Asset Managers – Fossil fuels
Coal exit
Committed to transition
Before excluding companies from their portfolios by selling shares, a first step is to develop a shareholder engagement strategy that enables the transition of companies in which a player has invested.
Scope of application
In order for a policy to be truly binding on a financial player, certain points need to be clarified, particularly with regard to the policy’s scope of application. In the case of a sector-based policy such as coal or hydrocarbons, the following elements need to be specified: the scope of the policy, in this case the value chain of coal-related activities, and the financial activities concerned by the policy.
Value chain
The coal value chain corresponds to the various activities involved in the coal mining process, from extraction to marketing.
New projects
In addition to exclusionary strategies aimed at disinvesting more or less gradually in the sector, the player may decide to stop investing in new projects linked to the coal chain of activity. New projects are an area to be treated differently from other assets, as they involve the financing of assets that have a life of more than 30 years. A coal mine planned today will continue to operate after 2050. This is the date often used to achieve ‘carbon neutrality’. As a reminder, carbon neutrality can only be achieved at the global level; at the level of financial institutions and companies in general, we speak of a contribution to carbon neutrality, as ADEME points out in its March 2021 note.
Financial activities covered
Commitment or exclusion strategies can be applied to one or more assets, or to the entire financial portfolio. In the case of management companies, this is divided between open-ended funds, dedicated funds or mandates. A management company chooses whether to apply its coal policy to its existing funds, to new funds or to all its funds.
Terms and conditions
In order for a policy to be truly binding on a financial player, certain points need to be specified, in particular how the policy is to be implemented. In the case of sector-based policies such as coal or hydrocarbons, the following elements need to be specified: the strategy’s inclusion in a timetable, and the measurability of the policy, corresponding in this case to the types of exclusion thresholds applied.
Calendar
In order to comply with the Paris Agreement and maintain a trajectory aligned with limiting global warming to 1.5°C, financial players must divest from the coal sector, with an exit timetable of 2030 in EU countries and 2040 in the rest of the world. French asset management companies have used these timetables as the basis for their exit strategies, and some have proposed more ambitious timetables than those recommended. Thresholds are set and regularly reviewed to reach the exit target on the dates presented below.
Exclusion strategy
Exclusion (or disinvestment) involves not investing in any new coal-related projects, as well as stopping financing already carried out in the sector, according to thresholds and activity perimeters defined by the player.
Threshold type
Absolute thresholds are exclusion criteria enabling players to make the transition away from coal. In a coal exclusion policy, a player stops doing business with companies whose coal-related activities represent more than X€ of sales, or which have a thermal coal-fired power generation capacity of more than X GW. (X being the absolute threshold).
Relative thresholds are also exclusion criteria. In a coal exclusion policy, a player stops all activity in companies whose coal-related activities represent more than X% of their sales, or where coal represents more than X% of their electricity production capacity (X being the relative threshold).
Exposure to players in the coal industry
Exposed assets
Exposure to coal industry players is calculated on the basis of amounts invested in mining companies and energy companies that produce electricity from coal, as listed in the GCEL. Funding for companies upstream or downstream of the value chain, or that use electricity produced from coal, is not included in this calculation. Exposure to companies upstream or downstream of the value chain, or which use coal-fired electricity, is not included in this calculation. 2021 exposure to coal companies covers a wider range of players than in 2020, which explains the slight increase in 2021.
Getting out of oil and gas
Definitions of unconventional hydrocarbons
Not all types of oil and gas have the same effect on the climate, depending on the geological characteristics of the hydrocarbon reservoirs (extra-heavy oil, shale oil or gas, etc.) and/or where they are extracted (in deep waters or in the Arctic zone, for example). Most current methodologies therefore distinguish between conventional and unconventional deposits according to these characteristics. Definitions of unconventional are not yet harmonized. It is therefore important to understand which types of hydrocarbons are included in this category, depending on the methodology. Based on this distinction, players apply different policies to these two categories.
