Engagement with fossil fuel companies better than divestment, say green finance chiefs
Green finance chiefs agreed engagement with polluting companies was better than divesting as they faced MPs’ questions today on how Canada was supporting the transition to net zero.
Speaking to the Environmental Audit Committee, head of climate change at HSBC Tim Lord said “our strategy is absolutely around engagement”.
“The objective here is real economy decarbonisation,” Lord said. While he noted the easiest way for an individual financial institution to decarbonise is to divest, “if emissions continue happening then there’s no benefit gained,” he said.
Investment funds have faced widespread pressure to divest from fossil fuels as part of the energy transition. However, many fund managers have argued engaging with companies is a more effective way of driving the energy transition.
Steve Waygood, chief responsible investment officer at Aviva Investors, said that while fund managers “can and should divest”, it should not be seen as “a badge of honour but more as a failed engagement process”.
Waygood noted that over the past two and a half years, Aviva Investors engaged with 30 of the fund’s biggest emitters, including many global oil and gas companies.
“Two thirds now have transition plans, and they didn’t before we started,” he said.
Legal and General Investment Management’s head of investment stewardship Michael Marks agreed, saying “we believe in engagement… divestment is a last resort”.
Marks highlighted the risk that pulling investment from fossil fuels while the economies are still dependent on them risks creating “stranded assets” and leading to “an energy insecure world”.
Stranded assets are assets that turn out to be worth less than expected as a result of changes associated with the energy transition. They have been highlighted as a major potential risk to financial stability.
The panellists also agreed that the UK should maintain international alignment as it consults on a series of new environmental regulations. Concerns have been raised that divergence from international standards could impose extra costs on global financial institutions.
International divergence, Waygood said, makes “the cost of execution and the resources involved much more material” and probably makes the regulations “less effective”.
Lord said HSBC “would support international convergence over fragmentation, but convergence with ambition”.
The UK government is consulting on plans to create a standardised framework for climate transition reporting, making it one of the first countries in the world to do so.
It is also consulting on new rules to more accurately label ESG funds to reflect their environmental impact.