The CAMRADATA Climate Transition Roundtable took place virtually in London on 19th May 2022.

Caroline Le Meaux (Head of engagement and voting, Amundi Asset Management)
Josh Palmer (Head of sustainable credit research, WTW)
Keith Scott (Director, LawDeb)
Cadi Thomas (Head of ESG research, Isio)
Dr Stephen Porter CFA, PhD (Responsible investment lead, Scottish Widows)
John Cook (Senior vice president, Mackenzie Investments)
Padmesh Shukla CFA (Chief investment officer, Transport for London pension fund)

For more information about CAMRADATA’s previous whitepapers and to become involved in future roundtables please contact [email protected]

The resurgence of fossil fuel prices and the value of companies that produce them is a reminder that decarbonisation will not be a straight path. In the first quarter of this year alone, Oil & Gas as a sector of the S&P500 appreciated 39%. A very different story to the sector’s weak performance over the previous decade, which spurred the development and implementation of Low-Carbon investment products.

Given the recent turnaround in the value of fossil-fuel companies, the CAMRADATA Climate Transition roundtable 2022 began by asking panellists whether they had raised or reviewed their exposure, or those of their clients, to the energy sector over the past 18 months.

Caroline Le Meaux, global head of ESG research, voting and engagement at Amundi, said that that every portfolio manager was free to allocate as they saw fit within the firmwide ESG policy. This includes a commitment by Amundi last year to avoid the worst hydrocarbon producers [it will divest from those firms deriving more than 30% of revenue from unconventional methods such as tar sands]. Le Meaux said that commitment was being realised this year regardless of market movements.

Keith Scott, an independent trustee to five UK pension plans, said that several had already opted for Low-Carbon-tilted strategies. Their exposure to energy had fallen in terms of allocation but due to market price increases in the energy sector overall, exposure had not changed dramatically.Stephen Porter, Responsible Investment Lead at Scottish Widows, gave a similar report. He said that as a universal owner, with a mixture of passive and active equity exposure, change to oil and gas was probably neutral in aggregate.

John Cook, portfolio manager of the Mackenzie Environmental Equities Strategy, said it doesn’t invest in fossil fuel producers. However, he warned that there had to be greater capex not just in renewables but in fossil fuel companies too in order to achieve decarbonisation. “We believe the world needs some amount of oil and gas to transition smoothly,” he said. “Fanatical Low-Carbon tilts won’t get us where we need to go. They actually drive capital away from solutions.”

Padmesh Shukla, chief investment officer for the £14bn TFL Pension Fund, said that its exposure to fossil fuels, like many other pension funds, may have gone up marginally because of exceptional performance of the oil, gas and materials sector over the last 12 months and not because of any new allocation. The war in Ukraine has further exacerbated this trend. On the positive side, however, exposure continues to fall versus the Fund’s benchmark, but commodities in general have been hugely diversifying and supportive in this inflationary period. “We have a Net-Zero commitment with a strong focus on engagement, and divestment as a last-resort strategy, with the exception of coal,” said Shukla.

Cadi Thomas, head of ESG at pension fund consultancy, Isio, made a similar point. “Our clients don’t typically take sector bets. The asset managers they appoint will usually focus on picking companies with good transition plans rather than complete disinvestment.”

Josh Palmer, head of sustainable credit research at WTW, a global investor consultancy and fiduciary manager, agreed that the focus was on issuers with credible transition plans. He noted that emissions in monitored portfolios had risen as the world economy reopened after Covid-19.

This had led to interesting conversations with credit managers. Palmer gave the example of one credit manager’s portfolio in which 85% of emissions were created by just four companies. “What would happen if those four were excluded? The irony is that both quality and yield would have risen,” claimed Palmer. That is not the whole story, however. Assessing transition risk is complex and much depends on timescales. Palmer explained that one of the four was a transition play, a geothermic smelter in Iceland, supplying aluminium. So cheap energy and carbon-free energy but with extra shipping costs (the essential materials for aluminium such as bauxite are not found on Iceland).