Trucost News / 08 Apr 2014

Funds get to grips with stranded assets

Trucost has assessed the Environment Agency Pension Fund’s exposure to stranded assets held in sixteen investment portfolios representing over two thirds of the EAPF’s 2.3bn AUM.

Trucost has assessed the Environment Agency Pension Fund’s exposure to stranded assets held in sixteen investment portfolios representing over two thirds of the EAPF’s 2.3bn AUM. The research focussed specifically on potential stranded assets related to the fossil fuel reserves of extractive companies within the fund’s active and passive listed equity portfolios.

Each portfolio’s exposure was compared to its appropriate benchmark. Trucost found that active portfolios were significantly less exposed to embedded carbon and none of the portfolios were significantly more exposed to embedded carbon stores than their benchmark index.

Lauren Smart, Executive Director, Trucost said, “Our research evidences the success of the Environment Agency Pension Fund’s focus on active carbon risk mitigation strategies by its investment managers.”

Stranded assets are those which suffer unanticipated or premature write-offs, downward valuations, or are converted to liabilities. The concept of fossil fuel asset stranding was first highlighted in 2011 by Carbon Tracker’s ‘Unburnable Carbon’ report, which developed the investment thesis that, should we wish to avoid catastrophic climate change impacts and thus limit maximum temperature rises to 2°C, the majority of fossil fuel reserves listed on global stock markets would be ‘unburnable’.

Fossil fuel extractives companies form a significant portion of global stock markets and investment funds. In addition, the supply chain reach of fossil fuels is inescapable in several other economic sectors, including primary industry, energy and transport. This exacerbates the extent to which very many investment funds, and by distillation very many more investors, are exposed to the consequences of fossil fuel asset stranding.

Trucost’s report provides the following recommendations for funds seeking to actively manage risk from carbon stores embedded in their portfolios:

  • Engage on disclosure: Engage with legislators and reporting bodies to advance standardised disclosure of fossil fuel reserves data in public corporate reports.
  • Engage on CAPEX: Engage fossil fuel extractives companies to explain expenditure to develop new fossil fuel reserves and strategies to drive a transformational shift to a low carbon economy.
  • Maintain investment exposure, maintain influence: Reducing investment exposure to the fossil industry does not precipitate a reduced prevalence of that industry. Be part of the conversation to influence the discussion.
  • Raise public awareness of stranded assets: One of the most effective tools in encour­aging governments to legislate is gaining wider social acceptance of the business case for a transition to a low carbon economy.

Faith Ward, Chief Responsible Investment and Risk Officer at the Environment Agency Pension Fund said, “The EAPF has made considerable progress in addressing climate risk, but there are still opportunities to further reduce the financial risk to the portfolio and potentially increase the returns of the fund as a shareholder. Based on Trucost’s recommendations, we have identified key actions of implementation and will publish progress against these actions via our website (www.eapf.org.uk) and in our annual report and accounts.”

Further information

Download Stranded Assets: Fossil Fuels

Media contact

Sarah Wainwright, +44 (0)20 7160 9800, sarah.wainwright@trucost.com