Al Gore's business partner warns investors of fossil fuel risks

Two influential investment industry grandees are separately touring the City of London challenging fund managers and pension trustees to adopt radical new approaches to investments in some of the world's largest fossil fuel extractors.

The investment experts warn that mainstream investment thinking is sleepwalking into a dangerous future

The investment experts warn that mainstream investment thinking is sleepwalking into a dangerous future

David Blood, former head of asset management at Goldman Sachs, and Howard Covington, onetime chief executive of New Star Asset Management, both warn that mainstream investment thinking is sleepwalking into a future where the threat of climate change either leaves huge reserves of fossil fuel unburnable or plunges the global economy into crisis.

Blood insists long-term investors such as pension funds can only justify holding stakes in such companies “if they believe climate change is a hoax”.

The former Goldman Sachs partner left his role at the bank 12 years ago to team up with former US vice-president and climate change campaigner Al Gore, establishing Generation Investment Management. Now a business responsible for funds of $12bn (£8bn), it is focused on investments that are positioned in anticipation of a dramatic transformation in the energy industry.

“We are convinced that the transition from a high-carbon to low-carbon economy will be the most significant process in modern economic history – matching the industrial revolution in scale, and the technological revolution in pace,” Blood and Gore explain in their strategy statement for Generation, whose clients include the Environment Agency and the Church of England’s commissioners in the UK, and Calstrs, one of America’s largest pension funds.

“We believe investors are increasingly aware of the materiality of this transition for business, and we think financial markets have a significant opportunity to chart the way forward.”

Blood said he spends much of his time challenging fund managers’ “knee-jerk” hostility to divestment campaigns that target holdings in fossil fuel companies. “There is a great fear of divestment because there is always something that someone thinks should be divested. And if it is a significant part of your portfolio it becomes tricky,” he explained.

“The natural reaction for most investment committees is: ‘No, we will not divest; we will engage [with fossil fuel groups].’ We say: ‘First, please understand the risks in your portfolio – that should inform where you should engage and where you should divest’.”

He added: “If your purpose is to change [companies] then think carefully about that. There are some businesses that cannot change … Pragmatically, do you really think ExxonMobil is going to withdraw from the hydrocarbons business?”

Generation has been managing money on these principles for just over a decade and, far from seeing returns hampered by a self-imposed boycott of fossil fuel companies, the fund’s performance has comfortably exceeded the global benchmark index for all but one year.

Generation nevertheless expects even greater investment outperformance when the economics risks associated with climate change bite further.

Blood insisted the case for divestment can be firmly made from an economic perspective without straying into politics. Indeed, he suggests the case is not helped by commentators – he cites the Canadian author and campaignerNaomi Klein – who link climate change activism with wider criticisms of capitalism.

“The most effective way to address climate change is through the markets,” Blood said. “What upsets me is that there many people on the right in the US who are thoughtful people [but] are climate deniers – not because they reject the science, but because they see it [state intervention] as a political campaign for big government. And that is unhelpful.” 

While Generation’s message is still far from mainstream thinking in investment circles, Blood is not the only industry veteran to spot climate change as a game-changing prospect heaving into view.

Covington, who at New Star Asset Management was running a business once responsible for investments of £20bn, is touring the investment institutions with an alternative proposition, also radical and disruptive.

Like Blood, Covington warns of a dystopian future in the absence of preventative action now. He has said: “Climate arithmetic shows that we may be very hungry in a few decades’ time … [it] could take us way beyond adaptation into the realm of crumbling disorder.”

Existing efforts by a small number of institutional investors – many linked to churches, charities or unions – are failing woefully, he argues. Rather than advocate divestment, however, Covington suggests that pension fund trustees should hear the challenge of climate change as a call to arms, galvanising them to impose their will on recalcitrant corporations.

Covington advocates what he calls “forceful stewardship” – investors using the voting rights attached to shares to request that companies adopt 2-degree-consistent plans.

An increase in the temperature of the planet by 2C over pre-industrial levels is thethreshold at which leading climate scientists warn dangerous and irreversible warming may occur.

Covington wants to see bold investor demands pushed through at shareholder meetings – demands that spiralling expenditure on fossil fuel exploration be halted; that financing of lobbying efforts or misinformation campaigns linked to denial of climate science be ended; and that the connection between executive bonuses and increased reserves be broken.

If that sounds unlikely, Covington says his approach is marked out from ineffective shareholder efforts so far because it is founded on a bold reappraisal of the responsibilities of pension trustees and similar long-term investors.

Specifically, he is looking for an opportunity to test the legal duties of fund trustees in the courts. That way he hopes to establish in law that those responsible for diverse long-term funds are in fact obliged, in the interests of future beneficiaries, to address the risks to long-term returns presented by climate change.

Raj Thamotheram, a former head of responsible investment at the Universities Superannuation Scheme, who jointly published a paper on forceful stewardshipwith Covington in January, has argued that long-term investors must determinedly resolve to set companies on a rapid path to “decarbonising” their business. “Anything less represents a failure of fiduciary duty,” he wrote in 2013, and those in charge of long-term funds “are legally required to seek to balance the interest of different generations of fund beneficiaries impartially”.

He told the Guardian: “We are talking to large institutional investors about … using their voting rights to ask companies to put forward value-enhancing low-carbon business plans so that shareholders can assess the implications.”

But not everyone in the City is listening to increasingly vocal advocates such as Blood and Covington. There remain some influential figures who are stubbornly sceptical of manmade climate change.

Among them is Terry Smith, one of the City’s most successful and outspoken figures, whose latest venture, the Fundsmith investment management business, was founded in 2010.

Two years ago Smith declared on his personal blog he would stop airing his scepticism of what he calls “the quasi-religious belief that there is manmade global warming”.

Explaining his decision to remain silent, he said: “I have come in for some vituperative comment and action from ‘warmists’ … The media on climate change is so biased it would be laughable if it weren’t for the fact that the subject and the waste of scarce resources on cons which pose as solutions are quite serious.”

Asked if his views had changed since scientists from the UN’s Intergovernmental Panel on Climate Change published its most detailed report on global warming last year, a spokesman said: “He doesn’t have anything further to say regarding climate change.” The blogpost announcing his pledge of silence, and others airing his views on climate change, have not been taken down.

Simon Bowers

This article first appeared in the Guardian 

edie is part of the Guardian Environment Network


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