On 4 May new councillors will be elected across the country. They will have the power to get councils out of polluting companies to instead invest the £35 billion local government pension scheme in a way that doesn’t drive climate change.
The following candidates have signed our petition:
Scotland’s councils continue to invest in the companies most responsible for climate change, holding a £1,683 million stake in fossil fuel companies through their pension funds.
4.8% of the Scottish Local Government Pension Scheme is invested in fossil fuels – £3,300 for every scheme member. £543 million is directly invested in oil and gas and £113 million in coal. The majority of holdings, £1,046 million, were invested through intermediaries.
Councils invest in BP, who are fracking and drilling for oil in the Arctic as well as having a history of campaigning against subsidies for renewable energy, and BHP Billiton, the 12th largest extractor of coal in the world, currently mining in the centre of the Borneo rainforest and facing prosecution over Brazil’s worst ever environmental disaster. (more…)
By continuing to invest in the companies most responsible for global climate change councils are failing to protect their pension fund members’ best interests and risk losing huge sums as government action to curb climate emissions sees fossil fuel companies’ value plummet.
With these risks widely known by fund managers failure to act could leave them open to legal challenge.
What legal issues are relevant for councils considering divesting from fossil fuels and pro-actively investing in socially and environmentally beneficial projects in their local area?
The first priority of councils is their duty to act in the best interests of those who pay into and rely upon the pension fund: fund members and employers (1). This duty, known as fiduciary duty, comes first when councils approach their investment strategy: they must serve the best interests of their members.
There is a clear and strong case that council workers and other fund members have their interests best served by a pension fund which helps limit the threat of climate change and supports the development of their local community.
New Scottish legal advice published by the scheme’s advisory board (2) in 2016 has helped clarify how local councils should deal with environmental and social issues in their investments.
The advice says that funds are expected to have “long-term investment horizons”. This guidance echoes the approach given by the Law Commission of England and Wales who stated that “the primary aims of an investment strategy is therefore to secure the best realistic return over the long term, given the need to control for risks” (3). The legal direction here is clear: investing to make a quick buck, in companies with no long-term plan, is not consistent with funds’ legal duties.
Councils are expected to consider environmental and social issues at the point at which they make investments and to review such issues periodically.
Environmental and social issues may influence what they invest in as long as they don’t risk “financial detriment”. Since there is significant evidence showing that fossil fuels are of high risk and low long-term value, this enables an approach of ending fossil fuel investment.
Councils are advised that “investment options may be restricted where the investment returns to the fund may be negatively impacted by such environmental, social or governance factors.” In other words, if a financial case can be made, divestment is an option.
A recent update in the European Union rules for pension funds (4) compels funds to consider environmental and social issues when making investment decisions, and to carefully assess related risks such as the stranding of fossil fuel assets. Although Scotland is currently set to leave the EU, Scottish public bodies would do well to maintain compliance with EU law in the case of Scotland seeking re-entry.
When approaching any change to their investment policies councils should satisfy themselves that they have collected sufficient financial and legal advice to be clear that they are acting in their members’ best interests. However this is easy to achieve, and indeed has been done by those funds which have already divested from fossil fuels (5).
Where action has been limited it is attributable to funds focusing on short-term returns, failing to identify financial risks posed by the carbon bubble, and following outdated practices which do not give sufficient consideration to environmental and social issues (6).
A full appreciation of the legal framework reveals that far from being prevented from considering issues like climate change, funds are in fact required to take issues like climate change into account when making investment decisions.
The Bank of England has advised that funds may face “both regulatory and shareholder action if they fail to adequately consider, misrepresent or conceal climate change-related risk.” (7)
A 2016 legal opinion concluded that if it could be shown that climate change had financial implications for funds those funds taking no effective action would be in breach of their legal duties (8).
Funds could also face charges of intergenerational inequity: if fossil fuels are being retained due to their strong performance in the very short-term at the expense of exposing the fund to longer-term risks, this would be unfairly benefiting older members over younger members.
