What is fossil fuel divestment?

‘Divestment is …the removal of stocks, bonds or funds from certain sectors or companies.  The global movement for fossil fuel divestment (sometimes also called disinvestment) is asking institutions to move their money out of oil, coal and gas companies for both moral and financial reasons.  These institutions include universities, religious institutions, pension funds, local authorities and charitable foundations’.2

Fossil fuel divestment can be partial – for example just moving out of coal stocks, or moving out of the oil and gas sector as well.  The definition is limited to fossil fuel production – coal companies and oil and sectors; it does not include sectors that use fossil fuels.  Divestment can also involve moving proportions of stocks into ‘low carbon’ indices, as has happened recently with Haringey Pension Fund.3

Why do organisations divest?

Divestment from fossil fuels is the fastest growing divestment movement in history.  Divestment has a positive track record in the anti-apartheid campaign, and when applied to climate change, demonstrates that it is achievable to ‘leave carbon in the ground’.

Divestment is a visible public demonstration of the need for fossil fuel companies to change; companies whose moral license to operate is questioned or damaged are more likely to change their behaviour.  Fossil fuels are the main contributors to climate change.  While the fossil fuel industry is currently prospecting for more fuel to extract, estimates are that up to 80% fossil fuels must stay underground in order to avoid temperatures rising above 2 degrees C. The Paris Agreement signed in December 2015 committed world governments to a stronger target of 1.5 degrees, which has been interpreted as a signal of the beginning of the end of fossil fuels.4

Divestment from other sectors (eg transport, utilities, consumer goods) is not advocated by the Fossil Free movement and is limited to the companies listed in the Carbon Underground 200 list5 so the threat to diversification of the Fund is kept to a minimum.

What are the alternatives?

Pension funds can move funds out of fossil fuels and into “low carbon indices”.  This is the approach recently taken by Haringey Pension Fund3 and it is noteworthy that such funds regularly outperform general indices.

WYPF has stated1 that it has reservations about investing in renewable energy “with companies frequently relying on government subsidies which are funded from domestic energy bills, adding to fuel poverty”, yet it is undoubtedly the case that extensive subsidies and tax breaks are given to the fossil fuel industry6 which currently come out of taxpayers’ money.  The cost of renewable energy has rapidly declined and is becoming increasingly competitive with fossil fuels on price.  Many economists forecast that fossil fuel assets will become stranded as the price of renewables continues to fall.

According to the Confederation of British Industry and many others the fight against climate change can now be job creating not destroying7.  ‘One Million Climate Jobs’ is a comprehensive report which details how this is possible.8

What is the financial case for divestment?

Failure to divest early will increase the risk of WYPF holding ‘stranded assets’.  Once markets realise that continued burning of carboniferous fuels (and resultant ‘dangerous’ global warming) is no longer sustainable, the assets on which the oil, coal and gas companies’ share prices are predicted will become worthless.  Pension funds and other financial institutions are recognising the increasing risk of investing in fossil fuel companies.  For example, due to the potential impact of climate change on the value of their portfolio, pension giant Aviva recently commissioned a report on the cost of inaction.  The report urges institutional investors to assess their climate-related risks and take steps to mitigate them.  Aviva have subsequently stated that they will divest from highly carbon-intensive fossil fuel companies if they feel the companies are not making sufficient progress towards the engagement goals set.9  Investment experts Mercer consider climate change ‘A new investment risk that demands action by investors’.10

Other prominent figures within the financial sector have spoken out about the need to consider climate risk and take seriously the risk of stranded assets.  Mark Carney recently warned investors that they could face “potentially huge” losses from climate change action that could make vast reserves of oil, coal and gas “literally unburnable”.11

Fossil fuel free indices can equal or perform better than indices with fossil fuels in them (see FTSE fossil fuel exclusion indices and research by MSCI).12

We would further argue that the historic financial performance of the fossil fuel shares should not be seen as evidence of future performance, especially following the strong climate targets set out in the Paris Agreement in December 2015.

Who has divested from fossil fuels?

To date 500 organisations worldwide have committed to divest in some way from fossil fuels.  This includes over 60 in the UK with 13 universities eg Sheffield, Warwick, Glasgow; the UK Environment Agency; the British Medical Association; Haringey Pension Fund; the South Yorkshire Pension Fund, and the Church of England.13


Is engagement with fossil fuel companies preferable to divestment?

We value the achievements cited by WYPF regarding shareholder resolutions (especially relating to annual reporting), when they have engaged with BP and Shell.1

However, evidence indicates that shareholder engagement can work in some sectors where the change required does not challenge the companies’ core business model, eg getting a company to remove a certain product from its supply chain.  However, engagement does not work well where the core business model requires change.  Attempts to move Shell and BP over the past two decades have not worked.  This is evidenced by the failed Beyond Petroleum project – BP pumped billions of pounds into low carbon technology and green energy but gradually retired the programme to focus almost exclusively on its fossil fuel business.17

Indeed, while Shell and BP have stated publicly that climate change is a global threat, they continue to actively prospect for new fossil fuel reserves.

Leading environmentalists such as Jonothan Porritt and Bill McKibben believe fossil fuel companies will never play a leading role in a move to a low carbon economy.  In 2015 Jonothan Porritt, founder director of Forum for the Future, who spent years working on sustainability projects with BP and Shell, stated that engaging with major fossil fuel companies on climate change has become futile as they are not able to adapt to the need to exit fossil fuels. 18  There are no examples of shareholder engagement being able to change the core business of a company

Which UK Pension Funds have already divested from fossil fuels?

