Mindful Money's Barry Coates on why fossil divestment makes a difference and should be supported - even by car owners

Mindful Money's Barry Coates on why fossil divestment makes a difference and should be supported - even by car owners

By Barry Coates*

The Government’s decision to require default KiwiSaver providers to exclude fossil fuels has kicked off a debate around the impact. This is long overdue. It not only affects default funds, but most of our KiwiSaver investments.

Currently less than 3% of KiwiSaver funds are managed under a policy to exclude fossil fuels. Does this mean that the fund managers who manage 97% of our KiwiSaver funds are right to continue investing in coal, oil and gas production?

We need facts and analysis to examine this decision, and fossil fuel divestment more generally. We also need to bust some myths about divestment and fossil fuel investments.

Will excluding fossil fuels mean lower returns?

For many people, this is the big question. There’s a lot of cheerleading in the financial press for fossil fuel companies but few hard facts. The most consistent and reliable information comes from US market indices. The results are startling.

Over the past 10 years, coal stocks have dropped by an average of 28.5% per year. Oil and gas share prices have been flat over a 10-year period but have halved since 2015. Meanwhile the overall market has risen by an annual average of 12.65%.

Most New Zealanders defer to the financial experts on the assumption that they know how to make high returns, even if they ignore the consequences of the investments on people and the environment. So it is shocking to see that fund providers that manage 97% of KiwiSaver funds have been losing money on fossil fuels that are in their portfolios.

It’s not as if they haven’t been warned. The former Governor of the Bank of England, Mark Carney, sounded the alarm in 2015, after detailed analysis from the NGO, Climate Tracker. It was their analysis that revealed 80% of fossil fuel reserves will not be able to be used if the world is to stay within the agreed UN target for global warming of 2˚C.

And the worst impacts on share prices of fossil fuel companies may be yet to come. There has been $12 trillion of institutional funds already divested from fossil fuels, but there is far more yet to divest. Warnings have come from the major passive funds, notably BlackRock and State Street. The implications are huge. There is so much money at risk that central banks have warned that collapsing prices for these stranded assets may cause another global financial crisis.

From this analysis, it is implausible to conclude that default funds will earn lower returns if fossil fuels are excluded. To the contrary – strong evidence suggests they will earn higher returns.

Do New Zealanders really care about avoiding fossil fuels and should the government act?

The most authoritative source of information on public attitudes is the annual survey of responsible investment undertaken for Mindful Money and the Responsible Investment Association of Australasia by Colmar Brunton. The data below shows that 75% of the public would like investment providers to avoid investing in fossil fuels.

Information on fossil fuel investments across all KiwiSaver funds is now available to members of the public for the first time. Mindful Money’s Fund Checker shows how much of each KiwiSaver portfolio is invested in fossil fuels and which companies.

The Government has a duty of care towards those in default funds who are not going into a fund by choice but because they are allocated to a fund. By requiring exclusion of fossil fuels in default funds, the government is protecting the interests of the majority of the public.

Their power of choice is not being taken away. They can choose to invest in fossil fuels. All that has changed is that the default has been set at no fossil fuels rather than being set at investing in fossil fuels. This referred to in the economic literature as a nudge towards a policy outcome.

Does divestment make a difference in transition to renewable energy?

It does make a difference, but not always through a direct impact. If it is just one individual shareholder not investing, and they don’t inform the company why they are not investing, it doesn't make a difference. However, where divestment is part of a collective effort, divestment helps remove the ‘social licence of the companies, raises their cost of capital and accelerates the diversion of investment to alternatives. It also increases the willingness of governments to regulate.

This has been the experience of divestment movements against the slave trade, apartheid and tobacco. The global movement on fossil fuels has now persuaded institutions with $12 trillion of funds under management to divest. The evidence is that this has made a major difference. In addition to higher costs of capital and lower share prices, fossil fuel companies encounter operational problems, such as not being able to hire good employees. Shell has warned that divestment is a major risk to its business.

