Ethical Investment

I met several people in the finance-with-conscience crowd the other week, when I went for a spot of champers and Marmite soldiers at the House of Commons for National Ethical Investment Week.

I learned about various views on social and positive impact investment, and about elements of the Coalition Government’s “Big Society” and the proposed Green Investment Bank.

Ethical Investment appears to have come a long way since I put some money into a Fair Trade company many moons ago, where I knew I would never see a dividend, or even be able to sell the shares at some point.

Grown up people in sharp suits and big name frocks now do moral banking, and often reap a healthy return on their investment – “doing well” as well as “doing good”, as Adam Ognall of UK Sustainable Investment and Finance says.

I was challenged to think about what faith communities do with their money around a month ago, all precipitated by a conversation I had with Martin Palmer of the Alliance of Conservation and Religions, and then I heard something at a recent meeting that caused me to investigate a little…

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from: Jo Abbess
to: Adam Ognall, UK Sustainable Investment and Finance (UKSIF)
date: 19 November 2010
subject: When can this rumour be confirmed or denied ?

Dear Adam,

Good to meet you again at the ECCR [Ecumenical Council for Corporate Responsibility] meeting this afternoon.

I overheard something interesting, and I would like your advice about when and where and by whom this rumour could be confirmed or denied.

Somebody who shall remain nameless was talking to somebody else I shall not name, and I overheard the first person claim something that the second person appeared unaware of : that the Church of England have been compelled to review their policies on fiduciary duty as regards the management of the Church’s investment portfolio, and that this would be happening in the very near future.

If the Church of England Commissioners will be obliged to consider a different screening process on their holdings than they have up until now, this would be a very big deal indeed, and highly newsworthy.

So, who do you think could be approached to confirm or deny this rumour, in your expert opinion ?

Many thanks,

jo.

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from: Adam Ognall, UKSIF
to: Jo Abbess
date: 19 November 2010
subject: Re: When can this rumour be confirmed or denied ?

Jo

Good to see you last night. This I not something I am aware of. Can I suggest you contact Edward Mason who is Secretary to the church’s Ethical Investment Advisory Group. He is based in Church House. If there is such a discussion Edward will be aware.

Adam

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from: Jo Abbess
to: Edard Mason
date: 19 November 2010
subject: Question regarding the Church of England’s investment portfolio

Dear Edward,

Adam Ognall has offered me your name and e-mail address, to contact you regarding the Church of England’s investment portfolio.

The central question surrounds sustainability screening.

I have been attempting to understand the dichotomy displayed by, on the one hand, the Anglican Communion undertaking a commitment to environmental protection with the Fifth Mark of Mission, and yet, on the other hand, the Church Commissioners maintaining an investment portfolio that includes holdings in energy and mining companies.

There are two angles to sustainability – the sustainability of the environment and the sustainability of the business model for each company.

As an example of the latter, as my fellow students and I attempted to research at the beginning of this year, BP shows a reticence to admit areas of stress in its engineering programme, and projects the end of the “Oil Era” to be several decades into the future, and cannot seem to face the possibility that this might be brought forward by several factors, including potentially emerging global policies on Carbon pricing.

The question is : does it make investment sense to hold BP stock, given that the company appears to be in denial about its long-term survivability ?

Naturally, one would expect investment fund managers to have reached behind the glossy corporate presentations to pick out the risks, but it seems that many “ethical” investment funds are not including business survival risks in their screening.

Does the Church of England intend to alter its guidance on fiduciary duty for the work of the Church Commissioners to embed all issues of sustainability into their remit and directive ?

Is there a timetable for reform of the screening that is applied to Church of England investments ? How are holdings included or barred ? And will this be reviewed ?

Some in [my Christian organisation] are mulling advice to be offered to our members on the subject of ethical investment, and how our members could bring the subject up in their local and national church structures. It would be of great interest to hear of any suggestions of change in the stance that the Church of England takes towards balancing environmental sustainability and business sustainability in their investment.

Obviously, a failed energy company would not be able to offer any return on investment. However the rates of return that an emerging energy company can offer will still be some years off. Investment always implies a fallow period in “payback” times, yet the long-term prospects in cleantech and clean energy are looking more in focus and solid as time passes. The general economy is in the doldrums, so it will be hard to make lasting returns from any sector currently. While there is general lowered expectation, it would seem a good time to divest from fossil fuels and minerals mining into start up “ambient” clean energy companies, pending the economic recovery. In fact, this move could precipitate recovery by itself.

Thank you for any and every opinion on this matter.

Regards,

Jo Abbess

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from: Edward Mason
to: Jo Abbess
date: 24 November 2010
subject: RE: Question regarding the Church of England’s investment portfolio

Dear Jo

Thank you for your e-mail.

At the moment the Ethical Investment Advisory Group (EIAG) is reviewing its long-standing ethical investment exclusions relating to military products and services (now completed), pornography, tobacco, alcohol, gambling, human embryonic cloning and doorstep lending. There is no current intention to introduce other kinds of screening, although the EIAG may recommend disinvestment from individual companies that are not responding to engagement on serious ethical concerns – hence the Vedanta Resources disinvestment earlier this year.

