UK Government ban on fossil fuel divestment threatens future pensioners

The UK Government's plan to ban local authorities and their £14bn pension funds divesting from companies they deem unethical, such as fossil fuels, could put the pensions of future public sector retirees at risk. UK councils have around £14bn of pension funds into fossil fuels; and this fund is far from alone as analysis of Australian pension investments last week showed that 15 funds lost AUD 5.6bn on their fossil fuel investments.

Just last month independent analysis showed that New York's teacher's pension pot had lost US$135 million because of its oil and gas investments - over a period in which the Standard & Poor 500 Index (considered one of the best bellwethers of the US economy) rose by more than 7.4%.

As the company behind the analysis, Advisor Partners pointed out: "This translates to more than a 25% decline in the plan's oil and gas stocks ... Exxon Mobil and Chevron Corp were the largest contributors to performance, where these two names alone caused plan participants to lose more than $39 million."

This fund is far from alone, with the Guardian reporting analysis of Australian pension investments last week revealing that 15 funds lost AUS$5.6 billion on their fossil fuel investments:

"Many Australians are losing thousands of dollars a year from their retirement savings because their super funds continue to invest in fossil fuel companies. Members of 15 super funds lost an average of A$1,109 per member in fossil fuel investments over two years. Some funds with heavier investments in fossil fuels lost almost triple that."

As the Guardian went on to report this weekend, investors were told that "companies and investors that shun sustainable, low-carbon assets stand to lose a lot of money."

Oil trader Vitol's CEO has expressed his view that the current run of low prices is likely to persist for a decade, saying recently that crude oil will likely stay at US$60 a barrel for at least ten years. And by then, the development of industries converting renewable energy to fuel may put an effective cap on future fossil fuel prices at around that level.

A bad idea for so many reasons

All in all, preventing councils from boycotting oil and gas is ill considered and threatens not just local authority assets but the financial security of future pensioners, especially in light of COP21 and the commitment made to investing in renewables.

As other investors and fund managers divest from fossil fuels, public sector retirees are put at risk of holding a disproportionate percentage of 'stranded' fossil fuel assets in their pension pots.

But given the penalties that could come from divesting and the pressure these councils' budgets are under, it is less likely that councillors will instigate changes to prevent risky fossil fuel assets shrinking employees' pension funds, and invest in the energy sources of the future.

And it's pensioners that stand to lose out. Last year investing in renewables would have made you up to 7% returns, according to the FT's analysis of the 6 major renewable investment funds. These aren't small scale funds.

Similarly, last month's January's UN Investor Summit on Climate Risk had a majority of the 500 presenters, who represented a combined US$22 trillion (£14.5 trillion) in assets, saying low-carbon investment was no longer one of corporate social responsibility, but one of cold hard cash.

In recent months, we've seen several councils look to invest in community energy, a sector that grew rapidly last year and supports local initiatives, for example cutting carbon emissions or helping reduce energy poverty. Doing this also lets them set up local supply businesses, giving them an additional income.

Investing in renewables

This ban on ethical investment is not the work of a government who has traditionally claimed to put local communities first. It is not the work of a government who has claimed to have a long-term economic plan.

Nor is it the work of a government that listens to its own central banker, Mark Carney, Governor of the Bank of England, who warned Lloyds insurers last September of the risks of ignoring the systemic dangers that climate change created for the world financial system:

"Our societies face a series of profound environmental and social challenges. The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity. While there is still time to act, the window of opportunity is finite and shrinking."

Given that there is a desire to divest these pension funds from fossil fuels; that there is strong economic evidence that shows doing so will be a prudent investment; and that there are many examples that show inaction will be damaging; this announcement, which makes it harder for councils to divest from fossil fuels and instead invest in renewables is dangerous and ill-thought.

And one that will hurt the environment, pensioners and the country's finances.

J W Bode is CEO of Mongoose Energy, the UK's community energy leader. The company works with its bencoms, such as BWCE and BEC, to develop sites and increase the number, value and capacity of community-owned renewable energy assets.