The decision to require default funds to exclude fossil fuels will send a powerful message to the companies and investment community. It will contribute to the switch of investment towards renewable energy.

Is it better to continue to hold fossil fuels and engage with the companies to shift their policies?

Active ownership means that the fund managers should actively engage with companies on their policies. This is crucial because they are owners of the shares and have a responsibility to contribute to governing the company.

However, turning up to an occasional meeting or voting at company AGMs is not going to change long established business models built around fossil fuels. The onus should be on those fund managers who hold fossil fuel shares to explain how their engagement has resulted in positive outcomes, or if not, how they have divested from those companies.

Currently very few reports of KiwiSaver fund managers show how their engagement is making a difference. This should be a requirement for the funds claiming to be ‘responsible’ on the basis of engagement.

Engagement is particularly effective when good companies do bad things, but has little impact where a company’s business model is built around practices that are socially or environmentally damaging – like fossil fuel producers. In those cases, fund managers should exit.

The reality is that efforts to substantially shift the practices of major fossil fuel companies have largely failed. The business model of the major companies remains focused on oil and gas. Even worse, research shows that Big Oil has funded climate denial. In the three years after the Paris Agreement was signed, the five major listed companies spent $1 billion of shareholders’ funds on misleading climate-related publicity and lobbying. Few KiwiSaver investors want to see their funds used in this way.

Despite claims of engagement and responsible investing by most KiwiSaver providers, KiwiSaver funds are still invested in the major companies that are locked into a fossil fuel business model. Analysis by Mindful Money shows that $262 million of KiwiSaver funds are invested in Exxon-Mobil, Chevron and BHP, three of the companies most resistant to change.

Government could have called for a policy of responsible investing on fossil fuels, but that would achieve little. A clear policy of divestment has the advantage of cutting through the misleading claims about engagement and investing responsibly, sending a strong signal to the sector and protecting KiwiSaver investors from investing in companies they want to avoid.

Will fossil fuel companies lead the transition to renewable energy?

The argument that oil and gas companies are leading the charge in investing in renewables doesn’t stack up. There have been repeated promises over the past 20 years that Big Oil will make the transition to renewables. There were high expectations in the 1990s when BP re-branded as “Beyond Petroleum” but within a few years the CEO was fired and the strategy abandoned.

Despite the claims of making a switch to renewables, analysis by the Carbon Disclosure Project shows that investor-owned oil companies currently are spending only 1–4% of their capital investment on low-carbon energy sources. Even the more progressive companies are making only tentative steps towards renewables. Equinox, cited as a leading example for transition, expects to invest only 15-20% of its capital spend on renewables by 2030.

Overall, investments in the oil and gas sector will still remain concentrated on extracting energy sources that are causing massive social and environmental damage and threatening our future. Leadership will continue to come from companies outside the oil and gas sector.

I’m driving a car and I don’t want to pay more for my petrol

Many people drive cars because they are the currently cheapest and most practical option to get to work or go on vacation. But that doesn’t mean they want to invest their money in fossil fuels. By contrast, switching investments to new battery technologies and EVs will help accelerate better alternatives being available at an affordable price.   

And no, default funds divesting from fossil fuels won’t mean that you need to pay more at the pump for your petrol. That’s fake news.

So, has the government made the right decision to require default fund to divest from fossil fuels? Overwhelmingly yes.


*Barry Coates is Founder and CEO of Mindful Money - a charity that promotes ethical investment, including by detailing on its website what different KiwiSaver funds are invested in. He is a former Oxfam Executive Director, Green Party list MP and developer of a sustainability programme at the University of Auckland Business School.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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36 Comments

Yes, we will end up using renewable energy by default.
Yes, we are better not burning the remaining FF, in Climate terms.
Yes, we are better going there early - as early as possible.