The EIAG does not take the view that investing in oil companies is unethical. When the EIAG has reflected on the oil industry we have come to the view that it would be very damaging to the billions of people who rely on fossil fuels for energy and the functioning of the economy precipitously to starve the oil industry of investment. Declining oil production now would impact us all and would have the biggest impact on poorer people in developing countries.

The EIAG only advises the investing bodies on ethical issues rather than fiduciary issues, although the investing bodies are naturally very sensitive to their fiduciary responsibilities, short term (pensions and support for the Church have to be paid now) and long term (the Commissioners’ endowment is for perpetuity).

The EIAG and investing bodies are very much involved in the process of transition to a low carbon economy. All the national investing bodies are members of the Institutional Investors Group on Climate Change (IIGCC). This is a group of investors taking a lead on integrating climate change considerations into investments. We lobby for appropriate public policy, share good practice, and complete an annual questionnaire process. See https://www.iigcc.org/ and, for the IIGCC Investor Statement of which all the national investing bodies are signatories, https://www.iigcc.org/iigcc-investor-statement.

In its engagement activities on behalf of the investing bodies, the EIAG asks oil companies to prepare for and contribute to the transition to a low carbon economy including through investment in renewable energy. We also discuss sustainability with a wide range of companies including supermarkets and consumer products manufacturers.

In their diversified portfolios, the investing bodies hold investments in renewable energy – see for example Impax Environmental Markets which is held by the Church Commissioners (https://www.impax.co.uk/funds/listed-equity-funds/impax-environmental-markets-plc). The Commissioners also invest with Generation Investment Management, the investment fund co-founded by Al Gore to invest in only the most sustainable companies (https://www.generationim.com/).

In case you have not seen the ethical investment policies on the environment and climate change, they can be found on the following links:

https://www.cofe.anglican.org/info/ethical/policystatements/environment.pdf

https://www.cofe.anglican.org/info/ethical/policystatements/policyclimatechange.pdf

The investing bodies are also members of the United Nations Principles for Responsible Investment which is about the integration environmental, social and governance issues into investment practice – https://www.unpri.org/.

I hope this is helpful.

Best regards

Edward

Edward Mason
Secretary to the Church of England Ethical Investment Advisory Group
Web: https://www.cofe.anglican.org/info/ethical/

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from: Jo Abbess
to: 24 November 2010
date: 24 November 2010

Dear Edward,

Thank you for taking the trouble to reply in detail to my questions.

The information was very helpful.

May I be permitted to share your words with my colleagues, some of whom are in the energy industry ?

Our conversation is currently centring on the recent International Energy Agency 2010 World Energy Outlook and the UK Industry Taskforce on Peak Oil and Energy Security, both of which indicate that oil and gas companies have a business model that is at risk from resource depletion, and therefore highly unsustainable :-

https://www.worldenergyoutlook.org/
https://peakoiltaskforce.net/

It may not yet be considered “unethical” by the EIAG to invest in potentially collapsing energy companies, but it could become considered unsustainable, and a risk to future returns on investment. I suppose this will not become generally accepted until the next oil shock, but I suspect that within a few years the question will be well-established.

It is interesting to me that the EIAG considers disinvestment from the oil and gas majors as being a social development risk. It is true that there is high dependency on fossil fuels in the global economy, but if depletion is going to cause serious issues of scarcity and high prices in the next decade, as the IEA and others consider is possible, it would surely be better to switch horses to ambient energy sooner rather than later, for the good of all. Investment in a full range of renewable energy technologies, at all scales, can be appropriate for any economy, at whatever stage of development and of whatever wealth levels.

The oil and gas companies are not showing signs of planning to make major shifts to renewable energy, despite a few percent here and there for wind power, solar power and green diesel (wherever that is these days). It is therefore highly likely that they will be tied to their heavy carbon liabilities, which will weigh them down, and they will become progressively submerged. Even higher prices for liquid fossil fuels will probably not be high enough to justify large numbers of drilling platforms in the Arctic Ocean; and making liquid fuels from gas or coal is energy and carbon inefficient, and besides, natural gas also has depletion issues, that are particularly sharp in the shale gas provinces.There is likely to be a global convention on stabilising the price of fossil fuels, as both buyers and sellers have an interest in keeping prices manageable. However, if there are standard prices for fossil fuels, further exploration will be ruled out, as this is becoming progressively more expensive. High prices will create general inflation because of high economy dependency, and thereby rule out exploration. Low prices will rule out exploration. Either way, in a scenario of depletion, if you consider this a valid scenario, new fossil fuel resources are unlikely to be added to reserves. The oil and gas companies operate on rather slim margins – if they cannot pass on costs, they will not develop their reserves. To me this indicates that the future of oil and gas companies is poor, and that investing in them holds risks.

The decline in oil resources that you mention is coming regardless of whether funds invest in oil and gas companies, it seems, so those at the “bottom of the pyramid”, the poorer people of the world are bound to suffer anyway, particularly if they are encouraged to take up the use of fossil fuels, even as the scenario of depletion looms.