(1) I use members to refer to individual people who are members of pension funds, although they are sometimes referred to as ‘beneficiaries’. I refer to employers who contribute to pension funds as ’employers’, although readers should note that in other literature employers are occasionally referred to as members.
(6) A review of why pension funds are not taking fossil fuel risks into account in their investment strategies was carried out by Share Action and ClientEarth in 2016. Click here to download the report.
All this followed on the success in Waltham Forest Council, the first to commit to full divestment from fossil fuels, and South Yorkshire’s divestment from coal. It’s all happening in England!
Scottish Councils are under pressure to follow England’s lead, but no local authority here has yet made a commitment. With new Pensions Committees in place shortly after the May election there is a great opportunity to get more action north of the border.
Mercer are one of the largest financial consultancy companies in the world. Owned by the global financial firm Marsh & McLennan, they provide advice to asset owners, such as large corporations, foundations, universities and pension funds.
In 2015, Mercer published a highly influential 100 page report ‘Investing In a Time of Climate Change’. The report aims to help asset owners and investment managers, who move asset owners investments around, understand better how to consider the impact of carbon risk on their portfolios.
Over a year after the report’s release, we wanted to consider what relevance it held for UK councils taking action on carbon and climate change risks.
What does the report say?
In the report, Mercer states that “climate change is an environmental, social and economic risk, expected to have its greatest impact in the long term. But to address it, and avoid dangerous temperature increases, change is needed now. Investors cannot therefore assume that economic growth will continue to be heavily reliant on an energy sector powered predominantly by fossil fuels.”
The main questions addressed by the report are:
How and when will climate change affect the risk and returns of an investment portfolio?
What risks and opportunities to investments are created by climate change, and how do we manage these considerations to fit within current investment practices?
How can an investor become resilient to climate change?
The report says that the decisions investors make could result in four possible outcomes:
Transformation: a strong climate change action plan puts us on a path that keeps global warming within safe levels (defined at 2oC above pre-industrial levels this century).
Coordination: policies and actions are aligned and cohesive, limiting global warming to 3°C.
Fragmentation (Lower Damages): limited climate action and lack of coordination results in a 4°C or higher rise in the global temperature.
Fragmentation (Higher Damages): same limited climate action as the previous scenario, but assumes that relatively higher economic damages result.
Quantitatively forecasting climate risks and investment outcomes at different levels of financial systems the found that:
Annual returns from coal could fall by anywhere between 18% and 74% over the next 35 years, with effects more pronounced over the coming decade.
Conversely, the renewables sub-sector could see average annual returns increase by between 6% and 54% over a 35 years.
Diverse portfolios are best placed to protect investors from negative financial returns, especially under a 2°C scenario.
Portfolios will also need to consider greater material risks that will arise under a 2°C plus world. For example, under a 4°C, scenario, chronic weather patterns (long-term changes in temperature and precipitation) pose risks to the performance of many financial assets.
Key risks will come either from structural change during the transition to a low-carbon economy, where investors are unprepared for change (i.e. still invested in the carbon economy and unprepared for the low carbon economy), or from increased physical damage, for example from events like extreme weather.
The report’s main recommendations are:
Asset owners (such as local council pension funds) should put in place an integrated governance approach that enables them to build capacity to monitor and act on shorter-term (1–3 years) climate risk indicators as well as on longer-term (10-year plus) considerations.
This will require asset owners to develop investment policies that clearly incorporate climate risks.
Once a clear policy is in place, asset owners should develop new risk assessments, develop new ways to focus their investments (for creating new ‘mini-portfolios’ that invest in the low carbon technologies) and improved management and monitoring.
Why does the report matter?
The report was a clear acknowledgement from a well known global financial firm that climate change poses material financial risks to investment portfolios.
Moreover, Mercer states that action is needed now, and that even though climate risk is more complex and longer-term than most investment risks, uncertainty about the future should not be a barrier to action.
The findings reinforce the efforts of divestment campaigns as they clearly demonstrate that:
The prospects for investment in coal are abysmal.
The long-term outlook for renewable energy is safe and healthy.
