Pension firm intensifies engagement with select oil companies

Whilst Danish pension firm PFA has now divested equities in US oil companies, the investor is now placing its chips on Total and Shell as the "winners of tomorrow" due to green energy engagement. Although it's not just about CO2, says PFA Asset Management COO.

A icon of North Sea oil, Shell's old Brent Alpha platform in in the process of being scrapped. | Photo: LINDSEY PARNABY/AFP / AFP

During this last year, Denmark's largest private pension company, PFA, has taken numerous investment positions connected to climate. Last May, the firm joined the Net-Zero Asset Owner Alliance, a group targeting climate neutrality in their asset portfolios from 2050.

At the moment, PFA reveals the scope of emissions reductions to be achieved come 2025. However, its newer offering, Climate Plus, already operates with a zero-emissions profile and furthermore aims to become carbon negative as of 2030.

All that notwithstanding, PFA is not necessarily receiving universal praise for its friendlier climate profile.

In March, Financial Times published an article detailing points of criticism directed at the Danish group for its bond holdings tied to fossil fuels – not least the USD 187m in Canadian sub-sovereigns fixed income securities – specifically those from Alberta – which de facto imply PFA's underwriting of oil extraction from tar sands.

Meanwhile, Danish daily Information recently shed light on the pension company's engagement in French oil and gas supermajor Total's cooperation with Myanmar's junta regime.

Winners of tomorrow

Specifically, investment in the French major is otherwise a stand-alone issue for PFA. Whereas the pension group has divested equities in US Big Oil companies like Exxon Mobil, Chevron and Conoco Phillips, PFA has doubled its holdings in Total and has at the moment of writing roughly EUR 134m invested. Moreover, the Danish institutional investor has retained its position worth only slightly less that in Shell.

Ørsted is thereby the only company in the energy sector taking up more space in PFA's stock portfolio than Shell and Total. This choice is based on the fact that these two European oil outfits, just like Ørsted, are making waves in offshore wind as well as other renewable power technologies  – and that each of these have announced plans to become practically climate neutral from mid-century.

It's important to be careful in playing the transition card. One should pick one's battles in areas where change can be expected, and that's why we have selected companies with which we share strategic elements.

PFA Asset Management COO Rasmus Bessing

"From once having invested broadly in energy companies, we conducted a dramatic sorting last year and selected those we believe will be the winners of tomorrow. This decision is based on both financial and climate priorities. We have analyzed their ambitions in regard to transformation and specific objectives for CO2 reductions, and make our purchases accordingly," says PFA Executive Director and Chief Operating Officer Rasmus Bessing, adding:

"With that said, we are not in love with select companies. So, that picture could change, just as we will not persist in excluding US oil companies if these can make convincing cases based on the same parameters."

Even more climate friendly

That the pension group's investment criteria are complex and subject to change is underlined by the situation in Myanmar. It's doubtful that developments in the Asian country factored into PFA's decision to increase its its engagement with Total being that this took place months before the military's coup d'état in February. Nor had that aspect even been problematized before this this interview was completed.

Rather, invitation to dialog regarding investment inclusion or exclusion seemed to be sucked down into the undercurrent of critique in the Financial Times report. Even though getting attention from the British business media would normally be rather desirable for many a company, that specific story wasn't quite what PFA had dreamt of, Bessing acknowledges.

"Especially because we had done so much right," the COO says while walking up the stairs in the pension group's Copenhagen headquarters.

Despite the half-empty building, the visage of a young woman smiles from every corner. As the consistent figure in PFA's roll-up banners, she appears over-dimensioned holding a red balloon advertising for Climate Plus. Her suggestion is not so much about choosing a climate-friendly pension saving product – that would be tantamount to saying the rest of the firm's products are the opposite; rather, the ad would have customers make an even more climate-friendly selection.

This is ostensibly a theme occupying many minds at PFA.

Non-binary transition

Such advertisement also makes this preoccupation obvious for everyone else. Even though Climate Plus comprises less than 1 percent of PFA's total portfolio, customers have placed more than DKK 5bn (EUR 672m) in the offering during its first year since launching.

The offhand question is then why would PFA bother itself with the winners of tomorrow instead of merely ejecting each and every fossil energy company from its portfolio to go all-in with the winners of today. That's to say, not investing in businesses that promise to clean up their act looking forward, but rather those presently harvesting the bounty of already having done so.

"That, is, of course, also a consideration," Bessing replies only to almost immediately stifle the thought.

"But it's not so binary that we can go from the one to the other overnight. We acknowledge that oil and gas will play a role for several years yet, and even though one could naturally choose to say that it makes best sense to completely divest, we have a slightly different opinion. We want to influence select companies from within."

