Government ban on fossil fuel divestment threatens future pensioners

Hunter open pit coal mine in NSW, Australia.
The government is set to ban local authorities and their £14 billion pension funds divesting from companies they deem unethical, writes J W Bode. The law will specifically forbid divestment from fossil fuels - and that could put the pensions of future public sector retirees at risk.
Preventing councils from boycotting oil and gas is ill considered and threatens not just local authority assets but the financial security of future pensioners, especially in light of COP21 and the commitment made to investing in renewables.

Today sees one of the more interesting announcements coming from government, with local councils and public bodies being prevented from boycotting companies they deem to be unethical.

As widely reported, here in the Independent, "all publicly funded institutions will lose the freedom to refuse to buy goods and services from companies involved in the arms trade, fossil fuels, tobacco products or Israeli settlements in the occupied West Bank."

Bodies covered by the new law will include local councils, quangos, universities, agencies, museums and other public bodies. The penalties for non-compliance will be "severe".

The main aim of this appears to be to strengthen links with Israel - with Cabinet Office minister Matt Hancock making the formal announcement in Israel later this week and stating in a press release:

"We need to challenge and prevent these divisive town hall boycotts. The new guidance on procurement, combined with changes we are making to how pension pots can be invested, will help prevent damaging and counter-productive local foreign policies undermining our national security."

There has been a natural, and quite correct, reaction to criticise this as an attack on democratic freedom, and for preventing the voice of those electing local councillors from being heard. But in the rush to criticise it, I think one very important thing has been missed.

Government's new rules are putting pensioners at risk

And this is it: by preventing these Councils from divesting their pension funds from oil and gas, and instead investing in renewables, they will be putting these funds at risk. And in doing so, it is clear that this government's long-term economic plan is anything but sensible, considered or long-term.

The renewables vs fossil fuels debate has often hinged on the ethics behind it. But a lot has changed. Oil and gas is no longer a safe investment, while solar and renewables are getting close to grid parity - and this is likely to continue for the foreseeable future.

UK councils have put approximately £14 billion of pension funds (6% of the total amount invested by the 418 councils) into fossil fuels. This is a very risky strategy, and preventing their divestment is ill thought out and dangerous.

Preventing councils from boycotting oil and gas is ill considered and threatens not just local authority assets but the financial security of future pensioners, especially in light of COP21 and the commitment made to investing in renewables.

Just last month independent analysis showed that New York's teacher's pension pot had lost US$135 million because of its oil and gas investments - over a period in which the Standard & Poor 500 Index (considered one of the best bellwethers of the US economy) rose by more than 7.4%.

As the company behind the analysis, Advisor Partners pointed out: "This translates to more than a 25% decline in the plan's oil and gas stocks ... Exxon Mobil and Chevron Corp were the largest contributors to performance, where these two names alone caused plan participants to lose more than $39 million."

This fund is far from alone, with the Guardian reporting analysis of Australian pension investments last week revealing that 15 funds lost AUS$5.6 billion on their fossil fuel investments:

"Many Australians are losing thousands of dollars a year from their retirement savings because their super funds continue to invest in fossil fuel companies. Members of 15 super funds lost an average of A$1,109 per member in fossil fuel investments over two years. Some funds with heavier investments in fossil fuels lost almost triple that."

As the Guardian went on to report this weekend, investors were told that "companies and investors that shun sustainable, low-carbon assets stand to lose a lot of money."

Oil trader Vitol's CEO has expressed his view that the current run of low prices is likely to persist for a decade, saying recently that crude oil will likely stay at US$60 a barrel for at least ten years. And by then, the development of industries converting renewable energy to fuel may put an effective cap on future fossil fuel prices at around that level.

A bad idea for so many reasons

All in all, preventing councils from boycotting oil and gas is ill considered and threatens not just local authority assets but the financial security of future pensioners, especially in light of COP21 and the commitment made to investing in renewables.

As other investors and fund managers divest from fossil fuels, public sector retirees are put at risk of holding a disproportionate percentage of 'stranded' fossil fuel assets in their pension pots.

But given the penalties that could come from divesting and the pressure these councils' budgets are under, it is less likely that councillors will instigate changes to prevent risky fossil fuel assets shrinking employees' pension funds, and invest in the energy sources of the future.

And it's pensioners that stand to lose out. Last year investing in renewables would have made you up to 7% returns, according to the FT's analysis of the 6 major renewable investment funds. These aren't small scale funds.

Similarly, last month's January's UN Investor Summit on Climate Risk had a majority of the 500 presenters, who represented a combined US$22 trillion (£14.5 trillion) in assets, saying low-carbon investment was no longer one of corporate social responsibility, but one of cold hard cash.

In recent months, we've seen several councils look to invest in community energy, a sector that grew rapidly last year and supports local initiatives, for example cutting carbon emissions or helping reduce energy poverty. Doing this also lets them set up local supply businesses, giving them an additional income.

Investing in renewables

This ban on ethical investment is not the work of a government who has traditionally claimed to put local communities first. It is not the work of a government who has claimed to have a long-term economic plan.

Nor is it the work of a government that listens to its own central banker, Mark Carney, Governor of the Bank of England, who warned Lloyds insurers last September of the risks of ignoring the systemic dangers that climate change created for the world financial system:

"Our societies face a series of profound environmental and social challenges. The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity. While there is still time to act, the window of opportunity is finite and shrinking."

Given that there is a desire to divest these pension funds from fossil fuels; that there is strong economic evidence that shows doing so will be a prudent investment; and that there are many examples that show inaction will be damaging; this announcement, which makes it harder for councils to divest from fossil fuels and instead invest in renewables is dangerous and ill-thought.

And one that will hurt the environment, pensioners and the country's finances.



J W Bode is CEO of Mongoose Energy, the UK's community energy leader. The company works with its bencoms, such as BWCE and BEC, to develop sites and increase the number, value and capacity of community-owned renewable energy assets.