Global warming deal makes low-carbon transition irreversible and investors are taking note

By Alex Pashley

A freshly-minted pact to radically shrink fossil fuel usage this century has prompted investors to consider future bets on coal, oil and gas stocks.

None can claim they aren’t now aware of the impact of stashing cash into high-carbon assets after 195 nations promised cap warming to well below 2C last week, fund managers told Climate Home.

Investors have a “fiduciary duty” to engage with energy majors on climate risk, says Stephanie Pfeifer of the Institutional Investors Group on Climate Change.

“That’s one argument that can’t be used anymore… the Paris agreement settled that,” says the CEO of the European network of 120 institutional investors managing over €13 trillion in assets.

“No investors can claim now they are not aware of the issue of fiduciary duty of climate change, climate policy or the energy transition,” Pfeifer adds.

Over 80% of the world’s fossil fuel reserves need to be remain in the ground to hold warming to the 2C temperature threshold.

That means no more coal mines, and oil demand must peak in 2020, according to the Carbon Tracker think tank.

Some $2.2 trillion of planned investments up to 2035 are at risk of being stranded, rocking the financial systems as valuations plummet as investors pull money out of dirty holdings.

It led the Bank of England Mark Carney to issue a warning this year, and appoint Michael Bloomberg to lead a taskforce to coax companies to disclose the scale of exposed assets in a 2C world.

Initiatives like the Portfolio Decarbonization Coalition whose 25 members manage $600bn have gathered pace.

On the first day of trading after the Paris agreement, certain coal stocks declined and renewable equities rallied. But shifts in investment flows from high to low-carbon will be a more gradual process, as national climate plans taking force from 2020.

“The main impact of Paris brings this viewpoint nearer to the mainstream,” says Saker Nusseibeh, CEO at Hermes Investment Management. “It doesn’t quite make it mainstream, but it’s getting nearer.”

That view was blasphemy five years ago. But the result of Paris is to make governments finally think in 30-year time horizons, added Nusseibeh, whose London-based fund manages £29.5 bn.

In the momentous Paris Agreement on Saturday, the world agreed to cap global warming to “well below 2C” and “pursue efforts” to meet a 1.5C goal. It means a rapid phase-out of fossil fuels and technology to reverse greenhouse gas emissions.

That should compel investors to move beyond short-term returns and do the same. But strong national policies are needed to signal the direction of travel.

Donald Macdonald, a director trustee at the BT Pension Scheme, one of the largest in the UK, says Paris could bring a more standardised approach to reporting risk.

“There are a lot of idiosyncratic ideas and great volumes of data presented in different ways,” he said.

“Investors must get information that is meaningful, but in an understandable format, then take decisions.”