Lack of investments in low carbon infrastructure now will amplify the material financial risks associated with climate change later.
Unprepared investors will lose the most.
Investors that diversify away from fossil fuels and invest in “alternative asset categories”, including renewable energy, low carbon infrastructure, social housing, and green bonds will be better prepared for climate change impacts than investors that do not.
Essentially, the report argues that the “transformation” scenario is possible but only if investors take an active role in realigning their investment policy with effective climate action. Otherwise, we are headed for one of the financially, socially and environmentally disastrous “fragmentation” scenarios.
This conclusion supports the case for reinvestment in the just low carbon transition. A key shortcoming of the report, however, is that the modelling does not acknowledge or account for the need for the transition (and investments) to be just and democratic. Thus, the report doesn’t go far enough but nevertheless is a useful resource that supports the case for divestment from fossil fuels and reinvestment into low carbon solutions.
As recently as July 2014 BoE Governor Mark Carney expressed little concern about the financial risks associated with the carbon bubble in a letter to the UK Parliament’s Environmental Audit Committee. However a few months later, as policy demands ahead of the UN Climate Change Conference in Paris took shape and global oil prices weakened, the BoE position shifted considerably.
Climate change as a serious threat
Mark Carney warned in October 2014 the “vast majority of [fossil fuel] reserves are unburnable” if climate change is to be limited to ‘safe’ levels as pledged by the world’s governments.
In March 2015, the BoE warned insurance companies which underwrite financial markets risked taking a “huge hit” if their investments in fossil fuel companies are rendered worthless by action on climate change.
Paul Fisher, deputy head of the BoE’s Prudential Regulation Authority (PRA) supervising banks and insurers – tasked with avoiding systemic risks to the economy said in a speech to the 2015 Insurers Summit:
“Insurers, as long term investors, are also exposed to changes in public policy as this affects the investment side. One live risk right now is of insurers investing in assets that could be left ‘stranded’ by policy changes which limit the use of fossil fuels.
“As the world increasingly limits carbon emissions, and moves to alternative energy sources, investments in fossil fuels and related technologies – a growing financial market in recent decades – may take a huge hit. There are already a few specific examples of this having happened.”
“Changes in sentiment and financial innovation, such as the ‘hedging’ of carbon risk or fossil fuel divestment, can impact asset values. For example, the fossil fuel divestment campaign is an extant social movement that has managed to induce changes in investor behaviour among private and public wealth owners alike, such as university endowments, public pension funds, ultra high net worth individuals, or their appointed asset managers.
“While levels of divestment appear reasonably limited at this stage, the campaign may have the potential to trigger changes in market norms. Additionally, emerging research suggests preferences can also rapidly shift due to changes in market sentiment relating to expectations around climate risk.”
The report also mentioned that those who manage funds on behalf of others (known as ‘fiduciaries’) could be challenged if they failed to take these risks seriously:
“In future, directors and officers may face both regulatory and shareholder action if they fail to adequately consider, misrepresent or conceal climate change-related risk.”
This presents a major threat to the practice of oil companies like Exxon who, it was recently uncovered, identified climate change risks to their business model and chose to conceal them instead of acting decisively.
What risks does the Bank of England recognise?
The BoE Prudential Regulatory Authority paper covers a number of ways that climate change can affect financial stability:
Physical risks: impacts insurance liabilities and the value of financial assets that arise from climate- and weather-related events, like floods and storms damaging property or trade.
Liability risks: impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – hardest.
Transition risks: financial risks resulting from the process of adjustment towards a low-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a range of assets as costs and opportunities become apparent.
If we are to avoid dangerously destabilising the global climate we need to keep emissions to a carbon budget. It has been estimated that at least 80% of known fossil fuel reserves need to stay in the ground to keep inside our global carbon budget.
According to Mark Carney, carbon budgets pose a risk to financial assets because:
“If that estimate is even approximately correct it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics.
“The exposure of UK investors, including insurance companies, to these shifts is potentially huge.
“19% of FTSE 100 companies are in natural resource and extraction sectors; and a further 11% by value are in power utilities, chemicals, construction and industrial goods sectors. Globally, these two tiers of companies between them account for around one third of equity and fixed income assets.