Green oil company perfidy

PFA is hardly alone in doubting the viability of immediately changing the world's energy consumption. Nor is everyone convinced of the substance of oil companies' new green clothes. In a poll of institutional investors managing assets worth USD 15trn in total, published by Procensus in April, only 17 percent believed that oil companies would succeed in transforming from Big Oil into Big Renewables.

As the International Energy Agency showed last year in its special report on oil companies' transition, there's still a long way to go. The proportion of investments in oil and gas changed from 99.6 percent in 2015 to 99.2 percent in 2019.

Among climate-conscious investors, there seem to be two dominant approaches to affecting change: One favors complete divestment and future exclusion of fossil energy assets, while the other advocates maintaining investment to use as leverage in dialog to get businesses to change their ways – influencing from the inside, so to speak.

The main argument against divestment and exclusion is that equity positions would simply change hands in favor of unscrupulous investors that don't give a damn about the world's climate. On the other hand, maintaining ownership in fossil energy assets is criticized for doing more to ensure black companies' continued existence rather than achieving the purported greening effect.

Picking one's battles

Rasmus Bessing also acknowledges that individual influence is negligible for a investor such as PFA owning a mere per mille of equity interest in Total and Shell.

"PFA is a big investor. We are also a large investor in a European context. However, these a indeed very large companies, so the idea that we alone can make the difference makes no sense. Our real opportunity here is to be one of many pushing in that direction," says the COO, who rejects the notion that seeking change behind lines is a cheap excuse.

"I think it's important to be careful in playing the transition card. One should pick one's battles in areas where change can be expected, and that's why we have selected companies with which we share strategic elements. Whether that's an easy position to take? I don't think so. The alternative is that the stocks are purchased by parties that don't care about taking the dialog with the companies."

Ongoing evaluations

The COO recognizes that PFA is indeed taking that approach in selling off US oil stocks, but it's about gathering force in areas that make the soundest sense, he reasons.

Exxon and Chevron equities are not the only assets being offloaded. The same thing is true of, for instance, Norway's Equinor, British BP and Spain's Repsol, which is otherwise often highlighted as the oil outfit with the highest level of climate ambition. Moreover, the US oil industry is not being completely excluded being that several hundred million Danish kroner are invested in weighty groups like Baker Hughes, Schlumberger and Halliburton.

Even further down on the list of stocks figure a long row of other energy companies: Take for example Duke Energy, which earlier this year entered a settlement after being exposed for having directly leaked 39,000 tonnes of coal ash into a river in North Carolina. Then there's Czech CEZ, one of Europe's last remaining coal companies. Add to that Offshore Oil Engineering, a subsidiary of China's largest oil group, China National Offshore Oil Corporation, blacklisted by the US in January this year.

For many energy businesses, PFA has invested merely trivial sums in the grander scheme of things. CNOOC, for instance, has only received DKK 15m of the pension company's approximately DKK 140bn in equity holdings. From a cynical perspective without care given to climate, one could consider how this investment strategy would appear if the parameters were investment size rather than probable risk of placing one's backside at a height ripe for future lashing.

"It could be questioned whether some of our exposures will necessarily continue to make sense – not least when the sums involved are so small in a portfolio worth DKK 600bn. But it's a process we consistently evaluate in our equities team," Bessing admits.

More than CO2 in mind

The risk of appearing in more unflattering articles in Financial Times is, though, not what's driving the process.

On the way back down the stairs, the COO spells out that both climate change mitigation and PFA's placement within that agenda is of major concern. Bessing senses this both at work and at times when it has been possible to meet with people in private life – not least in regard to attracting clientele to the pension company's climate product, he points out.

The latter aspect can, however, also simply be ascribed to the economic common sense of retirement savers. All things considered, valuations of green equities during 2020 exploded, having Ørsted's share price, to mention one, appreciate 87 percent, while Vestas' surged by 112 percent. Total and Shell concurrently depreciated by 30 and 46 percent, respectively.

We are not a philanthropic organization, and nor are we a company that only has CO2 in mind.

PFA Asset Management COO Rasmus Bessing

On the other hand, the argument can be made once again for the winners of tomorrow. Whereas Vestas and Ørsted have seen their valuations respectively decline by a fifth and a third this year, the market values of PFA's two European supermajors have jumped by roughly 10 percent – but probably more borne on the back rising oil prices rather than corporate climate ambitions.

Bessing also concedes that consideration to size of savers' pensions is nonetheless still of primary concern.

"These must never become each others' opposites. Regardless of how laudable a company's purpose is, we must never invest in it if we lack confidence that doing so will contribute to our customers' future income base," he states and continues:

"In our analysis of Total and Shell, nor have we only looked at their pretty Powerpoint presentations and said they look nice. We have assessed possible price developments for green investment assets and analyzed various scenarios weighing size and return on investment based how it will affect our forecast ROI. We are not a philanthropic organization, and nor are we a company that only has CO2 in mind."

English Edit: Daniel Frank Christensen

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