual issuers with poor ESG ratings should not be confused with excluding an entire sector. A focus on only the supply side of fossil fuels ignores the importance of the demand side.”
“Ultimately, it becomes clear that many sectors have a major role to play in achieving “net zero”. The challenge becomes even greater when we consider other pressing ESG issues, such as human rights and biodiversity, to name a few”
PGIM Fixed Income prefers to assess individual debt issuers rather than entire sectors. According to de Jong, this does not mean that exclusion never occurs.
“We exclude issuers with underperformance and without credible efforts to improve, regardless of the sector in which they operate. But this problem does not lend itself to a simple, rules-based approach - it requires active, fundamental analysis.” Moreover, according to De Jong, there may be opportunities for the energy sector in a transition to net zero.