Engagement is a more complicated but more constructive route to reducing carbon emissions
Last week the Guardian newspaper launched a campaign urging the Wellcome Trust and the Bill & Melinda Gates Foundation to sell our investments in fossil fuel companies. Below, Wellcome Trust Director Jeremy Farrar explains the Trust’s position in a comment piece first published by the Guardian.
For two decades I lived in Vietnam, leading research into the health challenges affecting low- and middle-income countries. It is clear from my personal and professional experience that environmental change, including climate change, is among the most significant of these: rising temperatures, altered weather patterns, urbanisation and habitat loss have serious implications for nutrition, disasters and diseases such as dengue, malaria and ebola.
When I became director of the Wellcome Trust 18 months ago, I had no need to convince colleagues that this issue deserved our attention. In 2010 the Trust made understanding the connections between environment, nutrition and health one of its five key challenges and has since spent more than £32m on research that explicitly addresses these questions and still more in areas including infectious disease and population health that are influenced by a warmer world. We are developing this emerging discipline – where we must often stimulate excellent research before we can fund it – and we are increasing our support.
The Trust thus has considerable common ground with the Guardian’s fossil fuels campaign. We agree that substantially reducing carbon emissions is necessary if we are to restrict global warming to 2°C. We agree that fossil fuel producers have responsibilities to society that could often be better fulfilled. This is especially important to us because of our long-term approach to making investments. We agree that investors should consider environmental issues and journalists have every right to challenge us.
We do not agree, however, that the strongest contribution the Trust can make to a decarbonised economy is a commitment to avoid investing in a list of 200 fossil-fuel companies, compiled according to the size of their reserves rather than the position they take on climate issues. Our view is that it is more constructive and effective to take a case-by-case approach to investments in the energy sector. We consider individual companies on their merits, including the extent to which they meet their environmental responsibilities, when we decide whether or not to invest or stay invested. All companies engaged in fossil-fuel extraction are not equal.
We combine this approach with active engagement with the companies in which we invest. We use our access to boards to encourage them to adopt more transparent and sustainable policies that support transition towards a low-carbon economy. And we adopt the same position with companies that consume fossil fuels as we do with the companies that supply them. Carbon emissions are driven by both supply and demand: it makes no sense to devote attention purely to one side of this equation.
This maximises our influence as investors. We understand the attraction of the grand gesture for which the Guardian is calling, but such a gesture can be made only once. By maintaining our positions, we meet boards again and again, supporting their best environmental initiatives and challenging their worst. We would not be able to have the frank discussions we require if we published details, but we are confident that our engagement has impact. Were we to sell our holdings, it is unlikely that the buyers would exert the same influence. But when we are not satisfied that a company is engaging with our concerns, we are perfectly prepared to sell.
This strategy recognises the unavoidable fact that fossil fuels are essential to the economy, life and health, and will remain so for decades under any conceivable scenario. This is especially true in low- and middle-income countries, where growth is the best guarantor of better health. What is critical is to move away from the most carbon-intense fossil fuels towards those with lighter carbon footprints, and towards renewables and nuclear energy. Some fossil fuel companies – though by no means all of them – are playing important roles in this transition, for example by investing heavily in natural gas and carbon capture and storage. Some also champion carbon pricing, and already use carbon prices internally in assessing investment projects.
We back this policy with transparency. The Guardian has been able to name the Wellcome Trust’s most significant holdings because, unusually, we declare these in our annual report. Divestment campaigners should also be aware that our approach has had the same effect as some of the divestment initiatives they have most praised.
Stanford University pledged not to make direct investments in companies whose principal business is coal for energy (rather than steel). We have had no such investments for many years. The Rockefeller Brothers Fund (RBF) has initially pledged to reduce its investments in coal and tar sands to less than 1% of its portfolio. Again, our investments already meet this benchmark. (The RBF also has a longer-term goal of complete divestment). We also invest in alternative energy technologies, from novel and sustainable biofuels to nuclear fusion. This is a risky sector for any investor, but we continue to make these investments.
Last week, the Guardian’s editor was asked in a webchat whether divestment and shareholder engagement are complementary. He replied that "both look good to us" but that engaging to support decarbonisation is more complicated to explain, and thus hard to build a campaign around. Such complexity may indeed be tough as a campaign, but we embrace it as an investor. Our responsibility is not to heed the catchiest slogan, but to make the most difference.