NGS Super, a super ‘industry’ pension fund in Australia has become the first fund of its kind in the country to divest from the oil and gas sector. Sales of the funds’ oil and gas holdings totals A$191 million ($133 million), only a fraction of the funds’ A$13 billion ($9.1 billion) portfolio.
Shares for both Woodside and Santos dropped by 3% and 1.2% on Thursday respectively following the divestment.
Oil and gas divestment
The divestment comes as NGS extends its exclusion relating to climate impacts. Previously, the exclusion was limited to companies generating more than 30% of their revenue from the distribution, generation or extraction of thermal coal, but the super fund has recently extended the exclusion to companies who produce oil and explore oil and gas resources as a key part of their revenues.
This is in line with the fund’s goal of reducing scope 1 and 2 carbon emissions by 2025 within their portfolio, with the ultimate goal of becoming carbon neutral by 2030. NSG Super currently has the most ambitious carbon neutral target of the 14 super funds in Australia that have announced net zero plans for their investment portfolios.
The divestment announcement comes just one day after the Australian Greens announced they will back the new climate bill, which enshrines the country’s target of reducing emissions by 43% by 2030 against 2005 levels and net zero by 2050.
Stranded asset risks
The exclusion is not just a decarbonisation move, divestment is also motivated by the stranded asset risk of the 86 companies included on the exclusion list. The fund’s analysis of its portfolio found that companies whose revenues rely on oil and gas are “at risk of becoming stranded assets as the world decarbonises”.
“It would be irresponsible to put our members’ financial interests at risk without a portfolio well-positioned for the future”, explained Squire. “By divesting these companies, we expect to generate higher returns from allocating capital elsewhere”, he added.
A paper published in Nature estimates that globally, stranded assets as present value of future lost profits in the oil and gest could exceed $1 trillion “under plausible changes in expectations about the effects of climate policy”.
However, Squire also acknowledges that fund will continue to assess if the move will continue to be manageable on an annual basis, and also consider taking advantage of short-term rallies in oil prices through other portfolio completion strategies.
Further exclusions are expected in the future to help the fund meet its 2030 target for a carbon-neutral investment portfolio, but these are unlikely to be industry-specific and will be taken on a more case-by-case basis.
However, divestment is not the fund’s first preference. If an investment or asset has high emissions but a realistic business plan to reduce emissions in a reasonable time frame, the fund says it prefers to take an “engagement approach” to help companies transition to net zero.
Divestment vs engagement
This is not the first time that a pension fund has moved away from oil and gas, as funds look to clean up and future-proof their portfolios.
Pension funds in Canada, the US, Norway, UK, and the Netherlands have announced divestment from oil and gas in their portfolios over the past few years.
The Dutch ABP, one of the world’s largest pension funds announced last year that it will be selling €15 billion worth of its holdings in fossil fuel companies. The majority of this divestment comes from the fund’s holdings in oil and gas major Royal Dutch Shell.
The divestment announcement came just one month after a lawsuit was launched against the fund seeking a ruling on whether ABP needed to divest from fossil fuels to align its portfolio with the Paris Agreement.
In February 2022, the $280 billion New York State pension fund, the third-largest US state pension fund, announced it would divest half its stock and debt in shale companies, a total value of $238 million. The shale companies dropped from its portfolio they believed were “unprepared to adapt to a low-carbon future”.
However, not everyone believes that divestment is the best course of action to reduce emissions. The US’s largest state pension fund, the California State Teachers’ Retirement System, recently opposed a bill that would block the fund from investing in oil and gas producers.
Japan’s Government Pensions Fund, the world’s largest pension fund, has also been outspoken against divestment and instead promotes ESG investment for addressing climate change in its portfolios.
While many pension funds acknowledge the moral and economic arguments for oil and gas divestment, there is also the argument that they also give up their voice to pressure fossil fuel companies to accelerate their transition to clean energy. Divestment simply moves the buck to someone else, but does not address the emissions problem of companies head-on.
A University of Chicago paper argues that in a competitive market, “exit is less effective than voice in pushing firms to act in a socially responsible manner”. The paper finds that divesting from a company may depress the stock’s price, leaving the door open for other investors – without the same social and environmental concerns – to buy up newly cheap stock.
The divestment versus engagement debate continues to be a pressing issue for pension funds as there continues to be rising pressure from members, climate policy, and climate campaigners to take urgent action on reducing emissions.