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This is why NOT investing in Fossil Fuels is tricky

Ethical investing is tricky.  While something might seem simple on the surface, there are so many layers and factors involved in making a decision to continue investing or stop investing in a particular area.  We will cover many of the areas that make this tricky in future newsletters, but we are starting off with one of the most tricky – Fossil Fuels.

We all know that Fossil Fuels (using, producing) are bad for the environment and are a big contributor to climate change.  There is clear evidence that climate change is changing our weather systems and causing damage not only to property (floods, fires, cyclones), but also causing deaths.  As an aside, I have been rewatching the terrific series ‘Newsroom’, made from 2012-2014 and there is an episode talking about how climate change is going to have devastating consequences, and everyone sat around in disbelief.  The things that they were talking about are already happening in 2022.

Default KiwiSaver funds are required to divest from fossil fuel production – and we are assisting our clients to minimise their material exposure to fossil fuels, but it is complicated, as we outline below.
The trickiness of investing in Fossil Fuels manifests in many ways:

1.    Defining and Identifying what is a Fossil Fuels company

What is a Fossil Fuels company? 

A miner? An industrial process that produces pollution and CO2 through using fossil fuels?  A car producer, a business that uses lots of cars fueled by lots of fossil fuels?  A supplier to any of these businesses.

Definition and identification of what a Fossil Fuels company is difficult for the first stage of deciding whether to invest in fossil fuels, or negatively screen them out.  Here are some examples of actual definitions, to illustrate how complicated this is.

Mindful Money (our researcher into ethical investments): Exploration, production, refining and transport of oil, gas and thermal coal, including ownership of reserves (>10% of business involved).

Default KiwiSaver Funds:  The definition is to stop the funds from investing in companies that own proved or probable reserves in coal, oil or gas and derive at least 15 per cent of their revenue from exploration and extraction of coal, oil or gas, or whose primary business activity is included in one of five sub-sectors. Those sub-sectors include: integrated oil and gas businesses - companies that engage in all three fields of petroleum extraction as well as transportation and refining and marketing, crude oil producers, offshore drilling, oil equipment and services and companies that mine, process and market coal.

ANZ Investment Management: Generate more than 10% of their revenue from the extraction of unconventional oil and gas. This includes revenues from oil sands, oil shale (kerogen-rich deposits), shale gas, shale oil, coal seam gas, coal bed methane as well as Arctic onshore/offshore.
As you can see, these are the different definitions from three different New Zealand organisations, and they have different definitions and different targets of what ‘fossil fuels’ means, cue confusion.

2.    Ideal situation vs reality

We are still at the beginning of the process to transition to renewal energy as an alternative to fossil fuel.  While there are apparently many Tesla’s in Wellington there are many more fossil fuel powered vehicle throughout New Zealand and the rest of the world.  We are just at the start of the journey to change from being fossil fuel powered to relying on renewable energy.

Interestingly, New Zealands electricity is 84% powered by renewable energy (hydro, wind, solar, geothermal), but we still need the coal powered Huntly power station as backup, to power the demand in Auckland, and so that we don’t ‘go dark’. The target is for New Zealand to reach 100% renewable energy by 2035 (for our electricity supply) (https://www.nzte.govt.nz/page/renewable-energy)

The Paris and Glasgow agreements are focused on reducing the increase in temperature from pre-industrialisation temperatures by 2050. Some countries, companies, sectors are targeting changes to their business before this time period, but we are at the beginning of this process.

3.    Catch-22 – we need fossil fuels to produce renewable energy

Because we are at the start of this massive change, we still need to build wind farms and solar arrays, and we need the trucks (still powered by fossil fuels) to do this.  There are other needs for fossil fuels in producing wind turbines – hundreds of tons of materials like steel, concrete, fiberglass, copper an minerals used in permanent magnets.  https://www.forbes.com/sites/christopherhelman/2021/04/28/how-green-is-wind-power-really-a-new-report-tallies-up-the-carbon-cost-of-renewables/?sh=7e9261e273cd

4.    Fossil Fuel companies are investing in renewable energy

Yes, there are independent companies investing in and building renewable energy – our ethical fund managers are investing in them.  But the large profitable fossil fuel companies are also investing in renewable energy.  By eliminating any material investment in these companies (which many of our ethical investors are aiming for), it is important to understand that this may be reducing the overall development of renewable energy solutions.

5.    Even the decision makers can’t agree on what is ‘good’ and what is bad.

The EU has just released a new taxonomy (system of classification) for environmentally sustainable economic activities that includes nuclear power and natural gas as ‘sustainable’.
In the theme of ‘we are still at the beginning of this transition’, these technologies have been identified as ‘bridge technologies’ towards Europe’s 2050 goal of net-zero emissions.
There are questions about how nuclear power (with its issues of waste disposal) and natural gas (which is clearly a fossil fuel) can meet this criteria.

https://oliverhartwich.com/202...

More confusion.

6.    Ethics of increasing oil and gas prices on poorest people.

What are the ethics of reducing provision of oil, thereby increasing the price, affecting the poorest of populations around the world.  Many people in developing countries, and the poorer people in developed countries are still (and will be for some time) reliant on fossil fuel powered devices for transport, cooking and other day to day activities.

Summary

As you can see, while it is very desirable to reduce investment and exposure to fossil fuels, it is complicated.  Our goal is to assist our clients with understanding this issue and to show them what their material exposure is to fossil fuels involved companies (using the Mindful Money definition).  We have a goal to have those material exposures as low as possible, as soon as possible, while understanding that we are still at the start of this transition.