But we have to have a discussion about the kind of society we can run on renewables, the number of people we can support, and the consumption-level we wish to live at.

The number of people that will be able to be supported is the big political elephant that needs to be addressed

Over the past 10 years, coal stocks have dropped by an average of 28.5% per year. Oil and gas share prices have been flat over a 10-year period but have halved since 2015. Meanwhile the overall market has risen by an annual average of 12.65%.

Could one conclude that S&P 500 returns over the quoted term maybe a functions of expanding P/E multiples and shareholder cash flows may not be sustainable given debt funded share buy backs are a significant component of total returns?

12
up

No it's not started a debate on the impact of a government banning fossil fuel investment; it's started off a debate about government meddling in individual's private investment decisions and turning Kiwisaver, and the Super Fund, into a political plaything.

It is not appropriate for a government to ban individuals investment decisions either philosophically, certainly, or on any grounds. Indeed, philosophically it is deeply repugnant for those of us who view our Western birthright as free societies (and small states).

And that's where this ends.

But I'll also play devil's advocate. Four points:

1. The world can't live without fossil fuels: people would die in the developing world, and standards of living would plummet in the developed world because renewable energy only provides a minuscule amount of the world's energy needs, is chronically unreliable and as German and NSW consumers are finding, it's very expensive.

2. Banning private investors owning fossil fuel company shares does nothing to affect the decisions of fossil fuel companies; nothing at all. It merely affects what should have been the voluntary transactions between two individual investors (the companies managements couldn't care less about that). Worse, all the default funds now selling out of fossil fuel companies can itself lower the selling price of shares and allow rational investors to pick up windfall shares at the expense of the default KS investors. Also related to this, and despite what the author says - I don't accept his point of view - some of the biggest investors in renewables are fossil fuel companies as that makes sense for them from a market perspective, so fossil fuel company investment can be a gateway investment into renewables. The market was always going to sort this out; not meddling politicians and their useful idiots (in the political sense, I'm not calling the writer of this article a useful idiot).

3. Central banking has been far more destructive of human living standards than fossil fuels (which have hugely increased all humanities living standards historically and continues to do so), and at the end times of central bank stimulunacy we have entered with the collapsing markets lunatic monetary loosening is now bringing on, with no further monetary policy loosening possible that can be effective anymore, what will bring us out of the coming global recession - no, thanks to CBs, out of depression - is the current low cost of fossil fuels after the dramatic drops over the last two weeks. Those cheap fuel prices are the most powerful (real world) market stimulus for the future recovery.

4. On the DOW and S&P on Friday, fossil fuel company prices - Exxon, etc - were decimated on the plummeting fuel prices, thus if there's any share bargain to be had right now, they probably represent best value (for best future dividend yield thanks to buying in low) .... again, thanks to inappropriate Big Brother government meddling, 700,000 individual Kiwisavers are denied access to this.

God help us all with the level of ignorance right now supporting the growing governments in the West. Indeed, having destroyed price discovery and free markets totally I believe we'll see the Fed printing funny money ultimately to buy US shares: once they purchase the means of production by buying up all the shares (as BOJ is doing in Japan), all they'll have to do is install AOC at the top of the command, and the US will have had a full blown communist revolution. What a crazy, frightening world as we all lurch to the new gulags of each other.

And the worst impacts on share prices of fossil fuel companies may be yet to come. There has been $12 trillion of institutional funds already divested from fossil fuels, but there is far more yet to divest.

More to follow in the US shale industry if Putin's gamble turns out to be correct.

Bloomberg quotes Russian state-run think tank Institute of World Economy and International Relations president Alexander Dynkin as saying, "The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2." Link

I could be way off here , but I am fearful of this slow - moving rout leading to a full-blown crisis.

There is just too much bad news coalescing in the world right now , quite apart from this Virus , there are too many small ( or not so small) things causing negativity , uncertainty and fear .