“On the other hand, financing the de-carbonisation of our economy is a major opportunity for insurers as long-term investors. It implies a sweeping reallocation of resources and a technological revolution, with investment in long-term infrastructure assets at roughly quadruple the present rate.
“For this to happen, ‘green’ finance cannot conceivably remain a niche interest over the medium term. The more we invest with foresight; the less we will regret in hindsight.”
Whilst the BoE acknowledge the carbon bubble as a significant risk factor for financial markets, the carbon bubble report says it is not the Bank of England’s job to force banks, insurance and pension funds to decarbonise:
“Suggestions that banks and insurers should face new requirements to encourage low-carbon investment were “flawed”… Financial policymakers will not drive the transition to a low-carbon economy. It is not for a central banker to advocate for one policy response over another. That is for governments to decide… More properly our role can be in developing the frameworks that help the market itself to adjust efficiently.”
What should investors do?
For those who manage other people’s money, like local councils, doing nothing in the face of the overwhelming evidence of financial risks associated with climate change failure is no longer an option. The legal and financial consequences of carbon and climate risks for pension funds is increasingly clear.
Mark Carney, speaking to assembled insurers at Lloyds of London in September 2015 said:
“Climate change is the Tragedy of the Horizon. We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix. That means beyond: the business cycle; the political cycle; and the horizon of technocratic authorities, like central banks, who are bound by their mandates.
“The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade.”
Mark Carney goes on to suggest:
“Once climate change becomes a defining issue for financial stability, it may already be too late.”
In other words: financiers, investors and central banks cannot use their existing toolkit to deal with climate change risks. We need to compel investors to use new methods – like divestment – to signal an end to the fossil fuel era and begin in earnest an investment approach that is consistent with a safe, healthy future.
The campaign to divest local councils from fossil fuels is making waves.
The overwhelming majority of local governments’ investments lie in their pension funds (valued at £230 billion in 2015) and by pressuring councils to invest this money sustainably divestment campaigners are bringing about a major change in how money is invested for the future.
In September 2016 the first UK fund committed to go fossil free: Waltham Forest Pension Fund in London. A handful of funds have made public commitments to move significant portions of money out of fossil fuels and many more have increased their investments in low carbon and ethical funds. Some campaigns have successfully changed policy, won recommendations for further action, or have spurred the creation of new low-carbon investment options.
In this article we’ll set out what has been done in some councils to act on the fossil fuels investments of their pension funds.
What kind of picture do these achievements paint? Is there a single path which we need local council to travel, or must progress be achieved in different ways in different places?
Experience shows that our councils are unlikely to commit to full divestment overnight. Divestment commitments can be made without a policy for pro-active ethical investment (also known as re-investment), and vice versa. We should take care to describe change accurately and not to overstate how far we’ve come, but must also take heart in any progress towards climate-friendly local councils and, as you’ll see below, there has been a lot of progress.
Above all, we should learn from experience across the UK to help build an effective movement for change.
Divestment: Funds that have passed policy to divest from fossil fuels
These council pension funds have passed motions that publicly commit to full or partial divestment from fossil fuels.
At a pension fund committee meeting on the 22 September there was unanimous support by both Conservative and Labour councillors for the pension fund to ‘exclude fossil fuels from its strategy over the next five years’. The Fund’s Statement of Investment Principles (SIP) will be changed to enshrine this commitment. The Fund also agreed to invest more in wind energy and ‘seek to make direct commercial property investments in the borough’.
Councillor Simon Miller, chair of Waltham Forest Pension Fund said:
‘Not only does this mean that the fund will not be invested in stranded assets, but will be actively investing in cleaner, greener investments to the benefit of our community, borough and environment.’
In October 2015, the Environment Agency Pension Fund, part of the local government scheme, announced it would end most of investments in fossil fuels within the next five years.
The announcement was made with the publication of a new investment policy for the fund, which outlined a goal of ensuring the fund’s investments and processes were ‘compatible with keeping the global average temperature increase to remain below 2°C relative to pre-industrial levels.’
