Divestment is the last resort for responsible asset owners seeking to create change, says Storebrand
Several large European banks including BNP Paribas, Credit Suisse, ING, Natixis, Rabobank, and UBS made the headlines earlier this month when environmental groups alleged that they had financed some USD10 billion of oil trading from the Amazon rainforest over the past decade, despite its deleterious impact on the environment and the livelihoods of the indigenous peoples in the region.
The alarm was raised by research groups Amazon Watch and Stand.earth, who called oil extraction in the region “a gateway to deforestation and increased agricultural and industrial activity”.
The banks that were reported to have backed the oil trade were accused of double standards, as all had made public environmental commitments, such as to the 2015 Paris climate accord, the United Nations sustainable development goals, and promises to protect forests.
In the aftermath of the report, Swiss bank UBS and Netherlands-based Rabobank scrambled to state that they had stopped financing Amazonian oil, either wholly or in part, and Natixis and ING issued hasty pledges to “look into” the report’s findings.
Pressure has been mounting on financial institutions to “put their money where their mouth is” and offload their stakes in dirty industries, such as fossil fuels, over the last few years, with university endowments and pension funds among the first to announce wholesale divestments.
Jan Erik Saugestad, is the chief executive of USD91 billion Norwegian asset management firm, Storebrand Asset Management. The pension fund and insurer has been leading the charge on responsible investment for two decades,
Speaking about the recent revelation that European banks have backed the Amazon oil trade, he says: “Investors in banks should be concerned and challenge the policies the banks have when it comes to climate risk, biodiversity risk, or other nature-related risks, but there is also a need to engage the government, as they set the regulation and reporting requirements.”
Storebrand recently ditched investments in oil producers ExxonMobil and Chevron, as well as miner Rio Tinto. In the past, the asset manager has also cut ties with meat packing firm Marfrig, as well as with eleven unnamed palm oil producers, in protest at the deforestation they create in South America and Asia.
“For us, divestment is really the last resort,” says Saugestad. “We would like to stay as long-term investors and responsible owners, and engage with the companies. But clearly, at a certain point, the risk of staying invested may become too high.”
He subscribes to the view that if enough investors shift capital away from the worst-performing companies and into companies with solutions that are sustainable, this will drive up the cost of capital for unsustainable companies, and incentivise those firms to change.
Saugestad says this works “eventually”, but adds that “if you really want to create change, I think you have to engage with the companies sitting in the middle, that can improve and become better”.
Continuing to hold stakes in companies that are neither the most nor the least sustainable in their field, means investors have more leverage to request better sustainability practices. “If you can get the bulk of the companies to get better, that will have a significant impact.”
Engagement also becomes a much more effective tool when investors work together. “Partnership is the new leadership,” says Saugestad.
As a member of Climate Action 100+, a global coalition of investors worth a total of USD35 trillion, Storebrand has helped persuade Royal Dutch Shell to halve its carbon footprint by 2050, BP to align its investments to the Paris Climate Agreement, and coal miner Glencore to cap production.
However, investors and companies are only two pieces in the puzzle.
“Investors alone cannot really substantially change the outcome, just working through the cost of capital,” says Saugestad. “It’s really about the engagement and interaction between investors, governments, and companies.”
Storebrand’s most recent initiative saw it lead a 29-strong group of financial institutions worth a total of USD3.7 trillion, to demand action from the Brazilian government to preserve its rainforests.
“We made it clear what outcomes we desired in order to stay invested and what we believe was required to be successful investors in Brazil,” says Saugestad.
Saugestad spoke with Brazil’s Vice President Hamilton Mourão in an online meeting in July, and says he received a “genuine response” where real commitments were made.
“The Vice President expressed clearly that they were committed to keep deforestation rates at the historical minimum level, ‘at his watch’, as he expressed it; that they would respect the indigenous rights in accordance with international obligations; and that they were convinced that economic development and protection of the environment are complementary.”
There was an immediate result of Storebrand’s engagement, in that the Brazilian government decreed a 120-day ban on fires in the Amazon, and deployed the Army in the region to guard against wildfires.
“It's the result on the ground that counts. We will monitor actual deforestation rates, and the data that’s being made available to track deforestation risks in supply chains, particularly when it comes to the soy and cattle.”
Another knock-on effect of the initiative was that a group of 39 Brazilian companies, including some of Brazil’s largest firms, went to the government with similar demands, which was spurred on by their desire to maintain access to foreign markets and foreign capital.
“That’s maybe one of the most valuable results so far, that it seems to have opened up a much deeper and broader discussion in Brazil,” notes Saugestad.
As a pension fund, Storebrand is a very long-term investor, and so the companies it invests in must have policies and regulations that are sustainable for the future, as the world faces a growing climate change crisis.
Storebrand does not necessarily end its dialogue with a company after it has divested. It has even bought back into companies a year or two later “when we believed that they'd really improved their business operation”.
Saugestad gives the example of industrial manufacturing giant Siemens, which the asset manager exited after the corruption scandal in 2008 in which it was revealed that the manufacturer had paid over USD1.4 billion in bribes to government officials across the globe. Siemens then reshaped its business, and Storebrand reinvested, which Saugestad says has been a success, as it “actually became among the 100 best companies in our universe”.
Saugestad could even envisage having companies like Marfrig on Storebrand’s books again, “if they are able to prove that they have better traceability and they can really be truly different, with deforestation-free value chains”.
Nevertheless, there is little sign of deforestation slowing in Brazil so far. According to official government data from Brazil’s National Space Research Institute INPE, an area of rainforest larger than the city of São Paulo was cleared during the month of July, adding up to 9,205 square kilometres of deforestation over the past 12 months,
“Both in terms of fires and in terms of deforestation, there is clearly progress that needs to be made,” affirms Saugestad.