People have borrowed cheap money heavily to invest heavily in already indebted Stock exchange listed Companies, and these fickle folk will turn and run quickly , causing all sorts of damage

I would not be surprised if we don't end up with a BLACK MONDAY -TYPE EVENT as these over-indebted investors exit the market , in unison or at least like a herd

And dont tell me that algorithms will save us , our problems are in the fundamentals :-

Trade wars
Russia wanting to collapse oil prices
Banks with shaky balance sheets from being part of the asset price bubble that has been created
China closing down supply chains
European sovereign debt ( or global debt for that matter )
Massive Insurance claims from the virus could bring down businesses like re-insurers and their holding companies ( Like Berkshire Hathaway...........now wouldn't that be scary ? )
A decline in shipping volumes from reduced trade hammers shipping companies
Reduced demand for coal, ores and base metals from Aussie , Canada and South America and South Africa .
Retail sales falling affecting stores and thus property values ( due to online sales increasing )

All of this potentially leading to layoffs, unemployment , impaired landing , and affecting savings and pensions as the world slides slowly into recession or worse

Its not looking at all rosy right now .

'People have borrowed cheap money heavily to invest'
Be interesting to know the extent of leveraged equity investment vs non. Institutions dominate listed entity ownership and most will maintain their long term hold positions, eventually setting a floor.

@middleman ...........Hopefully institutional investors who have not got debt will create a floor price , but even they need cash to pay out nervous investors or pensions .

The awful truth about stock markets is that ungeared institutional investors are often forced to sell by those wanting to cash-in ( usually out of fear ) , and this magnifies the problem .

NZ's returns from sales of red meat this January are 26% up on January last.
BP's Energy Report for 2019 states that the quantum of the world's renewable energy sources is equal to the world's increase in demand for energy. Without fossil fuels the world as we know it will cease to function. The fossil fuel industry may be a sunset industry, but until some viable alternative is developed it is the only reliable energy source we have. As a matter of fact, it is not the burning of fossil fuels that is the problem, the problem is the inability to satisfactorily dispose of the exhaust fumes. If science were able to solve this problem we could carry on as we do now until the cows came home.

I think most people agree that self-funded pensions in general and Kiwi Saver in particular is a good idea . The surest way to kill it is to meddle with it and to erode confidence in it. It is as good as dead now.

I think most people agree that living on a healthy planet is a good idea. The surest way to kill it is to keep burning fossil fuels.

I think most people agree that the NZ impact from such measures won't have a fraction of a negligible effect on climate given our size.

I think most people are able to work out that per head, NZ'ers are among the worst emitters on the planet.

Don't hide behind the 'we're small' nonsense.

Per head means nothing when we have 0.007% of the world's population. Believing that NZ can alone make any significant impact on climate change is arrogant

I hope you are actually young youngdumbandbroke. That way when you grow old and your grandchildren ask “why on earth did your generation not take more action to combat climate change” you can explain. “I actually argued against New Zealand making any effort to combat it, as I felt we were too small to make a difference”. I’m sure everyone will agree with you and think you are great.

Or how about 'I was a card carrying member of the fundamentalist wing of the AGW religion that decimated NZs agricultural industry which previously fed 35m people, extinguished its tourism and other extractive industries, ushering in the great sackcloth and ashes austerity period (those were the days!). We kiwis on our two South Pacific piss ant rocks sure told the world a thing or two, eh'.

Aah. Spoken like a true denial cultist. Fry the planet, because I'll lose a dollar if we don't. Reasoning of a psychopath!

I don't intend on being captain planet like yourself and becoming "great". I just wanted to point out that NZ climate brigade trying to stop climate change is not only pointless but potentially detrimental to the rest of us

https://www.wri.org/blog/2019/09/what-does-net-zero-emissions-mean-6-com...

