You’ve probably never heard of Rupert Read, the philosophy academic with a collection of colourful waistcoats working in the small British city of Norwich. He’s the environmentalist who last month leaked an explosive report by JP Morgan that warned “life as we know it is threatened”.
The report, Risky Business: The climate and the macroeconomy, was written by the investment bank’s chief economist David Mackie and colleague Jessica Murray. It warned, in no uncertain terms, that burning fossil fuels is warming the planet on a trajectory that will cause famine, displacement, mass species extinction and economic collapse. “Something will have to change at some point if the human race is going to survive,” the report said.
Although JPMorgan’s brand is water-marked on each of the report’s 22 pages, the $US350 billion ($530 billion) banking behemoth initially distanced itself from its findings. Yet only a few days later at its annual investor day in New York City on February 25, it promised to stop financing coal mining, coal power and Arctic oil and gas drilling. It would also offer $US200 billion ($302 billion) to support clean energy and other sustainable projects.
The pledge put the bank on a par with its peer Goldman Sachs, which in December became the first large US bank to rule out future financing of oil drilling in the Arctic and new thermal coal mines. Then in January, BlackRock, the world’s largest asset manager said it would no longer actively invest in companies that generate more than 25 per cent of revenue from thermal coal.
As the world distances itself from the fossil fuel industry, Australia is stuck in a hard place. Oil and thermal coal account for about 80 per cent of our electricity generation and resources make up about one fifth of the ASX/200. Coal and iron ore remain two of the nation’s biggest export earners.
This week, the $168 billion government-run Future Fund ruled out divesting from thermal coal. And the portfolio manager of the country’s largest retirement savings fund, AustralianSuper, said there was no immediate plan to go fossil-fuel free. “The point is, it’s easy if you’re in New York. But it’s Australia’s second-biggest export so it’s not a decision we can make lightly,” senior portfolio manager Shaun Manuell told The Age and Sydney Morning Herald this week.
As the global fossil fuel divestment push gathers momentum, Australia’s financial sector is being forced to re-evaluate its support for fossil fuels. But for an economy heavily dependant on resource extraction, this is no easy feat.
‘Call it what it is’
While many major Australian companies are boasting of green futures and a willingness to do good by the environment the situation in the investment is more nuanced. The Age and Herald continue to expose underlying investments by major super funds that fail to live up to their green promises.
A similar dynamic is playing out in the US. Critics argue JP Morgan and Goldman Sachs can still fund major emitters – those involved in fracking, tar sands and liquefied gas terminals –under their policies. And they can still do deals with the biggest coal-mining companies and provide loans to oil and gas projects outside the Arctic, where the bulk of the resources lie.
BlackRock’s thermal coal exclusion applies to less than a third of its total assets and the revenue cap means it can still invest in major coal-producing companies, including Glencore and BHP.
The chief executive of $US3.8 billion ($5.5 billion) sustainable asset management group Trillium Matthew Patsky, speaking from Boston, says the announcements sent a message to the community: “We’re paying attention, we hear what you’re saying and we’re going to talk about it now” but fell short of committing to significant change.
“Some of this is unfortunately just that. It’s marketing, public relations. You have to call it what it is,” Patsky says.
Nonetheless, the concessions made by the financial giants has emboldened environmental activists to ramp-up pressure and refocused the discussion around the future of fossil fuel investing. “The last few weeks have proven that this will be a crucial year to end the age of fossil fuels,” environmental activist group 350’s website says.
Carbon emissions from fossil fuel combustion contribute about 78 per cent of total greenhouse case emissions, according to the IPCC’s most recent report, and there is overwhelming agreement within the scientific community that without additional effort to reduce these emissions, the world was bracing for irreversible change. The Paris climate agreement recognises that governments around the world must commit to keep the vast majority of fossil fuels in the ground.
Back home, the effects of climate change were brought into sharp focus after the unprecedented fire season that burnt an area the size of South Korea, roughly 12.2 million hectares, and killed 34 people and more than 1 billion animals.
Big four predicament
The big four banks have climate action policies and have thrown their support behind the Paris climate agreement’s commitment to limit global emissions. The banks have unilaterally pledged to reduce financing of thermal coal projects within the decade and have varying ambitions around financing new fossil fuel projects. Westpac, National Australia Bank, ANZ and Commonwealth Bank declined interviews to explain finer details of these policies.
Research by shareholder activist group Market Forces, obtained exclusively by The Age and Sydney Morning Herald, claims the banks are breaking their own climate policies by lending to projects that expand the use of fossil fuels.
An analysis of company records, financial databases and public disclosures found the big four loaned more than $7 billion to expansionary fossil fuel projects between 2016 and 2019 and a further $6.8 billion to companies with business practices that contradict the Paris goals to reduce warming within the century by 2 degrees.