The Fund has around 40,000 members, is valued at £2.9 billion in size and invests around £72.5 million (2.5%) in fossil fuels.
The policy included three targets to be achieved by 2020:
Invest 15% of the fund in low carbon investments.
Decarbonise the fund’s shareholdings in coal by 90% and oil and gas by 50%.
Support progress towards a transition to a low carbon economy by working with investors, fund managers, companies, researchers, and political leaders
This new approach reinforces past efforts by the fund to invest responsibly. In 2015 the fund invested £280 million in a new Legal & General fund that follows the ‘MSCI Low Carbon Index’, a list of companies that don’t invest in coal, major oil companies and other fossil fuels, reducing ‘carbon exposure’. The fund also invests £19 million in a ‘Low Carbon Workplace Fund’ which lends to energy efficiency programmes for commercial buildings.
Result: (Impressive) partial divestment
In November 2015 the South Yorkshire Pension Fund committed to low carbon investment policies that exclude ‘pure’ coal and tar sands companies. The fund is valued at £5.55 billion and invests around £317 million (5.7%) in fossil fuels.
On 17 September 2015 the investment board held a meeting where the Fund agreed that there should be ‘a long term tilt towards a low carbon economy within its portfolios’. It confirmed that there would be no direct investments in pure coal and tar sands companies.
‘Consideration will be given to reducing exposure to high-carbon intensity companies that fail to respond to engagement by not demonstrating a decrease in carbon intensity or carbon risk… Over time endeavour to manage a tilt within portfolios in favour of lower carbon assets in-line with the Paris Agreement, with a view towards progressively decreasing the Fund’s carbon exposure.’
Sheffield Climate Alliance‘s campaign for divestment of the South Yorkshire fund included colourful stunts outside the Pension Authority office, communication with the Fund Director and a long-running petition that has been steadily gathering signatures.
The following are examples of subsidiary local authorities calling on the council that runs their pension fund on their behalf, to divest from fossil fuels. These local authorities do not have direct control over whether divestment takes place as they are only one of several local councils that are part of their pension fund in question. However, divestment motions backed by fund employers can put considerable pressure on funds to act on their fossil fuel investments and invest responsibly.
Oxford City Council
In September 2016, Oxford City Council became the first local government in the UK to pass a motion on fossil fuel divestment. Oxford City Council pledged to make no direct investments in fossil fuel companies for ethical reasons.
The move was a hugely symbolic victory for the divestment movement, but the structure of Oxford’s council pensions means its effect has so far been limited. Oxford City Council is one of several local councils who are members of the Oxfordshire Pension Fund that currently invests around £42 million in fossil fuel companies. Divestment would require policy or action to be taken by the Oxfordshire Pension Fund, managed by Oxfordshire County Council.
The following council pension funds have made bold moves to invest their money in more ethical and low carbon ways, using a range of tools and strategies to make this happen.
The Greater Manchester Pension Fund, approximately £13bn in size, has made its investments more responsible by investing in joint infrastructure projects and renewable energy.
In 2014 it partnered with The Homes and Communities Agency to provide £25m in investment funding to build over 200 affordable homes in the Greater Manchester area. It is part of the Investing 4 Growth initiative, a joint project between six local government pension funds that seek ‘investments that have an economic impact as well as positive and environmental outcomes in the UK’.
It has invested £500m in an infrastructure investment partnership with the Lothian Pension Fund Authority, that funds renewable energy projects in the UK, and has a further partnership project with the London Pensions Fund Authority for infrastructure projects in Greater Manchester and London. GMPF has created a ‘special opportunities portfolio’ that enables funds to be allocated specifically to alternative investments like infrastructure.
Around 1% of its total funds to a special portfolio, called ‘Impact Portfolio’ that invests in renewable energy and through this portfolio, £10m has been allocated to UK renewable developer Albion Community Power to develop community scale energy.