At the very least, major emitters (such as the United States, the European Union and China) should reach net-zero GHG emissions by 2050, or it will be hard for the math to work regardless of what other countries do. Ideally, major emitters will reach net-zero much earlier, given that the largest economies play an outsize role in determining the trajectory of global emissions.

https://www.wri.org/blog/2019/09/what-does-net-zero-emissions-mean-6-com...

Climate change. The climate is always changing thats what makes it climate. If you mean man made climate change say "man made climate change" and once you say that then tell everybody what impact man has on the climate. Back it up with the specific science that proves that man is having a "significant" impact on climate.

So you took no action in other words. If you lost your argument then nothing happens. If you win your argument then nothing happens.

The way for NZ to take effective action is for us to team up with other similar sized nations and take action together.
We need enough nations on the team to make up a much more significant percentage of the total global emissions.

Taking action alone is dumb. Our signal is lost in the noise.
Taking action in a group including huge nations is also dumb. Our signal is lost in the noise.

Taking action as group of small nations, which when considered together are significant, now that is smart. Our signal is the same as the others, so it is not lost.

Jasmin, just in the same way nuclear testing was thought of in the 70's.

It's like you are fighting a yesterday's cause with nursery rhyme logic.
Fossil fuels have lifted most out of poverty and continue to do so (will you turn the electricity off in India, China etc.?).
No bad thing to remove the OPEC strangle on economic development.
People get that transition to non fossil fuels where able is to occur. Same way we stopped using whale oil.
Remember economic collapse will kill more people than any climate change.
Strategically countries, communities need control over their energy sources.
Can you see with the virus, economic continuance is most important & is being balanced with death rate, with maintenance of health system & services.

How are you in as position to claim that economic collapse would cause more death than climate change. No one is in a position to judge that as it completely depends on action or non-action we take now. JP Morgan in a release last week said “Human life "as we know it " could be threatened by climate change”. I’m sorry but comments like this have to be labeled what they are. Absolute lunacy!

Thanks Jamin, love your "how dare you" line of thinking. I hope you're not working in the PM's dept or for Shaw & Co.

If you have a background that includes economics, finance, science, the analysis is straight forward.

What bit are you having trouble working through?.
For example, Do appreciate the risk poverty has to everyone.

These might help you.
https://youtu.be/KW0R-NOJgbw
And
https://youtu.be/prrbooi9PNw

If you want to live a life without fossil fuels I can respect that. However I don’t; so please do not lecture me with your millennial angst. Your entire existence is based on fossil fuel use. If that conflicts with your beliefs then move to Stewart Island. The log burner will be working over time I would wager

The usual denialist crap, versus the usual well-meaning climate-but-nothing-else type of comment.

Sigh.

We are headed for global financial collapse, and for a readjustment of global population to sustainable levels. The finance because exponential growth within a bounded system is a short-term ponzi, the population because it was achieved by exponentially-increasing resource draw-down.

We've already forced the climate, and the lag-time says it will already get worse, even if we stopped now. But we are into the last 'doubling-time' for FF, so things were going to slow anyway. And we were descending through the EROEI because of the cherry-pick-the-best-first tendency. So the descent accelerated itself.

Neither BAU nor all turning to Nissan Leafs, are the answer. De-growth on a massive scale (ain't that an oxymoron!) is the only way to soften the crash. And post crash, a blueprint for post-crash living. Local, personal, community, non-global, full-circle nutrient (and as much of everything else as possible).

Gonna make a few folk quite redundant, and they'll find they are holders of no useful skills

Forgive me for not subscribing to your post apocalyptic fantasy. Any dates for this? What should I be looking for rain, sun, wind, rising oceans?

We may well be over populating the planet but what can any of us in NZ do about that?

Notice how those questioning the sacred tenets of the AGW religion are pejoratively labelled as 'denialists' and their views described as 'crap' by the high priests ? This categorising is the hallmark of all of history's extremist dogmas - personal denigration of dissenters and of those simply questioning more radical interpretations of de jour doctrines.