In September, CBA financed an American gas pipeline designed to transport up to 2 billion cubic feet of natural gas per day through Texas. According to scientific journal Nature, little or no carbon-emitting infrastructure can be commissioned to meet the Paris Agreement climate goals.
“This is significant for CBA,” Market Forces executive director Julien Vincent says. “There are supposed to be compliance mechanisms and people held to account if their policies are not followed.”
In a statement, CBA said it could not comment on individual customers, but its environmental and social policy had evolved “very significantly” over the last three years.
“The underpinning principle of our policy is to support a transition to net zero emissions, and to do that as quickly and efficiently as possible in the context of working with our customers,” the CBA spokesman said. “As part of that transition approach, we regard gas, for example, as a transition fuel which enables substitution away from coal-fired power. That is a step towards lower net emissions and then ultimately to zero net emissions.”
Similarly, NAB’s climate policy prevents it from financing new thermal coal projects. But in October 2018, after NAB pledged it would no longer finance new thermal coal mining projects, the bank co-financed a $720 million deal with Coronado Global Resources which owns Queensland’s Curragh coal mine, a largely coking coal plant –coal used for steel making – that recently agreed to continue supplying Stanwell power station with thermal coal until 2038. In September last year, Market Forces claimed NAB committed to co-finance an additional $US200 million to fund the expansion of the Curragh mine.
In a statement, NAB said it could not comment on specific customers but said it was working to limit thermal coal exposure. “We are capping thermal coal mining exposures at current levels and reducing thermal coal mining financing by 50% by 2028 and intended to be effectively zero by 2035, apart from residual performance guarantees to rehabilitate existing coal assets.”
Westpac and ANZ loaned a combined $258 million to ASX listed energy giant Woodside in October for development of the Burrup Hub in WA, which according to its website “could process more gas than the entire volume extracted from the North West Shelf since startup in 1984”.
ANZ said it will continue to reduce its thermal coal exposure over time but this “has not been in a straight line”. The spokesman said the overall exposure had reduced by 50 per cent since the Paris Agreement and pointed to its work in funding green projects. “We have been working closely with a number of our customers in recent years to assist them with their plans to transition to a lower carbon economy.”
Lending to the thermal coal industry is at its lowest point in four years, Market Forces found, but Vincent says the trend is partly due to the increasing use of non-disclosure agreements around financing fossil fuel projects.
Last March, Queensland’s thermal coal company New Hope secured $900 million from Australian banks to expand its New Ackland thermal coal operation, but the company’s chief executive declined to identify the lenders. This happened around the same time energy finance project Project Finance International reported potential lenders to Western Australia’s Bluewaters coal-fired power stated were asked to sign non-disclosure agreements.
“The industry and the lenders know they’re being watched,” Vincent says. “It’s reputationally risky to be seen lending to the coal sector and expanding it. So instead of trying to change behaviour, or operate more cleanly, the banks and companies are trying to keep this information from public view.”
An analysis of the world’s largest 100 banks by Moody’s found the lenders had very limited information available on financed emissions, with fewer than a third of banks providing a description of their climate risk assessment and monitoring methodologies. “Most banks’ climate risk management is at an early stage,” Moody’s vice credit officer Olivier Panis says. “The visibility for investors over the potential impact of climate risks and opportunities on banks’ financial performance remains limited.”
Funds in focus
During a parliamentary inquiry this week, the Future Fund, categorically ruled out following the lead of BlackRock in limiting its exposure to thermal coal after questioning by Greens senator Peter Whish-Wilson.
The government-owned and run fund only excludes companies that contradict with international treaties that Australia is a signatory to and has only once made an exception to exclude a sector on ethical grounds – tobacco.
“That was a unique judgment that we made, it was explained as a unique judgment and it will remain a unique judgment,” Finance Minister Mathias Cormann said, before saying fossil fuels were a legal investment producing goods and services to people around the world.
Similarly, AustralianSuper’s senior portfolio manager Shaun Manuell told The Age and Herald on the sidelines of a financial forum the $172 billion superannuation fund had no immediate plans to get out of financing thermal coal.
“It’s not up for us to make a public policy decision, it’s for us to determine the investment.”
Manuell said environmental concerns were a sub-set in the process of evaluating investments, alongside revenue and expense profile.
“It’s better than saying, is thermal coal good or bad, let’s just think about what thermal coal looks like from an investment process and make a decision then.”
While there are no bold statements coming from the superannuation sector around going fossil fuel free, funds are increasingly offering members a sustainable investment option. Yet AustralianSuper’s socially aware option was this week revealed to have at least $39 million invested in more than 20 global coal, gas and oil projects.
Giant retail super fund provider AMP’s $117 billion portfolio also includes an “ethical leaders balanced fund” that promises to “boycott the bad” by “actively avoiding” investing in fossil fuels, tobacco and nuclear power. Although an analysis of the funds portfolio holdings show the fund has stock in at least nine oil and gas companies, including Oil Search, Woodside Petroleum and Santos.
