A small number of financial actors could be responsible for an effective transition to a sustainable future. They are those with the most influence on the fossil fuel industry, and recent research explores their decisive role in the shift to a net zero future.
Unsurprisingly, those with the power to influence effective management of the coming transition include investment advisors, governments, and sovereign wealth funds from around the world. The top ten such shareholders together own 49.5% of potential emissions from the world’s largest energy firms, according to the latest research.
Influence over equity in fossil fuel companies could be key
The report, Ten financial actors can accelerate a transition away from fossil fuels shows a network analysis mapping the market structure of equity ownership in fossil fuel firms, and shows that ownership is concentrated among a small subset of influential shareholders.
According to the paper, the concentration of investor/owners include state signatories to the Paris Agreement such as Russia and Saudi Arabia, as well as well-known US asset managers like Blackrock, BNYM and Citigroup. The authors stated: “We conclude that a concentrated number of investors have the potential to influence the strategic direction and governance of these firms and should consequently be held accountable for financing the economic activities that contribute to climate instability.”
Source: Truzaar Dordi et al, Ten financial actors can accelerate a transition away from fossil fuels, Environmental Innovation and Societal Transitions (2022)
A tiny concentration of investors could swing the market one way or another
“This shows us that both investors and governments can be at the forefront of change if citizens and clients urge them to de-carbonize,” said Truzaar Dordi, lead researcher from the University of Waterloo. “A concentrated number of investors with the potential to influence the trajectory of the fossil fuel industry is either a problem, or an opportunity, depending on how you see things.”
To put together the final list, the researchers used their own scoring mechanism blending the financial actor’s fossil fuel holdings and investment in the world’s 200 largest fossil fuel firms. The approach is particularly interesting, following as it does CDP’s Carbon Majors analysis in 2017 which showed the outsized influence of the fossil fuel industry on the climate crisis, linking the top 100 companies to over 70% of global emissions.
Capital markets are critical to net zero
The University of Waterloo researchers’ approach highlights the importance of the role of the capital markets in effective transition. Without change from the world’s leading coal, oil and gas companies, achieving the Paris goals of cutting emissions sufficiently by 2050 will be almost impossible to achieve.
The paper outlines specific ways these 10 governments and private investment advisors can make changes that will have a transformative impact in the fight against climate change. Some recommendations include public disclosure of a scheduled phase-out of fossil fuel financing, an assessment of a portfolio’s exposure to climate risk in a 2°C world, and an alignment of investment portfolios with a 1.5°C scenario.
Individual action is not enough, fossil fuel majors must act
Underscoring the importance of taking systemic action through significant economic levels, Dordi said: “Individually, reducing the demand for fossil fuels by driving and flying less and turning off the air-conditioner are great. We should keep doing that. But we also need to reduce our production of fossil fuels, which these 10 actors can lead. Without them, we simply won’t have what it takes to meet our emissions targets and avoid catastrophe.”
The study was authored by University of Waterloo’s Truzaar Dordi and Olaf Weber, along with researchers Sebastian Gehricke of the University of Otago in New Zealand and Alain Naef of Banque de France. It was recently published in the journal Environmental Innovation and Societal Transitions.