Committed to transition
Scope of commitment
Before excluding companies from their portfolios by selling securities, the first step is to develop a strategy of shareholder engagement, enabling the transition of companies in which a player has invested. Shareholder engagement means that an investor interacts with the companies it finances, whether with debt or equity, with the aim of influencing their practices in the target sector over the long term and/or improving their reporting on these issues. These requirements are formulated as part of a structured, long-term approach. Simply divesting an oil & gas asset disengages the investor from carbon responsibility, but does not reduce the global carbon footprint in absolute terms. Example: economic agent A is an investor who owns an oil & gas power plant in operation. If it sells the plant to economic agent B, it effectively reduces its exposure to oil & gas companies in its portfolio, but the plant will continue to emit just as much.The aim of the commitment is to achieve a significant reduction in emissions by supporting companies dependent on the oil and gas sector in their energy transition, thereby enabling the closure of power plants. For example, if Agent A manages to replace the oil or gas-fired power plant with another low-carbon electricity production facility, such as a hydro-electric plant, it will have reduced both its exposure and absolute emissions, while maintaining access to electricity for local businesses and populations.
Scope of application
In order for a policy to be truly binding on a financial player, certain points need to be clarified, particularly with regard to the policy’s scope of application. In the case of a sector-based policy such as coal or hydrocarbons, the following elements need to be specified: the scope of the policy, in this case the value chain of coal-related activities, and the financial activities concerned by the policy.
Value chain
The oil & gas value chain corresponds to the various activities involved in the oil/gas exploitation process, from extraction to marketing. For each type of hydrocarbon, it is important to specify which part of the value chain is covered.
New projects
In addition to exclusionary strategies aimed at disinvesting more or less gradually in the sector, the player may decide to stop investing in new projects linked to the oil & gas industry chain. Upstream expansion projects correspond to expansions in the exploration for new sources of oil and gas, and in the production and exploitation of these sources. Midstream corresponds to the transportation, processing and storage of oil and gas.
Financial activities concerned
Commitment or exclusion strategies can be applied to one or more assets, or to the entire financial portfolio.
Terms and conditions
In order for a policy to be genuinely binding on a financial player, certain points need to be specified, in particular how the policy is to be implemented. In the case of sector-based policies such as coal or oil & gas, the following elements need to be specified: the strategy’s inclusion in a timetable and the measurability of the policy, corresponding in this case to the types of exclusion thresholds applied.
Calendar
In order to comply with the Paris Agreement and maintain a trajectory aligned with global warming limited to 1.5°C, financial players must divest from the oil and gas sector. French asset management companies have therefore used these timetables to draw up exit strategies, and some have proposed more ambitious timetables than those recommended. Thresholds are set and regularly reviewed to reach the exit target on the dates presented below.
Exclusion strategy
Exclusion (or disinvestment) involves not investing in new oil & gas projects, as well as discontinuing financing already carried out in the sector, according to thresholds and activity perimeters defined by the player.
Exclusion thresholds
Absolute thresholds (in units) are exclusion criteria enabling players to make the transition away from oil and gas. In an oil & gas exclusion policy, a player stops doing business with companies whose oil & gas-related activities represent more than X€ of sales or which have an oil & gas production capacity of more than X mmboe ( X being the absolute threshold). Relative thresholds (in percentage) are also exclusion criteria. In an oil & gas exclusion policy, a player stops all activity in companies whose oil & gas-related activities represent more than X% of their sales (X being the relative threshold). Relative thresholds can also be applied directly to power generation or to the energy mix. As part of the Global Oil and Gas Exit List, Urgewald has developed 6 thresholds for oil and gas, covering both Upstream (production, expansion, exploration) and Midstream (expansion and development of LNG terminals), which can serve as a benchmark for the policies of financial institutions.
Exposure to players in the oil and gas industry
Exposed assets
Management companies’ exposure to oil & gas industry players is calculated on the basis of amounts invested in mining and energy companies that produce electricity from oil & gas, as listed by GOGEL according to the calculations requested by the ACPR. Investments in companies upstream or downstream of the value chain, or which use electricity produced from oil and gas, are not included in this exposure calculation.