• 21 jun 2019
  • Blog
  • Assetmanagement

Getting our hands dirty for a cleaner world

Calls to divest from coal never come with the advice: sell to whom? A true and sustained shareholder dialogue with companies is more effective, argues Han van der Hoorn.
Han Van Der Hoorn 480X480 Pggm

Han van der Hoorn

Senior Macro Strategist

More and more, we are being asked: why don’t you sell all your investments in coal? After all, the use of coal for (primarily) electricity generation has a negative impact on the climate and the environment. To achieve the goals of the Paris Agreement, the world needs to switch to sustainable alternatives rapidly. Thankfully, this is happening already, although not everywhere, and not yet fast enough.

PGGM invests a small (and declining) share of its portfolio in companies that make use of coal. These companies emit greenhouse gases that cause climate change. Excluding these companies will stop emissions, or so the thinking of pressure groups seems to be.

But is this reasoning correct? The short answer is no. Excluding implies that we need to sell the equities and bonds we are holding. Not to the company itself, but to other investors. The company doesn’t disappear, but will have different owners or financiers. More often than not, the company doesn’t even notice; there is no need to refinance itself and it can continue its operations.

Unfortunately, supporters of the divestment campaign never tell us whom we should sell to. This matters, a lot. It is clear that these campaigners do not want us to sell to other responsible investors; they are being asked to sell as well. The group of investors that remains is the category interested in financial returns only, typically with a short horizon and sometimes less concerned about environmental consequences.

PGGM is a responsible and engaged investor, with a long-term investment horizon. We engage in a critical and constructive dialogue with companies, ask them to reduce their emissions where possible and embed sustainability in their strategy. Our focus is on companies with the ambition and ability to improve, including several utilities willing to transition to renewable energy generation. In addition, we use our voice at every shareholder meeting.

Last year, for instance, we voted against the construction of a new coal-fired power plant at an extraordinary shareholder meeting at ENEA in Poland. Responsible investors held a minority stake, as the resolution was adopted with a 75 percent majorityvote. A lesson could be that responsible investors should hold (many) more – not fewer – shares, if they wanted to block the construction of a new plant.

With a majority stake, responsible investors could also shut down existing coal-fired power plants. Unfortunately, though, these investors would not survive for very long. Shutting down plants that still generate revenue, would imply realising financial losses that come at the expense of the primary task of asset managers – generating financial returns – and would risk their long-term viability. The same is true for holding majority stakes: the return need to be not too low, but the risk would be too high.

Our strategy is therefore a mix of divestment and stewardship. We sell investments in companies with the highest emissions (as a percent of revenue) – in the energy, utilities and materials sectors – not because we believe this will make the world a better place, but because these companies are at risk if the transition to a sustainable economy accelerates. At the same time, we encourage these and other companies to become more sustainable.

Note that this dilemma – divestment does not solve socioecologic problems – applies more generally. For instance, in the production of palm oil, in heavy industries, transportation, and agriculture, similar and other issues arise on which engaged investors can challenge companies, such that they become the solution rather than the problem to the sustainability challenge the world faces.

The main contribution of the financial sector to the energy transition lies in financing companies that offer alternatives to fossil fuels, including renewable energy and energy efficiency. We have invested nearly 8 billion euros in companies that provide climate solutions, as part of the investment in solutions mandate that has been given to us by PFZW. Our investments generate renewable electricity for 3.5 million households, a lot more than the number of beneficiaries of our clients. This is more effective than selling coal or other carbon-intensive companies to other, less scrupulous investors.

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