Ethical investing is tricky.  While something might seem simple on the surface, there are so many layers and factors involved in making a decision to continue investing or stop investing in a particular area.  We will cover many of the areas that make this tricky in future newsletters, but we are starting off with one of the most tricky – Fossil Fuels.

We all know that Fossil Fuels (using, producing) are bad for the environment and are a big contributor to climate change.  There is clear evidence that climate change is changing our weather systems and causing damage not only to property (floods, fires, cyclones), but also causing deaths.  As an aside, I have been rewatching the terrific series ‘Newsroom’, made from 2012-2014 and there is an episode talking about how climate change is going to have devastating consequences, and everyone sat around in disbelief.  The things that they were talking about are already happening in 2022.

Default KiwiSaver funds are required to divest from fossil fuel production – and we are assisting our clients to minimise their material exposure to fossil fuels, but it is complicated, as we outline below.
The trickiness of investing in Fossil Fuels manifests in many ways:

1.    Defining and Identifying what is a Fossil Fuels company

What is a Fossil Fuels company? 

A miner? An industrial process that produces pollution and CO2 through using fossil fuels?  A car producer, a business that uses lots of cars fueled by lots of fossil fuels?  A supplier to any of these businesses.

Definition and identification of what a Fossil Fuels company is difficult for the first stage of deciding whether to invest in fossil fuels, or negatively screen them out.  Here are some examples of actual definitions, to illustrate how complicated this is.

Mindful Money (our researcher into ethical investments): Exploration, production, refining and transport of oil, gas and thermal coal, including ownership of reserves (>10% of business involved).

Default KiwiSaver Funds:  The definition is to stop the funds from investing in companies that own proved or probable reserves in coal, oil or gas and derive at least 15 per cent of their revenue from exploration and extraction of coal, oil or gas, or whose primary business activity is included in one of five sub-sectors. Those sub-sectors include: integrated oil and gas businesses - companies that engage in all three fields of petroleum extraction as well as transportation and refining and marketing, crude oil producers, offshore drilling, oil equipment and services and companies that mine, process and market coal.

ANZ Investment Management: Generate more than 10% of their revenue from the extraction of unconventional oil and gas. This includes revenues from oil sands, oil shale (kerogen-rich deposits), shale gas, shale oil, coal seam gas, coal bed methane as well as Arctic onshore/offshore.
As you can see, these are the different definitions from three different New Zealand organisations, and they have different definitions and different targets of what ‘fossil fuels’ means, cue confusion.

2.    Ideal situation vs reality

We are still at the beginning of the process to transition to renewal energy as an alternative to fossil fuel.  While there are apparently many Tesla’s in Wellington there are many more fossil fuel powered vehicle throughout New Zealand and the rest of the world.  We are just at the start of the journey to change from being fossil fuel powered to relying on renewable energy.

Interestingly, New Zealands electricity is 84% powered by renewable energy (hydro, wind, solar, geothermal), but we still need the coal powered Huntly power station as backup, to power the demand in Auckland, and so that we don’t ‘go dark’. The target is for New Zealand to reach 100% renewable energy by 2035 (for our electricity supply) (https://www.nzte.govt.nz/page/renewable-energy)

The Paris and Glasgow agreements are focused on reducing the increase in temperature from pre-industrialisation temperatures by 2050. Some countries, companies, sectors are targeting changes to their business before this time period, but we are at the beginning of this process.

3.    Catch-22 – we need fossil fuels to produce renewable energy

Because we are at the start of this massive change, we still need to build wind farms and solar arrays, and we need the trucks (still powered by fossil fuels) to do this.  There are other needs for fossil fuels in producing wind turbines – hundreds of tons of materials like steel, concrete, fiberglass, copper an minerals used in permanent magnets.  https://www.forbes.com/sites/christopherhelman/2021/04/28/how-green-is-wind-power-really-a-new-report-tallies-up-the-carbon-cost-of-renewables/?sh=7e9261e273cd

4.    Fossil Fuel companies are investing in renewable energy

Yes, there are independent companies investing in and building renewable energy – our ethical fund managers are investing in them.  But the large profitable fossil fuel companies are also investing in renewable energy.  By eliminating any material investment in these companies (which many of our ethical investors are aiming for), it is important to understand that this may be reducing the overall development of renewable energy solutions.

5.    Even the decision makers can’t agree on what is ‘good’ and what is bad.

The EU has just released a new taxonomy (system of classification) for environmentally sustainable economic activities that includes nuclear power and natural gas as ‘sustainable’.
In the theme of ‘we are still at the beginning of this transition’, these technologies have been identified as ‘bridge technologies’ towards Europe’s 2050 goal of net-zero emissions.
There are questions about how nuclear power (with its issues of waste disposal) and natural gas (which is clearly a fossil fuel) can meet this criteria.

https://oliverhartwich.com/202...

More confusion.

6.    Ethics of increasing oil and gas prices on poorest people.

What are the ethics of reducing provision of oil, thereby increasing the price, affecting the poorest of populations around the world.  Many people in developing countries, and the poorer people in developed countries are still (and will be for some time) reliant on fossil fuel powered devices for transport, cooking and other day to day activities.

Summary

As you can see, while it is very desirable to reduce investment and exposure to fossil fuels, it is complicated.  Our goal is to assist our clients with understanding this issue and to show them what their material exposure is to fossil fuels involved companies (using the Mindful Money definition).  We have a goal to have those material exposures as low as possible, as soon as possible, while understanding that we are still at the start of this transition.



 

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