Since 2009, Lancashire County Council (£5bn in size) has diversified its investments, increasing investments in infrastructure (directly with its own staff and indirectly via external fund managers) and property. The majority of the direct investments have been in renewable energy projects and companies in the UK, the US and Australia.
LCPF invested £12m in Westmill Solar Coop, the UK’s largest cooperative. This has been through ‘refinancing’ – investment made after, rather than before, the solar farm became operational making the loan less risky.
In September 2015 LCPF agreed to create a Responsible Investment Policy which will provide a more detailed long-term strategy for investing responsibly.
In July 2014, the London Borough of Croydon Pension Fund decided to switch its equity assets of around £350m to a Legal & General (L&G) global ethical investment fund to avoid exposure to tobacco, nuclear power and arms stocks.
In January 2016, Haringey Council voted to invest two-thirds of its London Borough of Haringey Pension Fund (HPF), around £220 million, in the MSCI World Low Carbon Target Index Fund (a list of companies that don’t invest in coal, major oil companies and most other fossil fuels). HPF has not fully divested from fossil fuels, and will actively ‘engage’ in persuading companies to decrease their carbon emissions.
Islington Pension Fund (IPF) recently announced that 15% of its total fund would be invested in infrastructure and social housing through a new portfolio.
The fund is relatively small in size (£971 million) which means greater financial risks compared to other pension funds, and less expertise in investing in special responsible pension funds. To overcome this issue, IPF is part of a project of London pension funds that are pooling their funds to create a Collective Investment Vehicle that will manage assets worth £24 billion. The CIV will be used primarily for infrastructure investments, and the CIV opens up possibility for individual funds to jointly invest in things like renewable energy or socially-useful infrastructure.
In 2009, the Strathclyde Pension Fund (around £14bn in size) created a ‘New Opportunities Portfolio’ (NOP) that invests in ‘alternative’ (or not so typical) types of assets like infrastructure, renewables, housing, smaller property and local regeneration. To date, NOP has invested in financing several small and medium enterprises as well as the construction of the Glasgow Commonwealth Games’ Athletes’ Village. In February 2016, it partnered with the Green Investment Bank and contributed £10m to a £60m investment in community renewable energy projects. This investment will go towards several renewable energy projects including a hydro-electric power station in Western Scotland.
Stepping stones: enabling’ policies, feasibility studies and reviews
The following local councils have passed motions that could enable divestment to take place, look in detail at the options and feasibility of divestment and reinvestment, or review their current investments. All these approaches could be useful tactics on the way to divestment, and can help show funds the different options they have to invest their money more repsonsibly.
The e-action convinced the GMPF’s Pensions Committee to change a key paragraph (8.1) in the SIP from: ‘The Fund … does not actively invest in nor permanently disinvest from companies solely or largely for social or ethical or environmental reasons.’
To the more helpful: ‘The Fund … may choose to actively invest in or disinvest from companies for social, ethical or environmental reasons, so long as that does not risk material financial detriment to the Fund.’
Feasibility studies and investment reviews
In the spring of 2015, City of Edinburgh Council and Glasgow City Council passed resolutions at full council meetings that called for a report to set out the feasibility, costs and benefits of introducing a partial or complete fossil fuel divestment strategy for the Lothian Pension Fund (£5 billion in size) and Strathclyde Pension Fund (approximately £14 billion), to be reviewed within the context of the funds’ statement of investment principles. Divest Lothian and Fossil Free Strathclyde have been two very active campaigns.
On the 20 October 2015, Bradford City Council passed a motion to review the investments of West Yorkshire Pension Fund in order to assess the necessity and feasibility of divestment, pushed by an active Fossil Free West Yorkshire Pension Fund campaign. Similarly, on the 8 October 2015 York Council agreed to review the investments and investment options of the North Yorkshire Pension Fund.
Despite the best efforts of successive governments to create an energy market, it remains notoriously uncompetitive. In Europe, municipal energy is commonplace and growing – we should do the same in Scotland.
The so called market is dominated by the big six utility companies, whose pricing practices have been criticised by the competition watchdog. Consumer trust in the market is low and they are reluctant to switch suppliers for a better deal given the hassle of switching. In fairness, the Big Six are often unfairly criticised and new entrants have been guilty of some pretty poor practices as well. The fault is in the system.
The IPPR, has made a convincing case for local authorities to set up municipally-owned energy companies that can supply electricity and gas at competitive prices and don’t have to distribute profits to private shareholders. By targeting those on low incomes, they can also help tackle fuel poverty. The local authority “brand” may also encourage otherwise reluctant low-income households to switch suppliers and save money. Nottingham and Bristol have followed this model and London, under a new Labour Mayor, looks likely to follow.
In Scotland a slightly different model is being adopted. Our Power is a community benefit society established and owned by a number of local authorities and housing associations. It too aims to tackle fuel poverty through the supply of affordable energy, focusing on social housing tenants, and seeks to buy a minimum of 30% of its energy from renewable sources. The Scottish Government is also at least considering setting up its own energy company, although details are limited.
The problem with these models is that they are simply playing the failed market and are relying on the same wholesalers. An alternative approach is for councils to establish genuine energy companies that generate renewable electricity and help households to install energy efficiency measures, funded from the long-term savings in their energy bills.
The APSE research paper, ‘Municipal Energy: Ensuring councils plan, manage and deliver on local energy’, found that:
For every £1 invested in renewable energy schemes there is a further £2.90 in cashable benefits
17 jobs can be created from every £1 million in energy saving measures on building
Energy efficiency and renewable energy can create 10 times more jobs per unit of electricity generated than fossil fuels
The local government sector annual energy bill of £750 million could be reduced by up to half by leveraging in spending power and using readily available and low cost technologies existing buildings.
Fife Council has done some of this with its £1.3 million turbine at the council’s recycling and resource recovery facility near Ladybank. This is expected to generate enough electricity to power 200 homes. They also generate clean energy from garden and food waste at the council’s anaerobic digester and from landfill gas. Aberdeen has similar projects as well as the city’s district heating scheme. A number of councils use solar photovoltaic panels.
Glasgow City Council is in the process of setting up an energy services company which will oversee the creation of renewables and low carbon projects in the city. It has mapped sites, but progress has been slow.
A more radical plan for the city has been proposed by Jim Metcalfe, based on research carried out by the Energy Saving Trust. This would involve the creation of a locally-owned company which would be able to reinvest profits from power generation on improving building insulation and reducing fuel poverty. The council should be leading on this, using council bonds, available at historically low levels, to finance the plan.
While electricity generation is important, we also need to make progress on heating homes. This is where district heating schemes come in. The Energy and Climate Change Select Committee heard in January that the £300 million government scheme to develop district heat projects needs a “regulatory investment framework” during this parliament to support future growth. District heating is a 50-80 year long investment and so you want to attract the lowest possible cost of capital to ensure the lowest cost for consumers. Councils are again in the best position to do this. In Scotland, work has begun on tapping into geo-thermal heat from disused mine workings.
Governments could help more by making energy efficiency a national infrastructure project. In Norway, the introduction of legislation to support district heating has shown a 150% increase in the installed capacity over the last 10 years. This has helped make it possible for the city of Drammen to create a district heating network that supplies several thousand homes and businesses with clean, affordable heat. This system didn’t rely on Scandinavian engineering, but the expertise of Glasgow-based Star Renewables.
There are a number of interesting municipal energy projects in Scotland and the rest of the U.K. However, they are patchy, small scale and not nearly radical enough. We need councils to take the lead, establishing full scale energy companies that can provide energy efficient homes with cheaper electricity and heat. They would also generate desperately needed revenues.
This would be municipal enterprise of the sort councils in the 19th Century created to revitalise our towns and cities. We now need 21st Century municipal leadership to take this forward.
Market values and the business models of fossil fuel companies do not reflect the limits established by policy commitments. Companies such as BP and Exxon Mobil are extracting fossil fuels for a world warming by 6 degrees C.
If and when a 2 (or 1.5) degree limit on warming is properly enforced this carbon bubble will burst and fossil fuel companies share value will plummet.
