1) Why is Wespath Benefits and Investments (Wespath) implementing a guideline relating to climate change?
Wespath actively pursues strategies designed to address the risks from investing in companies with inadequate management of environmental, social, and governance (ESG) issues. Recognizing a shared concern—with United Methodist plan participants and other stakeholders—about the importance of addressing climate change, the agency formalized and strengthened a climate change guideline to inform the execution of its sustainable investment strategy of active ownership. This guideline will provide direction for identifying and managing the excessive sustainability risk that could potentially affect the value of assets held on behalf of benefit plans and institutional investment clients.
2) The board of directors “has concluded that wholesale exclusion of securities of companies with specific problematic environmental, social and governance policies is not justified.” Why has Wespath reached this conclusion when a number of prominent campaigns are calling on the need for divestment from the entire fossil fuel industry to combat climate change?
The staff of Wespath has carefully researched, and the agency’s board of directors has reviewed, significant documentation and information regarding the role companies play in contributing to (and mitigating) climate change. The board of directors is committed to its sustainable investment strategy that emphasizes active ownership. The board strongly believes that our comprehensive sustainable investment strategy will positively impact outcomes by using our influence as an investor in seeking change to company performance and public policy relating to material ESG issues.
3) Why does the climate change guideline focus on thermal coal companies representing an excessive sustainable investment risk and why does it not include other fossil fuel companies?
Thermal coal accounts for 73% of CO2 emissions from power generation and 29% of total energy-related CO2 emissions1. It is the subject of increasing regulation. The United States and other developed countries have publicly announced their intent to reduce their reliance on thermal coal. Accordingly, Wespath has concluded that the production and consumption of thermal coal is not a sustainable business model. As nations and consumers reduce their reliance on thermal coal, they are transitioning to other sources of energy such as oil, natural gas and renewables. We believe that extractive industry companies involved in the production of oil and natural gas have an important role to play in the transition to a lower carbon-based economy. We strongly believe that active ownership through corporate and public policy engagement will help hasten this transition and support the continued growth of the renewable energy industry.
1 International Energy Agency (IEA)
4) What is the Wespath’s response to research that indicates that oil and gas companies will be unable to produce their proven fossil fuel reserves if the catastrophic consequences of a two-degree Centigrade increase in average world temperatures are to be avoided?
We acknowledge this important research and actively analyze new findings as they emerge. We fully support the efforts of those dedicated to reducing the world’s reliance on CO2-emitting technologies and are optimistic about humankind’s creativity and innovation in solving such problems. We remain concerned that immediate and significant reduction of the world’s reliance on fossil fuels would create adverse geopolitical and socio-economic consequences. We currently believe that a decision to exclude all fossil fuel companies from investment would be a breach of our fiduciary duties.
5) The climate change guideline explains that Wespath will “use engagement to improve corporate environmental performance.” How can engagement convince an oil company to stop producing oil—isn’t that like trying to convince a tobacco company to stop selling cigarettes?
Wespath identifies industries and companies with elevated risk and engages companies in dialogue (either independently or with a broader group of investors) to protect the value of our investments and to mitigate the effects of climate change. Unlike the example of the tobacco industry, we believe there are substantial actions that oil and gas companies can take to lessen their environmental impact and to support the transition to a lower-carbon economy. We play an important and valuable role as investors in persuading companies to capitalize on these areas of financial and environmental benefit.
6) Have other environmental issues involved with the extraction of coal (mine subsidence, erosion, release of heavy metals and toxins into waterways, destruction of habitats, deforestation, etc.) been factored into the Climate Change guideline? Or is the guideline strictly about coal’s contribution to CO2 emissions?
Wespath has for years actively engaged companies that it believes have unsustainable business policies and practices resulting in environmental degradation. While the climate change guideline focuses on the change in atmospheric temperatures resulting from CO2 emissions, we will continue to identify patterns of destruction to forests, waterways, etc. and promote practices that reduce negative environmental impacts.
7) Has the Wespath considered promoting the economic development of technologies that prevent the release of CO2 into the atmosphere, such as carbon capture and sequestration? If these technologies become economically viable, will Wespath review the thermal coal guideline?
Wespath has researched and analyzed a variety of technologies intended to control CO2 emissions. We are optimistic that the abundant intellectual talent in the United States and elsewhere will perfect viable and economical technological solutions to mitigate the adverse consequence of excessive CO2 emissions. Wespath has some indirect exposure to companies involved in developing these technologies and we are actively pursuing broader investments in this area. If the technology does become viable and economical, we will analyze the extent to which the production and consumption of thermal coal will once again become sustainable. If we determine that it will be, then we will decide whether we need to revise our climate change guideline.
8) Why does the guideline distinguish between companies that produce or consume coal in developed countries versus developing countries?
Nearly one-in-five people on the planet lack access to electricity2—a significant factor in eradicating poverty. Our Climate Change guideline recognizes that until greater progress has been made in addressing the “energy access” problem, sources of energy, like coal, will continue to play a role in creating economic opportunity for the world’s poorest. Our hope is that in the near future, sustainable energy sources will power the developing world.
2 www.se4all.org (Sustainable Energy for All)
9) Why does the guideline focus both on coal mining companies and companies in the utility sector that use coal to produce electricity?
The United States and other developed countries have clearly communicated their intent to reduce their reliance on coal. Electric utilities are subject to stricter regulations regarding their CO2 emissions, and we have seen a number of recent plant closings because the operators cannot economically comply with these stricter regulations. Accordingly, we have determined that the mining of thermal coal and the consumption of thermal coal represent excessive sustainability risk to these companies.
10) How did Wespath determine the percentage levels used in the guideline (50% of revenue, 75% fuel mix)?
The guideline is intended to highlight areas of excessive sustainability risk in our funds, specifically in relation to a company’s exposure to thermal coal. The percentage levels provide an indication that a mining or extraction company generates a majority of its revenues from coal, raising concerns about its ability to shift and/or create profits from alternative sources. The percentage levels for electric utilities are intended to serve as an indicator of a company’s ability to start shifting its fuel mix away from coal.
11) Which companies does the Climate Change guideline lead Wespath to exclude due to an excessive degree of sustainability risk?
In 2015, Wespath Investment Management, Wespath’s investments division, contracted Sustainalytics (a global ESG research provider) to identify and assess the management policies and practices of companies that pose excessive sustainability risk under our new guideline. With external research provided by the firm, we have identified ten companies for exclusion under the Climate Change guideline.
12) Why has Wespath chosen to implement this guideline rather than offer a fossil-free fund for those who believe that Wespath retirement accounts are profiting from companies that are destroying the planet?
Wespath is implementing this guideline in addition to the introduction on December 31, 2014 of the Equity Social Values Plus Fund. This fund invests in companies with highly rated sustainability policies and practices regarding the environment, diversity, employee relations, human rights, product quality and safety. The fund is not 100% fossil-free, but its exposure to such companies is limited.
13) To what extent is Wespath investing in renewable energy companies and projects? How will Wespath invest the money realized from selling its coal stocks? Could it be invested in renewable energy companies and/or projects?
Wespath holds shares in a number of public companies focused on manufacturing products and/or providing services supporting the renewable energy industry. In addition, we continue to explore opportunities for investing in privately owned companies involved in this area. As with any investment decision made by Wespath , we conduct sound and prudent due diligence to help ensure that the investments we make will provide our participants with suitable investment returns.
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