I don't give R/A what you subscribe to. I deal in real counts (which puts me well ahead of economics).

I count soil nutrient depletion. I count aquifer depletion. I count species extinctions. I count temperature range. I count resource depletion. I count sink capacity remaining. But mostly, I count energy and entropy. And I don't make the mistake of thinking humankind is somehow above nature, nor do I make the mistake of confusing technology with energy itself.

And those counts tell us there is a long-term-maintainable level for human-species support on this finite planet. The carriable population depends on your desired consumption per head, but 1-2 billion is the generally-accepted range.

Dates? Easy. Google World3 - that graph has been updated continually for 50 years. But the unknown is when general panic crashes the totally artificial financial system. Nearly happened in '08, it's been on steroids ever since and will never come off artificial support. Somewhere short of 2030, is my appraisal, and overdue is my description.

NZ should stop immigration, urge a 2, 1 or none child per couple (with a discussion about 2 and snip for either sex, if persuasion isn't enough). Carrying-capacity here is probably south of 2 million, ex-fossil energy (which will happen well before 2050, even if all used). That should be the 2050 govt target. Then work on getting food to those folk. I suggest more will live rurally, probably in village clusters. Cities will be at least part-abandoned, particularly the south-facing portions and the high-rise shadowed ones. Perhaps 1/4 acre sprawl can self-feed to a certain extent.

Infrastructure will be triaged beyond recognition - much seal will revert to gravel, much gravel to grass/weeds. Pipeline failures will increase. Grid-outages ditto. Local will make more sense, face-to-face will be the only trust mechanism.

Sorry if those who were taught the gospel according to Adam Smith, convinced you of eternal salvation at 3% growth a pop.

It's curious you raise environmental issues as they are rarely mentioned with the climate change narrative - which I see as far more of a political ideology with the goal of control. I am very sympathetic to environmental causes, but they rarely get much airplay. Many of your views are dystopian and extreme, it feels like a chapter out of The Road. However we live in a democracy and no one is going to vote to live in a lean-to.

'urge a 2, 1 or none child per couple (with a discussion about 2 and snip for either sex, if persuasion isn't enough)'. The last sinister clause reveals much. Those of us who lived through the disastrous years of Cold War totalitarianism will recognise it as an echo of those times.

Man has contributed 0.01% of the atmospheres 0.04% C02 - yet here we are considering forced sterilisation. As you say, to question this publicly is career suicide and that for me violates all the principles of a free society. The great philosophers wrote about this (John Locke).

It is the fading from consciousness of the teachings of people like the great John Locke, other moral and political philosophers and religious leaders, that has created the belief vacuum which makes us so vulnerable to fanatical ideologies and blandishments of vacuous and often amoral leaders. Even to the point a delusional pol pot or Ghandi style agrarian based living vision is not perceived as extremist nor ultimately disastrous.

Middleman, I've placed you in the "sane" interest contributors club! It's a small, exclusive group.

Smart, well-read people can see exactly what's going on.

If your regime is based on the extraction of pieces of a finite planet, you're in long-term trouble. If it is based on exponentially-increasing said draw-down, you are in short-term trouble.

The religion hereabouts is the gospel according to endless growth. It worked on paper, the way a 4000-year planetary history worked. Then Darwin, Wallace and Lyell came along. The incumbents are still beating the denial drum, because their mana/standing/imcome is dependent on same.

Same goes for belief in GDP and 'economic growth', both of which which ignore physical boundaries, indeed ignore physics period. Didn't take a rocket scientist to see the system was going to hit the wall. Interesting that someone has to denigrate the messenger, blaming them of exactly what the someone is guilty of. Reminds me of The Shipley days - when she accused someone of something I always looked for that colour of mud in her corner.....

The Limits to Growth are physical, and will therefore play out. Pity some people aren't well-enough read :)

Or was that a second Shipleyism?

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