Why divestment is not the only way

The shift in the energy sector has gained incredible momentum – in 2020, 37% of the world’s energy consumption came from renewable sources¹. That said, oil and gas are still used as backup to renewable sources, because we currently don’t have the necessary battery storage to replace the role played by oil and gas – we still need to build it.

In short, to keep up with today’s global energy demands, and to ensure access to energy is equitable (i.e. affordable) investment in oil and gas has an important role as a transition fuel – for the time being.

As an investor, CSC is one part of a complex puzzle, and we’re striving to reduce net emissions to zero as soon as possible, which is aligned with the Paris Agreement which seeks to limit the increase in the global temperature to ‘well below 2 degrees C’ above pre-industrial levels by 2050. Active engagement is our preferred approach, instead of simple divestment. This is because divesting only changes the ownership of a company, which doesn't necessarily reduce the net underlying emissions impact on the environment.  

That said, we acknowledge that in some cases active engagement will not be enough to bring about the change that we think is required. For example, we’ve divested from undiversified companies which generate 70% or more of their revenue from thermal coal production and generation, because the financial risks to these companies are rising, and engagement is unviable.

We want to protect your savings from that risk, so this means that you personally have no companies in your retirement portfolio to companies in Australia like New Hope and Whitehaven, where the final residual divestment of less than about 0.5% of our fund will be completed within the next quarter – because we gave our external managers the discretion to manage that divestment in a way that would continue to grow your savings.

We currently remain invested in well-run Australian gas producers, for example. Because gas emits around 50% less emissions than coal, and plays an important and necessary role as an interim fuel to ensure countries around the world continue to have reliable, uninterrupted and affordable energy until technology limits are overcome (e.g. when wind and solar energy is unavailable under certain weather conditions).

While in principle divestment appears to provide a clean and simple solution, in practice it's not as clean and simple as it may appear. This is why we use exclusion lists as provisional screens, not definitive judgements. For example, with an objective to decarbonise a portfolio, we could try to automatically exclude any utility company based on current Environmental, Social, and Governance (ESG) scores on carbon. But, the historical data driving these scores may not take account of the fact that many companies are moving towards clean energy production and decommissioning their coal burning electricity generation plants.

As long-term investors, we can stay committed to supporting these companies, encouraging them in this transition journey towards lower carbon, supporting their financial value to your savings and having real world impact, not just paper impact.

Many ESG or ‘ethical’ investment options do divest fully from all fossil fuel exposure, not just entities unable to evolve, which may make these portfolios seem clean on paper – but we all have to think about whether the paper virtue translates into real world impact. For climate ambitions to be met, all industries have to make innovative transformations to become clean and futureproof. For this to happen, capital markets need to focus on supporting those companies in heavy emitting industries to make deep decarbonisation changes. Changes that go beyond protecting one portfolio, and focus on the bigger picture of protecting the planet.

_{[1] International Renewable Energy Agency, Renewable capacity highlights, 31 March 2021.}