Net zero needs a more nuanced approach than simply dumping stocks, Barrenjoey hears

Shareholders should not be shy about pushing companies on emission reduction plans, but with energy prices sky high, strict divestment policies are falling from favour, fundies say.

Fossil fuel companies must be part of the transition to net zero, investors say.

Strict divestment policies around companies with a heavy emissions footprint such as oil and gas producers ignored the current energy crisis and the need to invest long term to facilitate the transition to net zero, fund managers have told a Barrenjoey Capital Partners discussion.

The investment bank hosted the panel – including UniSuper sustainable portfolios manager Lou Caparelli and Tribeca Investment Partners Asia chief executive Ben Cleary – and heard engagement, rather than a carte-blanche sell off, would be the better strategy.

Mr Cleary said that while divestment had been flavour of the month in the past, a more realistic approach was setting in.

While the oil and gas sector for example had become “a bit of a pariah,’’ the elephant in the room was that the world was in the grips of an energy crisis, he said.

“In real terms energy prices have never been higher. In our view, we’ve been saying this for three or four years to our investors, yes, we want to move towards a 100 per cent renewable world, but there’s got to be capital spent on the transition.

“I think you’ve seen a number of major asset allocators just in recent months pivot back from a divestment-only strategy to one that’s going to concentrate more on that transition period.’’

That transition period might well be over the medium to longer term for some companies, with the focus now swinging to what individual companies’ transition plans were, he said.

“We talk about ESG 2.0 which we feel is going to be far more commonplace in investment markets, which will tolerate investment into fossil fuel producers which are actively decarbonising and have sensible and plausible strategies to reduce their footprint,’’ he said.

Mr Cleary said Santos was a good example of a company with a clear pathway to net zero.

“Globally it’s one of the best decarbonising stories that we can see within the oil and gas industry,’’ he said.

Mr Cleary said industries such as wind power which were thought of as core to the ESG investing thematic were also heavily reliant on cost inputs such as oil, which indicated the complexity of the issue.

A copper mine’s largest cost input was oil, which in times of high energy prices meant more expensive copper, and therefore more expensive wind turbines, Mr Cleary said.

“Everyone wants to be green, and no one wants to pay for it from a consumer point of view, so it is going to land in corporates’ laps’,’’ Mr Cleary said.

Mr Caparelli from UniSuper, which has a modest investment in the fossil fuels sector but does own more than 10 per cent of pipeline operator APA Group, said engagement with companies was the key. He said there was an expectation from an investor point of view that companies had stated decarbonisation goals, and the $106bn fund was not reluctant to nudge companies in the right direction.

“What we’re working with the companies on is to encourage them and push them to move faster on decarbonisation,’’ Mr Caparelli said.

“Included in our expectation of companies is that they have decarbonisation goals.

“As time marches, our expectations of companies are growing and we are in the process for the next issue of (our) climate report of setting much more detailed expectations of companies in terms of, what action plans do the companies have, what is their interim target and what are they doing about it to get there.’’

Mr Caparelli said the days of company management being dragged kicking and screaming to the table on this were well in the past, and “they understand that it’s an existential threat for them’’.

Mr Caparelli said fossil fuels companies who were looking to expand their traditional operations had “difficult questions to answer’’ but broadly speaking, simply dumping a stock did not contribute to the net zero journey.

“Divestment doesn't really answer the energy transition problem, it just transfers the problem to someone else,’’ he said.

The challenge was obviously easier for some companies such as real estate investment trusts or companies who could increasingly depend on the decarbonisation of their energy supply through the grid, while other heavy emitters had a more difficult task.

Mr Caparelli said UniSuper tended not to support activist resolutions posed at company annual meetings, but was not afraid to wield the stick by voting against remuneration reports or against the re-elections of individual directors.