Investing for a stable climate: adopting the Oxford Martin Principles

29 June 2018

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Over the last decade, calls for fossil fuel divestment have targeted university endowments, public pension funds and religious institutions. Campaigners have presented fund managers with a binary choice: to remove companies involved in the extraction of coal, oil and gas from their investment portfolios, stigmatising them and applying moral pressure on governments to pass legislation targeting those firms, or to remain invested, implicitly condoning these companies’ contribution to climate change.

With rapid emission reductions required to achieve the Paris Agreement’s goal of limiting the rise in global temperature to ‘well below 2 °C’, institutional investors must consider the twin questions of how best to manage the financial risk of fossil fuel assets in their investment portfolios becoming stranded and meeting their ethical duties. Fossil fuel divestment, alone, does not necessarily achieve this goal. Rather, it confines investor action on climate change to a comparatively small proportion of global emissions (the fossil fuel industry) and passes away the potentially powerful lever of investor engagement to less ethically-minded investors who purchase divested stocks.

In light of this and following advocacy by the College’s undergraduate body, St Hilda’s College (University of Oxford) have rewritten their investment policy to actively engage with all firms in which they invest and pursue a medium-term policy of divestment from those that remain incompatible with our stipulations. The policy adopts the Oxford Martin Principles for Climate-Conscious Investment as a framework to shape the College’s investment decision-making. St Hilda’s is the first institution to do so.

Our advocacy has also helped contribute to the decision by Sarasin & Partners to implement the Principles to guide their new Climate Active Engagement Fund (in which St Hilda’s will invest). Following a briefing paper provided by Dr Matthew Ives and myself on behalf of the Environmental Change Institute and Smith School of Enterprise and the Environment, the Bishop of Oxford, the Revd Steven Croft, will also recommend the Church of England adopt these Principles at a General Synod debate next month.

The science-based Oxford Martin Principles provide a rigorous framework for engagement with firms. In contrast to other sustainable investment criteria, such as the Transition Pathways Initiative (currently employed by the Church of England), the Oxford Martin Principles focus on the need to reduce net greenhouse gas emissions to zero, as is required by Article 4 of the Paris Agreement. The Principles make the following requirement of firms:

1. Commitment to net-zero emissions

If global temperatures are to be stabilised at any level, global net greenhouse gas emissions must be reduced to zero. Although some industries will decarbonise faster than others, all must ultimately reduce their emissions to net-zero for temperature stabilisation. Companies should develop and publish a net-zero emission plan and commit to a date or temperature increase by which to achieve this goal. The long-term temperature goal of the Paris Agreement potentially requires net-zero emissions to be reached around mid-century.

2. Profitable net-zero business model

Business plans should ensure firms’ profitability when compliant with Principle 1. This provides valuable information for investors concerning the long-term financial viability of a firm under efforts to mitigate climate change.

3. Quantitative medium-term targets

Mid-term targets (e.g. 2030) should be provided that can be monitored by investors. These should be in line with achieving a net-zero business model in the time frame stipulated by Principle 1. This principle ensures transparency and validation as companies decarbonise.

In implementing the Oxford Martin Principles, investors should require board-level vision statements which provide transparent, viable strategies to eliminate firms’ net greenhouse gas emissions in line with the Paris Agreement goals. Companies should also explain what assumptions they have made regarding technological development, carbon pricing, financing of emission reductions (such as installation of carbon capture and storage technologies), and the sensitivity of their targets to different societal trajectories, such as the Shared Socioeconomic Pathways.

Firms compatible with this interpretation of the Oxford Martin Principles will have developed plans which are aligned with the goals of the Paris Agreement. For those companies which do not develop such strategies, their business plans gamble on a failure to achieve the Paris goals, imposing a financial risk on their investors. In such circumstances, the stigmatisation arising from divestiture may be the most effective course of action for ethically-minded investors.

These Principles therefore provide investors with guidance on engagement with targeted firms and when to divest if engagement efforts have proven to be fruitless, as is the strategy adopted by St Hilda’s College.

The public statement on St Hilda’s College’s new investment policy notes that the ‘College believes that this active ownership approach will ensure it is doing what it can to support the aims of the Paris Agreement while … protecting the College’s long-term financial interests’.

Oxford’s researchers have led the way in providing the academic basis for aligning investments with the challenge of tackling climate change. The financial and ethical advantages of this approach to climate-conscious investing have been rightly celebrated by St Hilda’s. Now it’s time for the other institutions to follow suit.

Rupert Stuart-Smith is a student at St Hilda’s College and the School of Geography & the Environment, University of Oxford.

This opinion piece reflects the views of the author, and does not necessarily reflect the position of the Oxford Martin School or the University of Oxford. Any errors or omissions are those of the author.