Church of England's Pivot on Fossil Fuels

The Church of England has decided that its investment arms will divest from fossil fuels, amid frustration that Shell and other companies are not transitioning quickly enough to low-carbon energy. Despite being a small investor, the Church's move carries weight due to its past engagement with oil companies on climate issues. While some mainstream asset owners have divested, most prefer engagement over divestment for now. However, as the gap between industry commitments and climate goals widens, more investors may also reconsider their positions.

Announcing that its investment arms will "disinvest" from fossil fuels this year, the Church of England said last week that this was triggered by "disappointment" that Shell, at its recent annual general meeting, "failed to increase the ambition of its short, medium and long term emissions reduction targets." As for the wider industry, the Transition Pathway Initiative (TPI) also recently found that "no oil and gas major" is aligned with a 1.5°C pathway, the Church noted in a statement. And while some oil companies have come "close to achieving" alignment with 1.5°C, "none have met the threshold to remain investible," it added.

The Church of England is a small investor and not the first among "ethical" ones to divest, but its move is nevertheless significant because its Pensions Board has been actively interacting with oil companies over the past decade on climate issues. Until recently, it was involved in "very intense engagement" with Shell as one of the Climate Action 100+ lead investors. Back in 2020, the board's chief responsible investment officer Adam Matthews, who is also TPI's chairman, called the UK-based major's Scope 3 emissions reduction targets "really groundbreaking." Shell then said it would proactively support decarbonization in sectors such as aviation and road freight while indicating "willingness to decide not to provide energy" to companies in those sectors that are not aligned with net zero, Matthews told Energy Intelligence.

Lost Confidence

But last month, in an opinion piece in UK newspaper The Telegraph, he wrote that he had "lost confidence" in Shell as "short-term is now influencing longer-term horizons" and the company's "enormous profits" will not translate into "significantly scaled investment in the transition." Matthews also expressed disappointment at BP's recent announcement that it was "weakening its climate targets." The Pensions Board will now focus engagement on energy demand and policymakers "to explore a phased moratorium of oil and gas that ensures fairness for emerging and developing economies."

Shell and BP have recently announced strategic pivots under which they will produce more hydrocarbons for longer. European oil companies however remain the "least unprogressive" ones in the industry, says activist think tank Carbon Tracker Initiative's Mike Coffin. But "to have reduced their commitment at this time when the science and the international process call for greater ambition" represents a "very significant" — and disappointing — change in approach, Matthews insists.

Mainstream Inertia

So far, beyond numerous ethical investors such as universities, foundations and religious organizations, few mainstream asset owners have said they would divest from oil and gas. The main exceptions are the Netherlands' ABP, one of the world's biggest pension funds with over $500 billion in assets, and several municipal pension funds in the US from cities including New York, Los Angeles, Chicago, Washington and Baltimore. ABP said in 2021 it would stop investing in fossil fuel producers because "we see insufficient opportunity for us as a shareholder to push for the necessary, significant acceleration of the energy transition at these companies."

Most large asset owners continue to prefer engagement over divestment. This includes California's CalSTRS and Calpers which oppose pending legislation that would prevent new investment in fossil fuel companies and require divestment by 2030. Engagement supporters insist that divested shares are set to end up with investors that consider climate as a low priority, while divesting means losing influence over carbon intensive companies embarking on a long transition. "Under any scenario, the energy transition will still take decades," BlackRock CEO Larry Fink wrote in its recent letter to stakeholders where he said that oil and gas are both expected to "play a vital role" in meeting global energy demand through the transition.

Widening Gap

But that attitude might change, at least for some investors, as the gap between the oil industry's commitments and 1.5°C trajectories widens, Coffin believes. He sees a parallel with the coal industry some 10 years ago when investors started to divest and banks to cut lending. The share price of coal companies started to fall before peak coal consumption effectively happened as market consensus on long-term coal demand gradually changed. "That's the risk, from a financial perspective, facing investors in oil companies over the coming years once market consensus is reached that peak oil and gas is actually happening."

Given that risk, and oil stocks' excellent performance in recent month, "cynics" might even argue that, regardless of ethical and climate considerations, now is the best moment for selling the sector, Coffin notes. Oil companies were probably undervalued two years ago, but they could be overvalued now, and this may never happen again as the global energy system transitions, he said. "Moral considerations are currently paramount, but over time it will be cold hard financial logic that will drive investors out of the oil stocks," think tank RMI's Kingsmill Bond concurs. "Who wants to be caught holding stranded assets at the top of the market after all?"

Philippe Roos is a senior reporter and senior analyst at Energy Intelligence. A version of this article originally ran in EI New Energy.