2. Establish exclusion and inclusion criteria
Establish criteria for screening companies that are easy to understand and empowers managers to deliver your mandate.
The scope of exclusions
The DivestInvest pledge asks investors to exclude, at a minimum, the 200 largest fossil fuel companies by reserves. Some go further and seek to exclude more companies that they identify as particularly vulnerable to a collapse in the fossil fuel supply chain of prospecting, extracting, refining, equipment, and services. Others prefer to exclude fewer companies, often basing their decisions on the proportion of revenues derived from fossil fuels. Recently, some companies, such as AP7 and the UK Methodist Church have decided to exclude companies they feel are “not compliant with the Paris Climate Agreement.
What route you choose will depend on your values and rationale for divestment, as clarified in Step 1. Consider easily communicable policies that will resonate with diverse stakeholders.
Case Study: Exclusions
- The Wallace Global Fund: “Avoid investment in companies that play key roles in the exploration, production, and retailing of fossil fuels, especially coal.”
- RS Group: “Divest from all exposures to coal, oil and gas exploration and production companies.”
- Copenhagen: “Divest all companies earning 5% of revenue from coal, oil, and gas prospecting, extraction, refining, and equipment and services.”
What to include
Getting the right exposure to climate solutions, though “positive screening” for example, is as important as what is excluded. Investible climate solutions now exist across every asset class of a typical portfolio and in every market. Examples include companies and projects delivering resource efficiency, sustainable energy generation, storage, and transmission, low carbon transport, buildings and sustainable agriculture and forestry.
One approach is to prioritise “environmental leaders” where after screening out fossil fuel extraction companies, investors pick securities which perform best in their sector for ESG, or equivalent metrics. The criteria for ESG evaluations can differ greatly between fund managers, so be sure to understand the underlying assumptions of any metrics.
Investors considering divestment – criteria for a managed decline
“Manage Decline of Fossil Fuel Businesses” sets out five criteria to help institutional investors decide whether or not to divest from companies which extract fossil fuels. Investors, considering divestment, can use all five of the criteria* to assess whether fossil fuel company activities are aligned with the managed decline pathway and goals of the Paris Agreement, and if investment in these companies should continue.
The paper also provides the five criteria as a basis on which investors can improve their engagement strategies with fossil fuel companies; and aims to improve the impact of divestment, by suggesting that demands for a managed decline are made more clear and central to the divestment announcements of investors.
The criteria are:
- No lobbying for policies that reduce the probability of the 1.5°C goal.
- No exploration spending.
- No approval or acquisition of new fossil fuel infrastructure or projects.
- A clear plan for wind down of fossil fuel extraction.
- Remuneration policies that support managed decline of fossil fuel extraction.
*The criteria are not in any way altering the call for divestment of all fossil fuel companies. The criteria are instead guiding principles through which investors can consider divestment, or remain invested in order to align the operations of fossil fuel companies with a managed decline.