They will not be able to sell their unburnablecarbon reserves, and they will be burdened with useless machinery and infrastructure, no longer required due to declines in fossil fuel valuations, extraction and consumption.
Climate change can be expected to burden fossil fuel companies with stranded assets in a number of ways:
Regulatory stranding: a change in policy or the law limits or bans extraction;
Economic stranding: the costs of extraction rise above the market price of a resource;
Physical stranding: longer transport distances, extreme weather effects, flooding of mines and wells, droughts etc;
Scientists, advocacy groups and environmentalists have known for decades of the threat runaway climate change poses to society and our environment.
What these new concepts, the carbon bubble, unburnable carbon, and stranded assets, articulate coherently for the first time the financial risk that climate change, and policies to limit its effects, poses to the value of fossil fuel companies and by extension those who invest in them, such as council pension funds.
Carbon risks and council pensions
Local government has a fiduciary duty to manage their workers’ pension fund investments in the best interests of fund members and to consider and develop strategies to actively manage or avoid risks that may reduce the value of pension fund assets, ensuring prudent management of the pension scheme.
Asset managers and other industry professionals have traditionally viewed climate change as a social and environmental risk, but not a financial one. Instead climate change has been seen as an ethical issue, a secondary consideration to maximising the financial strength of pension funds.
The carbon bubble has shifted the debate, forcing carbon risk onto the table as a key discussion point.
“There is a growing international consensus that climate change is unequivocal” … “once climate change becomes a defining issue for financial stability, it may already be too late.”
Fund managers and investment professionals have been slow to change the way they invest to protect their investments from these risks.
Furthermore, as financial products have become more complex local council have managed fewer funds directly. Instead they outsource many investment decisions to external fund managers, who invest on their behalf based on a Statement of Investment Principles (SIP) drawn up by the council.
Council financial officers have been slow to brief their external fund managers to demand action on fossil fuels, leaving funds vulnerable to the carbon bubble.
Councils lose £683 million as coal crashes
During the 2015/16 financial year global oil prices slumped from $100 a barrel to less than $40 a barrel. 48 American oil and gas producers filed for bankruptcy in 2016 alone.
The price of coal was also hard hit. In April 2016, Peabody Energy, the world’s largest coal producer filed for bankruptcy protection in the USA.
Campaign group Platform analysed the investments of 61 council funds into BHP Billiton, Rio Tinto, Glencore and Anglo American over this period.
Rather than supporting divestment from fossils fuels, many local authority pensions advocate shareholder engagement with fossil fuel companies. In the case of climate change this could mean trying to convince companies like BP and Shell to stop extracting fossil fuels and promote energy efficiency and renewable alternatives.
In 2000 major oil company BP ran a global advertising campaign giving itself the new slogan ‘Beyond Petroleum’. Yet BP’s marketing proved to be greenwash. Their last renewable energy division was unceremoniously dumped in 2013 to allow it to concentrate on its ‘core’ business: fossil fuels.
Investors like pension funds engaging with fossil fuel companies seems highly unlikely to drive a low carbon transition. True engagement needs the pressure created by divestment. “Engagement without divestment is like a criminal legal system without a police force.”
“Our key aim [is to] continue to pay pensions as they fall due. Part of that trade-off involves ensuring our portfolio is diversified across sectors. This inevitably means we will invest across a range of industries and that will, at times, include fossil fuels.”
Effective action: divestment
Some are moving in a different direction. In October 2015, the Environment Agency Pension Fund became the first Local Government Pension Fund to formally commit to begin divesting from fossil fuels, agreeing to dump 90% of its coal assets and 50% of its oil and gas stocks by 2020.
Mark Mansley, the Fund’s Chief Investment Officer said:
“We believe it will help address the risks and opportunities as the impacts of climate change materialise and is entirely consistent with securing the long-term investment returns of the fund and our fiduciary [legal] duty.”
Campaigners are encouraged to engage with the financial managers and councilors responsible for running and scrutinising council pensions, demanding action to reduce carbon risk and divest from coal, oil and gas holdings.