I congratulate the EIAG for your wisdom, foresight and ethics for the exclusions that are in place, and for the counsel on divestment from Vedanta. I understand that issues of child labour may have also been discussed, and Chinese working conditions.

I applaud the EIAG involvement in the IIGC and UNPRI processes and Generation.

It is to be hoped that increasing levels of investment into clean energy become a priority for the Church of England, not just on our own church roofs as in the case of St Silas and others, but also in our funds grown for the future.

I note with irony a conversation I had with a churchman (naming no names) in late Spring, who I had met through a Diocesan Environmental Group. Even though he was very much involved in local environmental matters, he regretted to admit that he had lost a lot of his retirement fund from having held shares in BP. I trust that the Church of England as a whole stays aware of the risks of continued high levels of investment in oil, gas, coal and uranium.

Best wishes,

jo.

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from: Edward Mason
to: Jo Abbess
date: 25 November 2010

Dear Jo

Do feel free to share my e-mail with colleagues.

Thank you also for elaborating your views further. We could clearly debate these issues for some time! However the key question you raise about the risk/return profile of oil companies is an investment issue and beyond the remit of the EIAG. All I can say is that from my knowledge of the national investing bodies, future energy issues are discussed by trustees, including peak oil.

I’d be happy to meet if you are ever in or near Church House.

Best wishes

Edward

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from: Jo Abbess
to: Edward Mason
date: 25 November 2010

Dear Edward,

Thank you for your summary.

I suppose, from my point of view, investment issues are ethical issues, as every financial transaction has the potential to do good or harm, cause growth or damage. For example, Fair Trade is good, but the degrading exploitation of labour and resources is not. Where the rate of return on investment is high, but environments and peoples are left poorer, that is an ethical question; but so also is the risk of the collapse of the very engines of trade. If, as the former chief of BP, Tony Hayward, said, we have four more decades of good oil and gas, at which point can we expect the economic edifice built on hydrocarbons to begin to crumble ? Is it ethical to continue to make investments into combustion energies when they cannot sustain the future ?

As you say, we could continue to discuss this at length, but I think your summary indicates that you believe that a programme of divestment out of carbon liabilities is SEP – somebody else’s problem. For me, there are ethical dimensions to the question of how the decarbonisation of our energy supplies gets started if, in the short-term, the fossil fuel sector continues to be attractive to investment. As depletion begins to be more noticeable, however, and prices start to rise, as production costs start to rise, and returns start to fall, the risk/return equation will tip towards liability, I’m sure, and it could be rapid, and many could suffer extensive losses. The instability that would bring, I believe, is a scenario that contains a moral imperative to address beforehand, in a preventative fashion.

Thank you for your invitation to meet at Church House.

Blessings and abundance,

jo.

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from: Edward Mason
to: Jo Abbess
date: Fri, Nov 26, 2010

Thanks Jo

I think it would be best to discuss face to face! It is neither my nor the EIAG’s – nor the investing bodies’ – position that the low carbon transition is someone else’s problem, just that the integration of changing energy futures into ethical investment and investment generally is not a big bang. Do let me know when you want to meet.

Best wishes

Edward

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from: Jo Abbess
to: Edward Mason
date: 2 December 2010

Dear Edward,

Thanks for your suggestion of a meeting.

I am conducting a piece of research and it could be useful to take a sounding from you as part of my study, if you could spare the time to answer 20 minutes of questions.

This would have to be in the New Year.

I would contend that “…the integration of changing energy futures into ethical investment and investment generally is not a big bang…yet.”

How exactly is human civilisation going to go cold turkey on our fossil fuel addiction when major investment continues to support itself on oil and gas platforms ?

How will major investors react, and what will happen to the economy, when the G20 gets serious about abolishing global fossil fuel (and maybe nuclear power) subsidies ?

The deliberations at Cancun this month are chasing a few percentage points of real change without firm commitments to emissions reductions by industrialised countries and the emerging economies.

Firm commitments to emissions reductions would necessarily involve major change for the energy companies. Will they comply ?

To take just one oil and gas major example – BP boasts it has shaved emissions from its production facilities and business processes – but not in the products that it sells, which is where the significant changes could come from.

Many people have joined 10:10 this year and pledged to cut back on emissions. What will the net result be, given that the commitment has not been universal in society ?

At the moment “sustainability” is merely a mass exercise in tinkering, it seems to me, unless we substitute the resources that we use for our energy.

When I say “we”, I mean the large energy supply and production companies, of course, as the lowly end consumer of energy bears no responsibility.

I would expect the eurocent to drop within the next five years, as it becomes clear that the trade in Carbon is not working, that green taxes are not stimulating change, and that the climate is continuing to worsen.

What could then ensue would rock the economic system, and cause major financial and political fallout. If sustained social stability is an ethical objective, maybe chaos prevention is better than cure ?

These are questions of right and wrong, to my mind. The climate doesn’t do compromise.

Regards,

jo.

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