Leonardo DiCaprio plans to divest his own and his foundation's fossil fuel holdings. Picture: AP/Bebeto Matthews
WHEN some of the biggest investors in the world decide to sell off their stocks, it’s time for every Aussie with a super fund to think about divestment.
During the past four years, some of the world’s biggest banks, wealthiest investors and a growing number of individuals have decided to turn their backs on fossil fuel investments, not just for ethical reasons but due to an increasing acknowledgment of the financial risks.
It’s a risk that every Australian with superannuation could be exposed to if there is a fall in the value of resource stocks, such as coal companies.
Global investment bank Goldman Sachs, which sold its coal mines in August, told its clients this week that it believed consumption of coal was now in terminal decline and would peak before the end of the decade.
“Peak coal is coming sooner than expected,” Goldman said in a note this week.
Coal will never rise again, says Goldman Sachs. Picture: Chris Hondros/Getty/AFPSource:AFP
The advisory saw the price of the world’s largest private coal company, Peabody Energy, drop by 2 per cent to $1.16. It’s shockingly low compared to the $81.54 it was worth on June 30, 2008.
While some people might not feel this affects them, the reluctance of superannuation funds to consider the cost of climate change action could see many people lose money due to their fund’s bad investments.
Canadian author and activist Naomi Klein underlined the risk during her visit to Australia recently, saying 80 per cent of proven fossil fuel reserves needed to stay in the ground if the world was to meet the 2C warming target that governments agreed to in Copenhagen in 2010.
“We see that fossil fuel companies have five times more carbon in their proven reserves than is compatible with life on Earth,” said Klein, who is a board member of climate change movement 350.org.
“This is why so many young people, faith organisations [and] local activists are joining the fossil fuel divestment movement.
“Australia, by the way, has what appears to be the fastest growing fossil fuel divestment movement in the world … this is all because people have done the math.”
EVERYBODY’S DOING IT
Divestment has become a worldwide phenomenon since 2011 when a group of US students concerned about climate change started pressuring their universities to stop investing in coal and other fossil fuels.
It has become popular partly because of the increasing recognition of the financial risks of investing in fossil fuels.
When one of the world’s richest sovereign wealth funds, Norway’s $1.26 trillion Government Pension Fund Global, announced in May that it would dump stocks in 122 coal companies, its decision was based on both climate and financial risks.
It was one of the biggest scalps for the fossil fuel divestment campaign, which has been backed by the United Nations.
A potential fall in the value of fossil fuel industries was also cited as a reason for Australian National University’s decision to sell $16 million worth of shares in resource companies, and the Rockefeller Brothers Fund’s decision to divest, despite it being controlled by a family that built a vast fortune on oil.
This week, actor Leonardo DiCaprio joined a new campaign, Divest-Invest Coalition, and he has pledged to dump his own holdings, and those of this foundation, in traditional fuel firms.
University students started the divestment movement.Source:Supplied
The divestment movement has grown from representing $50 billion in assets a year ago, to $2.6 trillion this year, according to Arabella Advisers, an organisation that helps guide philanthropy.
About half of Australia’s managed funds are now being handled using responsible investment strategies, the Responsible Investment Association Australasia pointed out in its 2015 report.
While financial risk is one of the reasons big organisations are choosing to get rid of fossil fuel stocks, ethical investing still plays a big part in why they divest.
A number of banks both in Australia and overseas have said they will not finance the proposed Carmichael coal mine in Queensland, which will see more coal shipped through the Great Barrier Reef.
Meanwhile, the City of Newcastle, which is home to the world’s largest coal port, decided to move its cash holdings out of the four major banks because they lend money to coalminers.
Individuals are also getting in on the act, moving their money into ethical superannuation funds and banks.
HOW DO ETHICAL SUPER FUNDS PERFORM?
Fears that ethical investments are not as profitable as traditional investments are also proving to be unfounded.
A report from research house Lonsec found that ethical super funds in Australia outperformed the returns from others in their peer group in 2014-15.
According to a sector review of responsible investment, the top performing ethical fund over seven years was Perpetual Wholesale Ethical SRI Fund, which delivered a 8.25 per cent return compared to the benchmark of 2.8 per cent.
Even on average, ethical funds as a group performed better than the benchmark, with returns at 4.09 per cent.
However, the report did note that this result was partly due to the underperformance of the mining sector, and ethical funds were more likely to struggle in a strongly rising or resource driven market.
When asked why superannuation funds would not respond to the risks of climate change, Asset Owners Disclosure Project (AODP) chief executive officer Julian Poulter said commodity prices had historically been cyclical and super fund managers expect prices to rise again.
“There is a tragic addiction to historical data in the investment world and large investors use very little judgment in risks looking forward for which they have no data,” Mr Poulter told news.com.au.
He said investors couldn’t model climate change because it had never happened before, and analysts who were close to companies were continually told that commodity prices would bounce back.
Commodity prices have historically been cyclical. Picture: Scott Olson/Getty Images/AFPSource:AFP
“They may do but they may not. If they don’t then many stocks are overvalued,” Mr Poulter said.
“In the case of climate change, they really haven’t done their job properly in doing the right assessments of the risks.”
Former Liberal leader John Hewson, who is also chair of the AODP, has been warning of the risks for some time and believes that managers of super funds have been slow to take into account the cost of climate action.
He has told news.com.au previously that superannuation funds are particularly vulnerable to climate risk because of the long-term nature of their investments. Mr Hewson said one of the biggest problems was that asset managers had a short-term focus and were paid based on short-term benchmarks.
During an appearance at the Festival of Dangerous Ideas, Dr Hewson said he believed climate change could spark a financial crisis, especially when considering the destruction that extreme weather events such as hurricanes and flooding could produce.
“[This] can impact directly on the value of assets, the value of shares, the value of infrastructure,” Dr Hewson said.
The risk would also be increased if an agreement was reached at the Paris 2015 climate change conference starting on November 30. It could force countries to take action and stop fossil fuel companies from achieving their full financial potential.
Dr Hewson said people should question how super funds were managing their money.
GET INFORMED
● Check your superannuation fund’s exposure to fossil fuel investments by going to www.superswitch.org.au
● See a list of the world’s largest investors and how they manage climate risk, go to www.aodproject.net
● Find out which banks lend to dirty coal and gas projects, go to www.marketforces.org.au