Environmental investing is a trend that is continuing to pick up pace. Financial consultancy firm Lonsec says its phone has been running hot with financial advisers seeking advice on how to provide products that align with investor preferences for low-carbon portfolios. A survey of 1000 randomly-picked superannuation account holders by Australian Ethical found 70 per cent of respondent felt their super fund had a duty to consider environmental factors when investing and 71 per cent wanted more information about how their funds spent money.
Chief executive of exchange-traded funds provider Betashare Alex Vynokur says there has been “unprecedented” demand for financial products free from fossil fuels and says community expectations around what is considered ethical has changed. Fifty years ago, most investors had stock in tobacco companies, a solid investment with endless growth opportunities. But once the science became clear that smoking kills, the investment community started excluding tobacco companies from their portfolios.
“What’s happening with fossil fuels is not too dissimilar,” he says. “Today it is very hard to refute the evidence, the statistics [of climate change].”
Fund managers have different strategies to brace for a world that is turning its back on fossil fuels. Active managers can either use their clout to encourage investors to transition to renewables or apply a hard screen to exclude companies that produce carbon-heavy resources. Australian industry superannuation funds say engaging with polluting companies is the most effective policy.
Questions are being raised about the authenticity of this approach. Last month one of super fund Cbus’ stocks, thermal coal producer China Shenhua Energy, announced it would increase coal production by 40 per cent at one of its mines to produce 28 million tonnes per year. Similarly, healthcare fund HESTA has stock in one of the world’s largest emitters Coal India that in February produced 98 million tonnes of coal, up 6.3 per cent from the same time last year.
Emma Herd, chief executive of the investor group on climate change at Climate Action 100+, does not like the word “engagement”, claiming it simplifies a complex toolkit used for pressuring companies to change their ways, from lobbying executives to voting on shareholder resolutions.
“Divestment is always an option. If we don’t think we’re responsibly managing our money, we’ll take it elsewhere. That’s a given,” Herd says. “It’s all about the transition. What’s the role of investors in making that happen?”
Another investment approach is to apply hard screens. Betashares recently launched two ethical products that exclude not just fossil fuel producers but downstream companies including service providers to the fossil fuel industry and also major financiers of emitters – the big four banks.
Passive fund managers use indices, a low-cost investment option that tracks a benchmark. Last month, five major industry funds were exposed to have billions invested in the fossil fuel industry. Cbus said divestment was a simplistic approach and, in any case, the majority of these companies were stitched into indices.
In some cases, though, passive products screened for fossil fuel exposures have outperformed ones tied to traditional benchmarks.
Index provider Vanguard recently launched two index fund options that broadly exclude companies in the fossil fuel industry, and so far, more than $1 billion has flowed into these products from both institutional and retail clients. The two indices – one tracking international shares, the other tracking bonds – have provided competitive returns to its mainstream alternatives, with lower fees, says Vanguard’s head of product Evan Reedman.
Vanguard’s ethically conscious global shares index fund returned 30.13 per cent last year taking a management fee of between 0.18 and 0.20 per cent. In contrast, it’s international shares index fund returned 18.07 per cent, taking a 0.21 per cent management fee. The bond option returned 0.52 per cent less than its mainstream equivalent.
Reedman says long-term macroeconomic conditions, such as looming regulation or carbon pricing, has contributed to making these products better performers in the long term. “The long-term economic health of the underlying companies ultimately contribute to the overall long-term return that investors receive by investing in these particular companies.”
Reedman says he had been “pleasantly surprised” by the uptake in the products and says “bushfire tragedy” has made investors more engaged with where their money is going.
The sustainable products offered by Betashares and Vanguard also show strong returns can be made without holding stocks in the fossil fuel industry. “The unfortunate myth that’s been spreading around the market is that responsible investment basically means you’re leaving returns on the table,” Betashares’ Vynokur says.
He disputes the idea Australia’s resource-heavy investment landscape makes it difficult to screen out fossil fuels, claiming his Australian equities ETF invests in technology, health and property stocks and has returned 10.77 per year since it was launched in 2017. “There are plenty to choose from.”
Like any trend, there are always going to be players that cheat the system. Responsible Investment Association of Australasia chief executive Simon O’Connor says his organisation provides certification to financial products branded as ethical. He says a handful of products are turned away each year due to lack of transparency or authenticity.
“This risk of green-washing is a hot discussion globally,” O’Connor says. “Some funds are not delivering what their clients are expecting.”
Herd says many of the tensions around investing in thermal coal can be alleviated by clear public policy and has called on the Australian government to end uncertainty in the market by enacting long-term targets around emissions reduction and carbon pricing. “It’s not that we don’t know what the policy tools are. It’s just that we’re not implementing them,” she says.
Until then, Read will continue to antagonise governments and financial behemoths of the world from his lecture hall in Norwich, a city of fewer than 300,000 residents famous for its medieval cathedral.