Charlotte Bancilhon, Manager, Advisory Services, BSR

Last week, the Second Swedish AP Fund announced it would divest from 12 coal and eight oil and gas companies, an amount totaling more than US$115 million. This announcement signals that the fossil fuel divestment campaign is continuing its shift from a grassroots movement among ethically minded investors, such as foundations and religious groups, toward mainstream investors.

Today, more than 180 pension funds (such as Storebrand), cities (such as Oxford, San Francisco, and Seattle), foundations (such as the Rockefeller Brothers Fund and Schmidt Family Foundation), and universities (such as Australian National University, Glasgow University, and Stanford) have made commitments to divest from fossil fuels.

Investors that have divested from fossil fuels often cite a Carbon Tracker Initiative 2012 report, which argued that if we are to limit the rise in global temperatures to 2˚C, which is widely considered the manageable upper threshold for global warming, then 60 to 80 percent of company reserves of fossil fuels are “unburnable.” Carbon Tracker predicted that if governments rapidly enact regulations to limit global warming, investors may face a carbon bubble or stranded assets.

Recent news stories demonstrate that divestment campaigns have forced institutional investors to act, or to explain their strategies to address carbon asset risk. Last year, following a student campaign at Harvard, the university hired its first-ever vice president for sustainable investment. And this summer, CalPERS—the second-largest public pension fund in the United States, whose US$291.3 billion in investments includes US$10 billion in fossil fuels—said it would continue to engage with oil and gas companies rather than divest from them, after facing pressure from California elected officials to divest.

Divesting from fossil fuels is not that straightforward, especially for large investors, who must navigate difficult questions about who will buy the shares, if divestment is in line with a fund’s fiduciary responsibility to pensioners, and whether divestment decreases or increases portfolio risk.

Therefore, investors are also using other strategies to manage carbon asset risk, such as measuring carbon footprints of funds and engaging with companies to reduce carbon emissions. Late last year, 70 investors representing US$3 trillion in assets asked 40 oil, gas, coal, and electric power companies to assess their exposure to climate change risk. At the UN Climate Summit this September, the UN Environment Program’s Finance Initiative, in collaboration with the Fourth Swedish AP Fund, asset manager Amundi, and CDP, launched the Portfolio Decarbonization Coalition, which aims to convene investors committed to measuring and disclosing the carbon footprint of at least US$500 billion of institutional investments. And after measurement comes action: The coalition plans to reduce the carbon footprint of US$100 billion in investments by December 2015.

Fossil fuel divestment is clearly a trend to follow. As investors and companies track developments in this area, they should know where they stand on the issue, as the divestment discussion will only increase in relevance as we approach the COP 21 climate talks in Paris next December.

Join us at the BSR Conference 2014 to explore investor carbon asset risk strategies in the session “Perspectives on ‘Unburnable Carbon’ and Divestment from Fossil Fuels,”  with Storebrand’s Matthew Smith and CDP’s Frances Way.