Squaring fossil fuel holdings with climate pledges

Hello from FT HQ in London, where I and a few colleagues had an interesting conversation on Wednesday with Jo Taylor, chief executive of the $190bn Ontario Teachers’ Pension Plan.

OTPP’s embarrassing $95mn investment in crypto disaster FTX, of course, came up. I also took the chance to get Taylor’s thoughts on the most exciting investment areas that he sees in clean energy, at a time of feverish activity in that space.

Joe Biden’s Inflation Reduction Act had “set the cat among the pigeons”, Taylor said, with new investment opportunities opening up as other major economies rushed to roll out green incentive packages of their own. OTPP was looking for opportunities to profit from metals used in batteries, he said. It was also seeking ways to bet on emerging forms of clean energy, including hydrogen and fusion. And it was chasing investments in high-polluting utilities where it can drive a shift to clean power and earn high returns in the process.

Still, Taylor made clear that his green ambitions had boundaries. I asked for his take on the argument, made by some green finance campaigners, that pension funds should pursue climate objectives above and beyond the conventional approach to financial returns, since this would be in the ultimate interest of their members.

“I can’t do that. That’s the simple answer,” Taylor replied. “I have a fiduciary duty to maximise returns.”

For the investment industry as a whole, the search for maximal returns has led to trillions of dollars of exposure to the fossil fuel sector, as our first item today details. And our new team member Kaori explains the controversy surrounding Japan’s hopes of refitting its coal-fired power stations. Have a good weekend. (Simon Mundy)

New study sheds light on fossil fuel holdings

Nearly all the world’s biggest money managers have now declared their support for serious action on climate change — often with stirring words that sit awkwardly with their still huge exposure to the fossil fuel sector.

Yesterday brought a new indication of just how huge those investments are. In a study of about 6,500 major institutional investors (you can explore the full data set here) the German non-profit group Urgewald found that their total holdings in oil, gas and coal companies exceeded $3tn.

That figure is probably a big underestimate, Katrin Ganswindt, a campaigner at Urgewald, told me. Limited transparency around the investors’ bond holdings mean it is impossible to capture the full fossil fuel exposure of their fixed-income portfolios. But the data still gives a useful picture of the ownership pattern.

US institutions accounted for two-thirds of the total fossil fuel exposure — reflecting the companies’ economic clout, and the US’s status as the world’s largest oil and gas producer. It also showcases their slower pace of climate action compared with European financial groups.

It’s striking how concentrated the fossil fuel exposure was among a few handfuls of investors. Half of it sat with just 23 institutions (18 of them from the US).

Seventeen per cent was with BlackRock and Vanguard, the world’s two largest asset managers. But while BlackRock easily outranks its rival in terms of assets under management, with $8.6tn to Vanguard’s $7.2tn, its portfolio is significantly less fossil-intensive. Urgewald estimates Vanguard’s fossil fuel exposure at $269bn, slightly ahead of BlackRock’s $263bn.

Vanguard — which has $34bn of exposure to US oil major ExxonMobil alone — has outraged environmental groups with its approach to climate issues, including quitting the Net Zero Asset Managers initiative in December. BlackRock remains a member of the group, which is part of the Glasgow Financial Alliance for Net Zero launched ahead of the COP26 summit.

Altogether, more than 40 per cent of the fossil fuel exposure in the Urgewald report was attributed to Gfanz members. Depending on your perspective, that’s either a promising sign of the clout they can wield as they pursue their climate pledges — or a depressing sign of how little they have done to date. (Simon Mundy)

Inside the G7 ammonia debate

Last weekend’s meeting of the G7 climate and energy ministers in Hokkaido, Japan, produced a hefty 36-page communiqué, proclaiming a united front on their “steadfast commitment” to climate action. Behind the scenes, however, there was disagreement over the hydrogen-rich fuel ammonia — for which Japan’s government has an enthusiasm that is far from universally shared.

Reports of a leaked draft communiqué suggested it would include language promoting ammonia as a low-carbon fuel, a strategy actively supported by Japan. But the mention of ammonia faced a swift backlash by environmental groups that questioned its utility.

In the final document the bullish language around ammonia had been watered down, with the caveat that this and other hydrogen-derived fuels should be used “where they are impactful as effective emission reduction tools”.

Seb Kennedy, head of data insights at TransitionZero, a UK think-tank, said that it was “good news” that the original wording did not make it into the final document, saying that “ammonia is a dead end”. 

Japan is aiming to convert coal plants so they can run partially on ammonia — a compound of nitrogen and hydrogen. While tests to achieve a 50 per cent co-firing rate are ongoing, currently only 20 per cent is technologically possible.

“The idea of burning 100 per cent ammonia is really quite far flung, which is what you’d have to do to make any meaningful impact on emissions,” said Kennedy.

Data published by TransitionZero showed that ammonia co-firing was found to be far more emissions-intensive than natural gas. In fact, the think-tank found that even with a co-firing rate of 50 per cent, emissions from a gas-powered plant would still be slightly lower.

The pushback from the wider G7 could spell trouble for Japanese policymakers, utilities like JERA, as well as companies such as IHI Corp and Mitsubishi Corp, which are working towards developing co-firing technology in countries like the Philippines, Thailand, Malaysia and Indonesia. Efforts are also under way in the US state of Texas to explore the prospect of producing ammonia, in a joint study by Mitsubishi, South Korea’s Lotte Chemical Corp and German energy firm RWE.

And on the sidelines of the G7, Japan Oil, Gas and Metals National Corp, and trading house Mitsui & Co signed a memorandum of understanding with the Abu Dhabi National Oil Company to launch a joint study in the United Arab Emirates on ammonia’s emission reduction potential.

Pouring large sums of money into ammonia co-firing technologies could end up becoming a risky investment, warned Kennedy. “If there’s serious amounts of money being put into these projects, then you would have to ask the serious question around the creation of potential stranded assets down the line,” he said. (Kaori Yoshida, Nikkei)

Smart read

The FT’s John Plender delivers an excoriating attack on the “astonishing failure of corporate governance and investor stewardship over executive pay”, which he blames for driving perverse behaviour by executives while undermining the morale of their more modestly paid colleagues.