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    The accelerating risk of investing in fossil fuels


    Russ Francis

    Pensions of BC teachers, public servants, and municipal workers include huge fossilized investments.

     

    IN THE BAD OLD DAYS, those wanting to earn a reasonable return in the stock market might have been well-advised to look for what amounted to climate-hostile companies. Sure, there were “ethical investors” who may have had little more than feelings of moral superiority to show for putting their money into the likes of renewable energy producers or makers of vegan bicycles. But many investors were reliably collecting vast payouts from big frackers, tar sands developers, and pipeline companies. That’s where the money was.

    That was then. These days, financial heavyweights ranging from outgoing Bank of England Governor Mark Carney, the International Monetary Fund (IMF), and the European Union have a warning: firms that do not properly account for and reduce their GHG emissions are headed for financial trouble.

    The IMF is by definition a conservative organization: its primary mission is to ensure the stability of the international monetary system. But its last World Economic Outlook update, issued in January 2020—the hottest January on record—warned of financial risks posed by the climate crisis, as a result of greater frequency and intensity of weather-related disasters like tropical storms, floods, heatwaves, and wildfires. “Climate change…already endangers health and economic outcomes, and not only in the directly affected areas,” says the report. “It could pose challenges to other areas that may not yet feel the direct effects, including by contributing to cross-border migration or financial stress (for instance, in the insurance sector).”

     

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    Mark Carney

     

    Among internationally recognized financial experts, few have stronger establishment pedigrees than Carney. A 13-year veteran of Goldman Sachs—one of the world’s largest investment bankers—in 2008 he began a five-year stint as governor of the Bank of Canada. Currently, Carney is playing the same role at the Bank of England until March 15, when he becomes the United Nations special envoy on climate change. “[A]ll financial decisions need to take into account the risks from climate change and the opportunities from the transition to a net zero economy,” he said in a January Bank of England statement.

    Carney warns that it’s not just the fossil fuel industry itself that will be hit hard by the climate crisis: those investing in them should also prepare for losses. Calling the climate crisis a “tragedy on the horizon” in a December 30, 2019 BBC interview, Carney warned pension funds that their fossil investments could eventually become worthless.

    Carney’s admonitions—which he has been espousing since 2015—may be prescient. The Boston Consulting Group reported this past December that from 2014 through 2018, the oil and gas sector had the worst total return of all 33 industries it tracks. (Total return is the sum of capital gains and dividends.)

    Despite this, British Columbia Investment Management Corporation (BCI) retains significant investments in fossil fuels.

    BCI manages the pensions of 598,000 British Columbians, including school and college teachers, BC public servants, municipal staff, and some BC Hydro employees. With managed assets worth $153.4 billion, BCI is one of Canada’s largest institutional investors. (All figures refer to March 31, 2019.) Of those assets, 40.5 percent are in the stock market.

    The corporation does not break down its share holdings by industry; however, a quick glance at its investment inventory shows that BCI does not discriminate against fossil fuel companies. According to an October 2019 report by the Colorado-based Climate Accountability Institute, 20 fossil fuel companies were responsible for 480 billion tonnes of CO2-equivalent emissions in the modern period of 1965 to 2017. This amounts to 35 percent of total global emissions in that time. Of the 20 companies, 8 are investor-owned and traded on stock markets. (The other 12 are owned by various governments.) BCI has investments totalling $690.14 million in 7 of those 8 investor-owned fossil fuel firms.

    As another example of its do-not-discriminate-on-the-grounds-of-emissions policy, BCI is invested in all five LNG Canada partners: Royal Dutch Shell ($219.17 million), Mitsubishi ($59.57 million), Petronas ($5.97 million), PetroChina ($34.31 million) and Korea Gas ($0.68 million). It also holds shares in the two companies that are building LNG Canada’s Kitimat facility, Fluor ($6.51 million) and JGC ($0.56 million.)

    Asked about the fossil-fuel investments, BCI spokesperson Ben O’Hara-Byrne said in an email that the corporation is part of the Climate Action 100+ plan, which works with more than 450 other investors to convince companies to reduce their greenhouse gas (GHG) emissions. “BCI invests in companies and sectors that generate reliable returns—this includes the oil and gas industry, a significant part of the Canadian and global economy,” O’Hara-Byrne said. Divestment is the wrong approach, he added: “We believe divestment eliminates our rights as a shareholder to engage with management and raise awareness of long-term risks and encourage change of practices.”

