Stephan Langen: The rearguard battle around investing in fossil fuels

Stephan Langen: The rearguard battle around investing in fossil fuels

ESG-investing Energy Transition
Stephan Langen (foto archief ASN Impact Investors)

This column was originally written in Dutch. This is an English translation.

By Stephan Langen, Head of Portfolio Management at ASN Impact Investors

Now that a third major pension fund is exiting fossil investments, the discussion is rearing its head again: does divestment help a sector become more sustainable, or do you make further progress through engagement or even activism? As far as I'm concerned, it's a rearguard action.

As a major investor, should you remain invested in major oil companies? The familiar arguments for and against were listed again last week in the FD.

Are you also under fire? Then hang in there, because the discussion is being conducted with the wrong arguments.

The 'remainers' argue that you can achieve something at fossil companies by putting sustainability on the agenda as a shareholder, for example by voting along with shareholder resolutions, or by conducting a dialogue with the board through engagement. They say that you have to be patient with them, because the transformation of a company with fossil fuels as its core business does not happen overnight. Moreover, say those who remain, oil companies are indispensable for the energy transition. I really miss valid arguments for that last argument.

In the meantime, the 'leavers' in the discussion prefer to vote with their feet: only by divestments, by depriving a company of capital, do you force it to fundamentally change its strategy. The 'stayers' counter this by saying that the place of critical leavers is quickly taken by more lenient shareholders. They leave everything the same, so that the divestment is counterproductive. Being able to claim to do something good apparently takes precedence over the obvious evil of not doing more.

For an investor who acts based on the belief that the economy of the future is fossil-free, the above discussion is not relevant. It does not invest in companies with fossil core activities. And he is also not a party to the above discussion, in which parties that do not dare to make the real choice measure each other.

This is not to say that instruments such as engagement have no place in sustainable investing. It does work, provided it is not focused on what a company does, but on how it carries out those activities and in this case how sustainable its business operations are. And if you want to escalate matters, I also see opportunities for success by putting sustainable proposals on the agenda as a shareholder.

But put it on the agenda of a company that fits within a sustainable future. There are great companies that really accelerate the sustainable transition with their solutions, but do have a CO2 footprint with their activities. In such a case, we are fully on board, but we are just as confident in discussing the decarbonization of activities.

We still see a preference for financial returns over social returns. We still think in economic and not ecological terms. Of course, sustainable investing involves difficult dilemmas. But the choice for a fossil-free future does give you clear direction as an investor. And it frees you from the yes-or-no quagmire in which the fossil discussion will hopefully one day completely disappear.

Stephan Langen is Head of Portfolio Management at ASN Impact Investors. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments.