Climate change the ‘most common’ reason for portfolio exclusion

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Concern about climate change is the most common reason for financial groups to exclude companies from their portfolios, according to research that underlines how the phenomenon continues to affect investment decisions despite a pushback against “woke” capitalism. 

The findings, from a coalition of non-profit environmental and sustainability groups, show that 40 per cent of exclusions are motivated by concern over climate change. Some 17 per cent of exclusions are driven by worries about companies involved in weapons manufacturing, with tobacco accounting for 12 per cent. 

The research indicates that financial groups continue to factor ESG — environmental, social and governance — questions into decisions, even as Republican politicians and state treasurers in the US lead a backlash against what they call “woke” capitalism, arguing it is not up to the financial industry to police companies. 

The coalition of NGOs, which includes Friends of the Earth Netherlands, Fair Finance International and Profundo, a Dutch research consultancy, looked at exclusions by about 150 pension funds, insurance companies and banks and compiled a list of 4,532 companies that have been excluded by 87 financial institutions in 16 countries. The final tally includes separately listed subsidiaries. 

The groups behind the research said that they hope the publicly available list will put additional pressure on those identified companies to change their practices. 

The most excluded company is Poongsan Corporation from South Korea, which is cited by 75 investors and banks due to its involvement in the manufacture of controversial weapons such as cluster munitions. Poongsan is followed by US defence group Northrop Grumman and India’s industrial conglomerate Larsen & Toubro. 

Fossil fuel companies are included in the climate category, as well as in ones relating to human rights violations. Among the companies most excluded by investors and banks for their investments in fossil fuels were Cenovus Energy, Suncor and ExxonMobil.

None of the companies named were immediately available for comment.

The tracker “shows that fossil fuels are becoming a ‘sin’ industry”, said Ward Warmerdam from Profundo, adding that it should “spur oil and gas companies to speed up their energy transition efforts with concrete and immediate actions to avoid losing investors”.

Some investors have become concerned about the financial risks of climate change in recent years, fearing that companies that fail to prepare for the switch to a greener economy could become very hard to sell. 

Norway’s $1.4tn oil fund, the world’s largest endowment fund, is among the big investors that has put Cenovus and Suncor on its exclusion list, citing “unacceptably high” greenhouse gas emissions.

There has also been a rise in investors announcing plans to exit fossil fuel intensive companies. ABP, one of the world’s largest pension funds, sold its holdings in fossil fuel companies in 2021, while earlier this year, the Church of England said that its pension and endowment funds, which collectively oversee more than £13bn, would sell off shares in more than 10 oil majors, including Exxon and Shell.

“We welcome the fact that several financial institutions exclude companies due to the links with detrimental climate impacts from financing,” said Peer de Rijk at Friends of the Earth Netherlands. It demonstrates that “some financials are willing to take steps to reduce their financed emissions,” he added.