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April 24, 2023updated 25 Apr 2023 7:49am

Investors still grappling with oil and gas transition

The NZAOA's caution against fossil fuel investment has caused controversy, but pressure is mounting to accelerate the transition to net zero.

By Adrian Murdoch

Net Zero Asset Owner Alliance, Oil and Gas
Pumped up. NGOs have criticised the NZAOA for being too closely aligned with oil and gas. (Photo by Thaiview via Shutterstock)
  • The Net Zero Asset Owner Alliance (NZAOA) warns against investing in long-lived oil and gas assets that could become stranded in a 1.5°C-aligned transition.
  • Gfanz members have left due to disagreements on fossil fuel investments; the Net-Zero Insurance Alliance (NZIA) has seen two insurers depart.
  • A coalition of environmental organisations and shareholders has filed resolutions in Japan’s largest banks calling for greater disclosure on net-zero commitments.

At the very end of March, the Net Zero Asset Owner Alliance (NZAOA) – an $11trn AUM member-led initiative of 85 institutional investors committed to transitioning their investment portfolios – published a position report on the oil and gas sector.

“We strongly caution against investment in long-lived assets that are likely to become stranded in a 1.5°C-aligned transition, and we underscore the reality that business-as-usual investments in oil and gas infrastructure are inconsistent with such a scenario,” was its frank conclusion.

Yet it still pulled its punches, talking about the effect on investors rather than the industry itself.

Günther Thallinger, board member of Allianz SE and chair of the NZAOA, spoke of the challenge of “balancing the supply of oil and gas on the one hand, and society’s demand for affordable and reliable energy on the other”.

Criticism was swift. “This paper makes the [NZAOA] look more aligned with Big Oil than it is with net zero,” says Lucie Pinson, director and founder of Paris-based think-tank Reclaim Finance.

But while it would be easy to see this as another failure for investors who continue to suckle at the teat of Big Oil, not all of them feel the same way.

Much in the same way that Germany’s GLS Bank has walked out of the Net-Zero Banking Alliance (NZBA) because member banks persist in funding new oil and gas projects, Danish pension fund AkademikerPension has threatened to leave the NZAOA because the paper on fossil fuel investments didn’t go far enough.

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“The position doesn’t live up to our standards and we will have to consider our involvement in NZAOA moving forward,” chief investment officer Anders Schelde told Reuters.

Unintended consequences

An initial unintended victim of this may be the Glasgow Financial Alliance for Net Zero (Gfanz), which has come under intense pressure with members leaving because it is both too constraining and doesn’t go far enough.

The umbrella group for the seven net-zero initiatives for financial institutions was launched in April 2021 by UN climate envoy Mark Carney in collaboration with the UN Race to Zero Campaign. In December, Vanguard Group, the world’s second-largest asset manager and with $7trn AUM, flounced out of its asset management arm, the Net Zero Asset Managers (NZAM) initiative, claiming it needed to speak with an “independent voice”.

More recently, the Net-Zero Insurance Alliance (NZIA) has seen two insurers leave – first Munich Re on 31 March, and then Zurich Insurance on 6 April.

“In our view, the opportunities to pursue decarbonisation goals in a collective approach among insurers worldwide without exposing ourselves to material antitrust risks are so limited that it is more effective to pursue our climate ambition to reduce global warming individually,” said Joachim Wenning, chief executive of Munich Re.

Zurich Insurance gave no reason, though critics were quick to ascribe them. “It is not credible for Zurich to engage their customers on the net-zero transition as long as the insurer doesn’t end their support for the expansion of oil and gas extraction themselves,” says Jennifer Buchli, campaigner at Swiss pressure group Campax.

Net-zero pressure builds

But the teething problems of Gfanz and the financial sector at least show engagement. “It’s clear a lot of work needs to be done to ensure the world is deploying capital consistent with a 1.5°C pathway,” a Gfanz spokesperson tells Capital Monitor.

Certainly, the pressure is building. On 11 April, a coalition of environmental organisations and shareholders filed resolutions in Japan to the country’s largest banks: Mitsubishi UFJ, Sumitomo Mitsui and Mizuho, as well as Mitsubishi, Tokyo Electric (Tepco) and Chubu Electric which jointly own Jera, the country’s largest thermal power generator.

The resolutions call for greater disclosure by the companies on how they will meet their net-zero commitments.

As Capital Monitor reported at the beginning of March, Mitsubishi UFJ and Mizhuo were the third and fourth largest funders of fossil fuel companies globally between the date that they joined NZBA and August 2022. Although Sumitomo Mitsui lagged, it still found the time to fund fossil fuel expansion to the tune of $1.6bn.

“The megabanks’ climate policies, targets and transition plans lack credibility,” says Eri Watanabe, Japan energy finance campaigner at Market Forces.

But the pressure is working. At the end of March, France’s Banque de France announced it would exclude companies developing oil and gas extraction projects by the end of 2024.

“After announcing last year that it would exit coal entirely and strengthen its hydrocarbon exclusions criteria by end-2024, the Banque de France has now decided that, by the same date, it will exclude from its portfolios any company working on new fossil fuel extraction projects,” it said in a statement.

It is a move that has won widespread approval. While movement in the financial sector as a whole towards net zero has been slow, there is now at least a sense that it is speeding up. There is a recognition that it has passed the point of throwing out platitudes and that it had better step up.

[Read also Gfanz: Why GLS Bank’s exit is a serious setback]

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