The UK Environment Agency pension fund has made a commitment to divest from fossil fuels: in coal by 90%, 50% for oil and gas by 2020.  They are on record as saying they have made a credible plan to deliver strong long term financial returns and would be pleased to discuss with other institutional investors their approach to addressing the impacts of climate change.  They have provided the following contacts that are happy to be approached: Faith Ward, Chief Responsible Investment & Risk Officer (faith.ward@environment-gency.gov.uk), and Mark Mansley, Chief Investment Officer (mark.mansley@environment-agency.gov.uk) 20

The South Yorkshire Pension Fund has decided to divest from coal and tar sands21 and on 14.1.16 Haringey council voted to divest a significant proportion of its fossil fuel investments.3

But what about Pension Funds’ fiduciary duty?

Fiduciary duty is rightly and legally a core concern for pension funds. Recent legal guidance makes it clear that fiduciary duty does not prevent local authority pension funds from divesting from sectors as long as there is not significant financial detriment.

In March 2014 the Local Government Association (LGA) (England & Wales) published a legal opinion on how fiduciary duties affected the scope for a Local Government Pension Scheme fund to incorporate Environmental, Social and Governance (ESG) risks into their decision making, concluding that as long as authority’s powers are used only for investment purposes “the precise choice of investment may be influenced by  wider social, ethical or environmental considerations, so long as that that does not risk material financial detriment to the fund.”14

A wider review of fiduciary duties was produced by the Law Commission (England & Wales) in July 2014 which stated that “the primary aim of an investment strategy is therefore to secure the best realistic return over the long term, given the need to control for risks.”  Financial risks to take into consideration included environmental degradation, poor safety record, and risks to a company’s long-term sustainability.  The advice also confirmed that non-financial factors, such as members’ views and quality of life, may also be taken into account so long as this does not result in significant financial detriment.15  WYPF have acknowledged this point in their quarterly report (2014, p15, Q3) and cite the Law Commission’s review on fiduciary duty:

The conclusion is that there is no impediment to trustees taking account of environmental, social or governance factors where they are, or may be, financially material.

We would argue here that ESG factors are indeed financially material, for the reasons given in this report, that fossil fuels may become ‘stranded assets’, potentially resulting in financial losses for WYPF members.

In conclusion, both Local Government Association (LGA) legal advice and Law Commission guidance say fiduciary duty rules do allow pension funds to consider ESG factors in investment decisions, so long as these do not negatively affect financial performance and are not contrary to members’ wishes.  As the Environment Agency recently said on its decision to decarbonise its equity portfolio:

The fund’s fiduciary duty is to act in the best long-term interest of our members and to do so requires us to recognise that environmental, social and governance (ESG) issues can adversely impact on the Fund’s financial performance and should be taken into account in the funding and investment strategies, and throughout the funding and investment decision making process.16


1          West Yorkshire Pension Fund 25.11.15 Fossil fuel Briefing Note for IAP/JAG members

2          The Guardian 9.3.15

3          www.pensionfundsonline.co.uk/content/pension-funds-insider/investment/haringey-to-invest-200m-in-green-fund/2038

4          http://www.reuters.com/article/us-climatechange-summit-idUSKBN0TV04L20151213

5          http://fossilfreeindexes.com/research/the-carbon-underground

6          http://www.independent.co.uk/news/uk/politics/uk-government-pays-6bn-a-year-in-subsidies-to-fossil-fuel-industry-a6730946.htm

7          Ed Milliband, The Guardian 24.11.15

8          The Campaign against Climate Change Trade Union Group (2014): One million climate jobs. www.climate-change-jobs.org

9         Aviva, (July 2015)  Aviva’s strategic response to climate change www.aviva.com/media/thought-leadership/climate-change-value-risk-investment-and-avivas-strategic-response.

10        Mercer (2015)


11        Mark Carney warns investors face ‘huge’ climate change losses.  Financial Times 29.9.15

12        MSCI (December 2013)  Responding to the call for fossil free portfolios, cited in Friends of the Earth (January 2016) Briefing: Local government pensions fossil fuel divestment

13        http://gofossilfree.org/uk/

14        LGA counsel advice (2 April 2014) www.lgpsboard.org/images/PDF/Publications/QCOpinion April2014

15        Law Commission (1 July 2014)  Is it always about the money? Pension Trustees’ duties when setting an investment strategy: guidance from the Law Commission www.lawcom.gov.uk/wp-content/uploads/2015/03/lc350_fiduciary_duties_guidance.pdf


16        Environment Agency (2015). Policy to address the impacts of climate change https://www.eapf.org.uk/~/media/document-libraries/eapf2/climate-change/policy-to-address-the-impacts-of-climate-change.pdf?la=en.October.


17        The Guardian  16.4.2015


18        Friends of the Earth (May 2014): Shell, climate change and the carbon bubble.



19        IIGCC (2015)  European investors welcome the unequivocal signal provided by the Paris agreement.



20        UK Environment Agency pension fund https://docs.hartlinkonline.co.uk/repo?docid=r3QvCgiSc0qXMhO84PuRXw


21        Pensions Age (2015). South Yorkshire Pension Fund to divest from ’pure’ coal companies



22        http://www.theguardian.com/environment/2015/oct/05/a-story-of-hope-the-guardian-launches-phase-two-of-its-climate-change-campaign