The disinvestment debate

THE Church of Scotland Investors Trust manages the investments held centrally and by individual congregations. The Trustees oversee the investments in their own time as unpaid professionals. We care passionately about the climate change emergency and support the framework of the 2015 Paris Agreement, particularly the stronger target of limiting the global temperature increase to 1.5% in 2050.

The trustees do not believe that disinvesting indiscriminately from fossil fuel companies is the best way to force the transformations in corporate behaviour needed to address the catastrophic effect of climate change. Why weaken a lobby group which is working?

The fundamental cause of climate change is rising greenhouse gas levels, due to our greater use of fossil fuels and a surging world population. Richer countries (like Scotland) burn more fuel per head, partly because we have higher incomes but also because we have outsourced heavy industries to developing nations yet we still buy their steel and other goods to make our lives more comfortable. Clearly, half our challenge is to find ways to cut down on our own total consumption of fossil energy while the other half is to develop alternative energy sources to replace fossil fuels.

The Paris conference set a framework using voluntary initiatives from each of the 195 participating countries. The next stage is a convention in 2020 to consider how these plans add up compared to the size of the problem, but the inevitable conclusion will be that much greater eff ort is needed.

To date, governments have announced high level strategies alongside a few specific proposals, but detailed plans with milestones are missing. Governments hold the most important levers, setting regulations and financial incentives to accelerate change and imposing taxes to make carbon fuels uneconomic. Without such detail, businesses cannot make long term plans, such as whether to give budget priority to new technologies or to focus on squeezing efficiencies from their existing processes.

Democratic governments have a specific problem as France and Australia found earlier this year when they tried to introduce environmental measures which impacted jobs and prices. If one government forges ahead of others it risks making its own industries uncompetitive and its electorate will vote against the immediate pain of higher taxes and lost jobs. Instead, collaboration between countries is vital to set common policies – but not easy to achieve. Carbon taxes will be essential, but will economies like Saudi Arabia join in? Even such obvious steps as international taxes on aircraft and shipping fuel will only happen if all countries participate.

Fossil fuel companies have grown to meet the demand we created by our appetite for better housing, more consumer goods, long distance foods, global transport and rapidly changing fashions.

Accepting our own share of the blame, we need to consider how all industries and services can work together in tackling a hugely complex issue. The Paris Agreement does not demand a sharp rupture in economic activity because of the damage which would be caused to vulnerable people and populations. For example, 80% of homes in Scotland are heated by gas, because it is cheap and clean. How would the poorer section of our population pay for the costs of installing other forms of heating and the higher running costs involved?

We all want a just transition, built on new technologies but not leaving people stranded. Working constructively with oil companies is just part of the massive challenge we must tackle together, as countries and with public and private enterprises. We all need to talk and to listen - shouting criticism from separate rooms does not change hearts and minds.

Oil companies are a big part of the energy supply market, although they only control 10% of total fossil fuel reserves, with the bulk held by sovereign states. They must make long term plans without knowing how governments will regulate them – such as the level of carbon taxes to expect. As shareholders in three major oil companies – Royal Dutch Shell, BP and Total – we exert little influence by voting as a single investor at company meetings. But as members of larger organisations, such as the Church Investors Group, Climate Action 100+ and the Institutional Group on Climate Change we engage effectively.

Already this year, BP and Shell accepted and endorsed resolutions to publish their plans to transform in line with the Paris Agreement and to report publicly on progress made (even linking their executive remuneration to these targets). Total, a French company, already publishes plans for its energy realignment (building sustainable power generation) and will report against these.

Most experts forecast only a gradual reduction in total fossil fuels is needed in the run-up to 2050. But there must be a massive change in the composition of fuels used, with natural gas growing at the expense of coal and heavy oil. This explains why oil companies continue to invest in shorter term exploration and production projects. Nonetheless their Research and Development budgets are already switching to sustainable sources of energy and to achieving greater carbon efficiency in their own operations and in how their products are used by their customers.

Not all companies respond satisfactorily to engagement activity. From our limited resources we cannot independently track the behaviour of all oil companies. Instead, through our collaboration with other investors we have access to the research performed by independent experts globally, such as CDP, which analyses a wide range of companies and sectors worldwide, impartially and comprehensively. As the result of this analysis we do not invest in Exxon due to its poor climate change behaviour.

It is unjust to publicly disinvest without giving credit to those companies which are changing in response to climate change, instead condemning them and their employees on behalf of the Church. Of course, if oil companies (and other major carbon producers) do not accept the need for change, criticism and disinvestment should properly follow.

Disinvestment from oil companies would produce an immediate drop in income to church funds of £500,000 while increasing the riskiness of the portfolio. But this issue should be determined by our Christian ethics rather than by financial arguments, even if there is financial disadvantage as a result.

We are very concerned by the slow progress of governments worldwide in tackling climate change (we have sympathy with the impatience of climate change protesters), but this year has been a triumph for the principle that engagement at company level works much better than disinvestment. The positive way BP and Shell co-operated with collaborative investor groups has been extremely heartening. Maintaining constructive engagement with oil companies, thereby exerting pressure effectively, will be essential as climate change strategy and targets develop. This principle must extend to other key sectors as well – airlines, engineers, cement and power companies, for example.

The General Assembly voted twice in favour of engagement and our policy is in line with the Church of England, the Methodists and Roman Catholic investors.

Indiscriminate disinvestment may create a few headlines in the short term but would also destroy our ability to influence these companies and would weaken our investor alliances just as they are working. Instead we believe in conditional investment – putting the church’s money to work with companies which listen but avoiding those that don’t.

Brian Duffin is Chair of the Church of Scotland Investors Trust.