The rise and risks of the global Divest-Invest movement

16 Oct 2014Archived News Emma Fagan Climate Change Matters

The global Divest-Invest movement gained momentum following the recent announcement from the Rockefeller Brothers Fund that they are withdrawing their funds from fossil fuel investments. The movement has placed the sustainability performance of Australian financial institutions in the limelight. Institutional investors are subject to increasing pressure from investor groups, shareholders and the general public to show that they are managing the risks associated with climate change across asset portfolios.

The best approach to manage these risks is to be prepared and transparent.

What is the global Divest-Invest movement?

Starting out as a series of local grass-root initiatives to divest from fossil fuel resources, in recent months the Divest-Invest global moment has been gaining significant traction. Far from a fringe activist movement it has morphed into a $50bn campaign , crystallised at the 2014 UN Climate Summit last week.
The Divest-Invest movement is a strategic initiative to mobilise billions of dollars in public and private capital as a financial lever for addressing climate change.
The movement is been taken seriously across the globe. This week saw the Rockefeller Brothers Fund divesting from fossil fuel assets within their $860 million charity endowment. This announcement has been made within months of Stanford releasing a public statement that they will no longer make direct investments of endowment funds in publicly trading companies which have the primary business of producing coal for electricity generation. Norway’s $816 billion sovereign wealth fund, the largest in the world, halved its exposure to coal assets at the beginning of the year.
The global Divest-Invest movement reflects a common trend of investors recognising the long-term risks of tying large portfolios to fossil fuel resources. The subsequent investment risk rating of non-diversified listed fossil fuel companies is beginning to rise, impacting on the Australian fossil fuel commodities sector, the power generation sector, and the Australian economy more broadly. 

Domestic reaction to policy uncertainty

Investor pressure in Australia has been especially significant in the wake of the current, ongoing political uncertainty.
The lack of a clear federal climate change policy in Australia has created a vacuum that is naturally being filled with upwards market pressure from investors, shareholders and the general public.
Whilst there have been no notable divestments to date in Australia, the Australian Investor Group on Climate Change (IGCC) is calling for greater transparency regarding portfolio the investment portfolio make up of major Australian banks and other financial institutions.
Grass roots activism is resulting in increased pressure on all financial institutions to divest, but also to be more open with financial dealings, and ensure that a dedicated climate change policy is in place to help manage all climate change related investment risks.

What are the risks?

As the global divestment movement gains traction, the likelihood of increased interest in the asset portfolio of a company grows. At the moment, banks and other major financial institutions with large asset portfolios are subject to two major classes of risk stemming from increasing pressure to divest or be more transparent as to the existing climate change management practices in place. Broadly these can be grouped under financial risks and non-financial risks, particularly reputational risks.

Financial risks

The financial risks associated with the Divest-Invest movement and other upwards investor pressure will depend on the make-up of the asset portfolio. Different asset classes have different levels of risk exposure, with private equity currently the most heavily targeted by the Divest-Invest movement.
The capital and credit risk ratings of fossil fuel interests are subject to change over time, pending any increases in divestment pressure.
For institutional investors, the most important step is understanding the portion of your total asset base that is likely to attract market pressure. Future investments should take into account an adjusted risk rating to manage these emerging market influencers.

Reputational risks

In a practical sense the divestment movement operates as a branding exercise for financial sector participants with large investment portfolios. As well as an exercise designed purely to drive divestment from fossil fuel resources, the movement is designed to create awareness of the current sustainability and climate change management practices undertaken by an organisation.

The IGCC and the Asset Owners Disclosure Project (AODP) publishes annual reports benchmarking the level of interest in this area in Australia. Similarly the Australian Council of Superannuation Investors (ACSI) publishes annual reports exposing the publicly known sustainability practices of ASX200 companies.
These reports provide a clear scorecard in respect of who is the most to least active in this space, and may influence the level of pressure that is placed on a particular organisation.

How you can manage these risks?

The best risk management approach is preparedness and transparency.

Be prepared

The Divestment movement is not purely about divestment. The movement is designed to create a critical review process of sustainable investment processes that manage the future risks of climate change.  Business should consider:
- The financial and non-financial climate change-related risks that may face your asset portfolio.
- Undertaking peer benchmarking to determine how your company performs against your direct competitors
- Developing a climate change management strategy and  corporate position which addresses identified risks
- Ensure that you have an associated communications and response plan to ensure consistency in public messaging. It will also streamline the reporting processes for both voluntary and involuntary schemes.

Be transparent

In addition to developing a dedicated climate change policy, there are a number of existing investor confidence programs that can be used to boost the sustainability profile of your company.  Again, there are a number of responses that your business could consider:
- Benchmarking will assist in identifying programs that will have the greatest impact in building a sustainable, proactive brand. Engage with voluntary reporting schemes and programs (such as CDP, DJSI etc.)
- Prepare a communication and response plan to engage and inform stakeholders, including via your sustainability/annual report.
- Implement changes to internal processes (such as the processes for evaluating investment decisions) to ensure sustainability and climate change risks are appropriately managed.

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