Carney warns on climate carnage for investors

Written by Rebecca O'Connor on 30th September 2015

Our collective exposure to the carbon dioxide emissions choking the earth is not just about how many more deaths due to respiratory illness we see each year.

It is also about our personal wealth.

This week, Mark Carney, the Governor of the Bank of England, fully yanked the ostrich’s head out of the sand, declaring banking and insurance industries – besides the oil and gas sector itself – as highly vulnerable to climate change-related risks.

This is not just a warning to abstract industries – sitting in offices in the Square Mile. Because, as the financial crisis proved, no industry, in our inter-connected and co-dependent global economy, is an island.

It is a warning to all of us. And bizarrely, the less wealth you think you have, the more likely you are to be exposed to it.

Big players in UK oil and gas have already lost between 28% and 40% of their value in the last 12 months – smaller and mid-cap players who focus on new discoveries have lost even more – Tullow Oil is down 75% in the past year.

It looks increasingly likely that such price shocks and concomitant share price declines are not isolated blips that will sort themselves out, but a violent and jolting long-term, structural pattern. Of ultimate decline? That could take generations to unwind – the peak oil theory has been largely discredited. There will be those who can get away with making short-term profit plays in oil and gas for many years to come.

But what if you are a regular saver, close to drawing their modest average pension of £59,000-ish, in the coming months?

Well, your meagre pot will have been made even more meagre losing £1,000 approx. over the last year.

The typical exposure of a pension fund or other investment fund, such as a stocks and shares ISA, to fossil fuels is around 6 per cent. The smaller the pension fund, the greater the impact of a percentage loss.

Remember the financial crisis, caused by all those sub-prime home loans defaulting? Well it could happen again, only this time, possibly worse, because it will be the value of entire stock markets collapsing, dragged down by the death throes of oil and gas, destroying the value of any savings you have managed to build up (and possibly ultimately increasing the cost of borrowing).

Even without you realising, without you consciously choosing to be exposed to these dirty fuels of the past, fund managers have been squirrelling away your cash – for the most part with perfectly decent intentions it has to be said, to make you dependable long term returns, partly in oil and gas.

This could turn out to be a wholesale mismanagement of people’s money so widespread that it would be impossible to point the finger, because you would be damning the entire investment industry. Fund managers can use the argument they were acting prudently, diversifying – it wasn’t their fault that 19% of the FTSE is made up of oil, gas and related commodities, after all.

But the ignorance, it has to be said, seemed partly wilful.

There were warnings of a carbon bubble long ago. What sounded like shrill conspiracy theories from over-active imaginations in the environmental sector now look disturbingly prescient.

Two years ago, when I spoke to the Association of British Insurers, which represents the multi-billion pound industry that takes responsibility for our pension and insurance money, you could hear the wind whistling between the spokesperson’s ears when I asked about ‘divestment’ (the campaign movement to get big investors to withdraw funds from fossil fuels) and what its views were on it. Around the same time a prominent IFA said “well no clients ever ask us about low carbon, so we don’t offer them”, failing to acknowledge that a client depends on their IFA for information on precisely this sort of risk, and not the other way round.

Look at oil and gas sector notes from some of the biggest global analysts – even in the last 12 months, their myopic risk sections talk about failing to discover new potential well sites, and the reopening of trade with Iran – no mention anywhere of the carbon bubbles and stranded assets that Carney is talking about.

Ditto the annual reports of some of the UK’s biggest pension funds. With the exception of the Universities Superannuation Scheme, which has come under pressure from well-versed academics to develop an authoritative voice on its attitude to carbon risk, the phrase “carbon risk” will not appear in any search and find.

Yet carbon risk has gone from being the elephant standing in the room to a dying child, coughing and spluttering on the carpet while everyone passes the canapés.

It’s no one’s fault that we are in this mess and it’s everyone’s too (though some more than others, don’t get me wrong.) One of the reasons not much has been done is that few people in the industry have a clear idea of how to unravel this mess. Through diversification and a complete dependence on oil and gas for our entire standard of living, extracting oneself, whether you are a company or an individual, completely from the ill effects of this rout is harder than getting that camel through the eye of a needle. For heavens sakes, I call myself the Good Money Girl and I drive a diesel car, because I am just normal, not wealthy, and I find it difficult to always walk the talk, even as one of the shouters.

Shell, which for all of its plans to drill the Arctic (now a $7 billion mistake), is not without awareness of these issues and funds groups on how to solve the energy transition without actually itself making an energy transition.

Even the most enlightened companies, such as Unilever and IKEA, find it hard to avoid the use of the products of fossil fuels and commodities in the products they sell, and the shift towards more sustainable energy generation and material use does not happen overnight, particularly when profits must be maintained.

In the absence of clear industry leadership, this movement out of fossil fuels has come so far from the ground up.

The divestment campaigning, through 350.org, Friends of the Earth and Greenpeace, is going great guns. But they aren’t mainstream. Mark Carney is – he’s the Governor of the Bank of England. And you are.

So what can you do? Mr Carney hinted said the way to go would be carbon impact assessments applied to every investment. That’s a good start, but the problem for lower income pension savers is they can’t just call up their wealth manager and ask them to re-allocate their SIPP to lower carbon assets. Another problem is to do with the fiduciary duty to only act in the financial interests of your client if you are a fund manager. Until now, this has meant ignoring ESG concerns, although after Carney’s speech, this surely gives carte blanche to give due consideration to carbon risk in any investment decision on a financial rather than an ethical basis.

If you are in an employer-pension scheme, it is very, very difficult to liberate your pension savings from carbon exposure. Your money is pooled with everyone else’s, and ironically, shifting out of oil and gas now would crystallise some of the losses that unless you are withdrawing your pension money, are only paper losses. So this would lead to everyone’s pension pot losing some value, in the short term at least. Even so, it makes it harder for the fund managers to justify reducing oil and gas exposure at the present time, which is why those few that are aware are largely adopting a wait and see approach.

You could switch your current account and savings to a building society to avoid your high street bank’s exposure. Unfortunately, investment banking divisions have not been siphoned off from high street banking arms – as per recommendations post-financial crisis – and investment banks are big spenders in oil and gas (meaning your current account is too). Building societies, on the other hand, are less exposed, as they are simply in the business of lending and taking deposits.

If you have a stocks and shares ISA, check the asset allocation (beyond the top ten holdings if necessary). If you think oil and gas companies such as Shell, BP and BHP Biliton are over-represented, consider switching to a low carbon stocks and shares ISA. These exist, and their performance has matched if not exceeded their non-low carbon counterparts over the last one to five years. Check Edentree Investment Management, the Jupiter Ecology Fund or Alliance Trust. Do not take it for granted that an ethical fund is not invested in oil and gas. It could be, for reasons too various to go into here.

But most importantly, remember, this is not a vague, general risk that will only be felt by a set of suits somewhere in the City. It is your money, your mum’s, your Grandma’s and your kids. Carbon risk is not just about the air we breathe and higher temperatures, it threatens life as we know it, which includes your cash.