Fossil fuel divestment could lower pension fund returns

Divesting away from fossil fuel investments would have led to lower returns or higher risks for council pension funds between 2002 and mid-2015, according to new research.

This week, diversification campaigners released figures showing that the UK’s 418 local authorities currently have £14bn of their £231bn pension fund invested in fossil fuels, claiming the assets were “risky”.

But a study produced by research firm Europe Economics, on behalf of the international committee of the Independent Petroleum Association of America, has come to the opposite conclusion.

It said: “Investors following the recommendation of the fossil fuel divestment campaign to exclude fossil fuels would, from 2002 to mid-2015, have sacrificed the equivalent of an annual return of 0.68 percentage points (68 bps) or, if they did not want to accept lower returns, would have had to take more than 20% extra risk on their investments.”

The study compared returns from the whole UK stock exchange against a portfolio of investments excluding fossil fuel assets.

It conceded that, during the period, other investments were available which tended to do well precisely when oil prices were high.

“But oil is such a significant asset that it is plausible that there is no other asset or combination of assets that allows investors to come close to duplicating the same risk diversification impact that investing in oil stocks would have,” it said.

The report comes in the same week that global warming campaign groups 350.org, Platform, Community Reinvest and Friends of the Earth released the results of freedom of information requests breaking down the £14bn of fossil fuel investments by local authority pension funds. It has also released an interactive map allowing residents to find out how much their council’s pension fund has invested in the category.

The campaigners argue that there is a financial, as well as ethical, case for divestment away from fossil fuels, arguing that fossil fuel companies are likely to be burdened with ‘stranded’ fossil fuel assets, which cannot be extracted due to international climate change agreements.

Natalie Smith, lawyer at environmental law organisation Client Earth, said: “There is a growing body of evidence suggesting that the financial risks associated with climate change will impact investment portfolios.

“If pension fund trustees fail to properly manage these risks in their investment decision-making process, and there is a consequential decline in value of the pension pots of members, then trustees and investment managers could be sued for breaching their fiduciary duties.”

In March 2014, following a clarification from the UK Law Commission on the interpretation of fiduciary duty, the Local Government Association published a legal opinion on how fiduciary duties affected investment decisions made by Local Government Pension Scheme (LGPS).

It said that “the precise choice of investment may be influenced by wider social, ethical or environmental considerations, so long as that that does not risk material financial detriment to the fund.”

Dave Prentis, general secretary of trade union UNISON, said that divestment, although desirable, would be expensive, and that opportunities to invest in low-carbon alternatives are currently limited.

He said: “The first duty of the LGPS is to pay the staff their pension benefits when they retire.

“It would be irresponsible to begin any programme of disinvestment in fossil fuels that threatened in any way the ability of the funds to pay people’s pensions.”

Photo (cropped): Glenn Euloth, Flickr.