    In the last few days of that hottest-ever January, UVic’s board of governors voted to adopt a similar approach for its $225 million short-term investment fund. The university’s investments will move slowly away from fossil fuels, even withdrawing from some, but will not eliminate them, according to a January 28 statement. Instead it will engage with those companies to “encourage” a reduction in carbon emissions of 45 percent by 2030.

    James Rowe, who teaches in UVic’s environmental studies department, calls this attitude a copout. In an email, Rowe said that oil, gas and coal are high-risk investments. “As energy generation shifts away from fossil fuels, investors who do not respond could be left with stranded assets—investments that are no longer profitable,” Rowe said. “Shareholder engagement with fossil fuel companies in the context of a climate emergency is our Neville Chamberlain moment; it’s a form of appeasement that makes us feel like we’ve addressed the problem, while the threat only grows more severe.” (On September 30, 1938, British Prime Minister Neville Chamberlain boasted that he had signed an agreement with Hitler for “peace for our time.” Eleven months later, the Nazis invaded Poland, leading to the Second World War.)

     

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    James Rowe

     

    Rowe added that for non-fuel industries, engaging companies might help reduce emissions, but for fossil fuel firms, that approach will not work if we are to keep global heating below 1.5 degrees Celsius, as required under the Paris Agreement. “To avoid blowing past our carbon budget, fossil fuel companies need to keep significant amounts of their reserves in the ground, and no company will willingly strand their own assets.”

    In December, the UVic faculty association voted to support the university withdrawing entirely from fossil fuel stocks. In doing so, it joined a worldwide trend. A growing number of central banks, investment companies, and governments are casting a skeptical eye at fossil fuel investments, often due in part to outside pressure. But their financial risks are also an accelerating worry.

    In June 2019, Norway’s parliament voted unanimously to order its $1.5 trillion sovereign wealth fund—ironically consisting of income from petroleum—to sell off its $10.6 billion investment in 134 oil and gas exploration firms, though it will retain its holdings in companies such as BP and Shell, which have renewable energy divisions.

    Last November, Riksbank, Sweden’s central bank, said it had sold off its Alberta government bonds because that province’s GHG emissions were too high. The same month, the European Union’s financing department, the European Investment Bank, said it would stop funding oil, gas, and coal projects by the end of 2021.

    In December 2019, Carney’s alma mater, Goldman Sachs, announced it would not finance new oil projects in the Arctic. And in January this year, the world’s largest asset manager took its first steps towards decarbonizing the $2.4 trillion it holds in actively-managed portfolios. BlackRock chairman Larry Fink told chief executive officers in a letter that climate change is now a defining factor in companies’ long-term prospects. “[W]e are on the edge of a fundamental reshaping of finance,” Fink said in the letter. To begin, BlackRock will divest all its holdings in thermal coal, due to its high sustainability-related risk.

    Despite Fink’s inspiring words, the change may not have been entirely altruistic. According to an August 2019 report by the Ohio-based Institute for Energy Economics and Financial Analysis, BlackRock lost an estimated $120 billion over the previous decade, most of it resulting from its investments in just four companies: Royal Dutch Shell, ExxonMobil, BP, and Chevron.

    To be sure, there may be some fossil fuel stocks continuing to provide strong returns in the short term. But these days, it is a lot easier to be ethical about where to invest and still make good returns.

    In always-reliable hindsight, there is a way one could have made money from LNG. On October 1, 2018, when LNG Canada awarded Texas-based multinational Fluor Corp the contract to build its Kitimat plant (along with its Japanese partner JGC), its shares traded at $77.95, when converted to 2020 Canadian dollars. A little over a year later, on December 9, 2019, they closed at $21.41—a 73 percent drop. In early February, the stock rebounded slightly, trading in the $25 to $27 range.

    This hints at how the BC government might have been able to recoup its $6 billion-and-counting donation to LNG Canada: by short-selling, say, $9 billion worth of Fluor; even after borrowing and transaction costs, the government could have picked up enough to cover its multi-billion LNG giveaway gamble.

    Short-sellers could have made even more money had they waited till February 18, 2020, when the company announced that the US Securities and Exchange Commission (SEC) is investigating Fluor’s past accounting and reporting. By late morning Victoria time, Fluor’s shares were trading heavily at $19.31. This amounts to a 75 percent drop from October 1, 2018.

    Who says you can’t make money from fossil fuels?

    Russ Francis is increasingly convinced that there is more wisdom in the Wet’suwet’en hereditary chiefs than in all the BC Liberal and NDP MLAs put together.

     

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