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Buying energy stocks may be a better way to save the planet

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LGC’s essential daily briefing.

In recent years mayors have sometimes been deemed to be mostly cheerleaders. Rather than enjoying broad powers to change things, their major contribution is as a figurehead, drawing attention to important causes.

For environmentalists no cause may be more important than the future of our planet. They will no doubt be heartened by London mayor Sadiq Khan’s call today for cities, and particularly their pension funds, to divest from fossil fuels.

Writing in the Guardian with his New York counterpart Bill de Blasio, Mr Khan said: “We believe that ending institutional investment in companies that extract fossil fuels and contribute directly to climate change can help send a very powerful message that renewables and low-carbon options are the future.”

The pair added that “less than 2% of the London Pension Fund Authority’s investments of £5.5bn ($7.1bn) are in extractive fossil fuels” and that this year the fund dumped “£700,000 of fossil fuel investments, including stakes in Shell and BP”.

Some will object that the first goal of a pension fund is to make money for its members, and not to pursue the policy goals of whoever occupies the nearest town hall. But even those keen to combat climate change may urge caution against Mr Khan and Mr de Blasio’s efforts.

In the investment world environmental, social and governance (ESG) factors have been used by investors for some time to evaluate company stocks. No neutral observer would argue all profitable firms are noble, but champions of ESG metrics believe that over the long-term better-behaved firms win.

The view has many sympathisers, among them local authority pension chiefs. But many at the LGC Investment Summit last week were irritated at another call to drop a controversial energy source. Friends of the Earth and other campaign groups had just released a report claiming that British local government pensions funds currently invest £9bn in fracking firms.

The campaign sought to pressure local authorities to divest from fracking, which involves injecting liquid underground to open fissures and extract oil or gas. The report noted that the “governments of Wales and Scotland both oppose fracking”.

But while cutting off public funding for fracking companies appears attractive, many involved in the management of local authority pension assets were sceptical. The reason? An organisation that does not invest in a fracking company is also one that has no say in how it is run.

Touching on the issue, John Harrison, interim chief investment officer at Border to Coast, explained at a summit roundtable how his investment pool carries out ESG policy with its associate local authority pension funds, who pool their assets in one place for greater investment clout.

“One of the principles of the responsible investment policy at Border to Coast, which all its partner funds have shared, is that they believe engagement is more effective than divestment,” he said.

“There is quite a lot of pressure on individual funds at the moment, from various different interest groups, to move it into a divestment agenda. And it will then become quite difficult from a Border to Coast point of view to have as effective a voice as it would have had otherwise.”

Mr Khan’s call will doubtless bolster his image as a progressive champion. Whether it is the best course for protecting the planet is less certain.

Jimmy Nicholls, features editor

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