The COP21 and the Carbon Bubble:
- In December 2015, the outcome of the COP21 conference underlined the need to limit the global temperature increase to 2°C and to keep 80% of known of fossil fuel reserves unburned.
- This creates the so called ‘carbon bubble’ meaning that most of the reserves are worthless as burning them would raise global temperatures above the internationally recognised 2°C limit.
- In addition, the Scottish Climate Change Act (2009) requires a 42% cut in emissions by 2020 and up to 80% by 2050. These measures have been taken to prevent a catastrophic backwash of high emission activities originating from fossil fuel extraction.
Such agreements must be reflected in the Fund’s future decisions and in evaluating the risk of their assets, in terms of returns but also in terms of social and environmental impact.
The Future of the Fossil Fuel Industry:
Several factors have already affected the future of the fossil fuel industry. These include:
- changes in the value of fossil fuel companies and shares as well as unpredictable price of oil and rising cost of production;
- the overvaluation of assets which will ultimately become stranded and lose their value;
- governmental action to regulate the increasingly toxic environment;
- the cost of renewable energy is continuously decreasing and is in some areas outcompeting fossil fuels.
Fiduciary Duty and Responsible Investment:
- According to the Strathclyde Pension Fund, the board members have a ‘duty to act in the best long-term interest’ of the beneficiaries. This duty takes in account matters of environmental, social and corporate governance (ESG), which may better ‘align investors with the wider objectives of society’.
- Continious investments in fossil fuel companies is therefore failing duty of reducing carbon emissions under the Climate Change Act (2009), failing to actively take part in fulfilling the international commitment of limiting global warming to 2°C and exposing the Fund and its members to unprecedented financial risks.
- Furthermore, engagement with these companies, that is currently carried out by the Global Engagement Services (GES) on behalf of the SPF, will not change the companies‘ desire of keeping up with their hydrocarbon intensive activities and prevent them from producing ‘the final product’.
As the economic and social threats of these investments increase, it is essential that the SPF revises its antiquated investment strategy to meet the realities of the 21st century – may they be environmental, social or economic. Pursuing a short-sighted and risky investment strategy on behalf of their members is in effect a breach of the fiduciary duty.
Recommendation – a brighter economic and environmental future:
- It is essential that the SPF takes the risks listed into account and acts upon them in a responsible and comprehensive manner. It has to make decisions that aim to fulfil their duty in securing a stable and better future for its beneficiaries, Scotland and the international community.
- Clear objectives of shifting finance flows must be established; while working in cooperation with other governmental bodies, companies and the public, we can reinvest in the local infrastructure and create mechanisms to deal with the loss of jobs by providing alternative industries.
It is an opportunity for the SPF to take a realistic approach to the necessities of in the 21st century and join public institutions and councils across Europe, including the University of Glasgow, Oxford City Council and the Norwegian Government Pension Fund, that have already divested.
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