Why one fund company won’t dump fossil fuels

Spurred by the burgeoning divestment movement, two of Canada’s investment firms recently re-jigged a pair of funds to make them fossil fuel-free. However, the country’s largest responsible investment fund company isn’t convinced that’s the way to go.

AGF and IA Clarington talked to Advisor.ca about their new offerings at the Responsible Investment Association’s annual conference in Banff, Alta.

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At AGF, Martin Grosskopf, director of sustainable investing, has gradually realigned the AGF Global Sustainable Growth Equity fund, previously known as AGF Clean Environment Equity.

In the past, the AGF fund invested in energy companies that Grosskopf says were “leading the charge” on environmental issues. “But over time, the fund has moved global, which has opened up a lot more opportunity.”

He adds, “Certainly I had a fairly negative view on Canada as an investment prospect, starting about three years ago, and didn’t really have a positive view on commodities. In conjunction with that, it became much more possible to go fossil fuel-free.”

He notes energy producers always made up a small proportion of the fund, with Suncor Energy the only name in the sector. “So it wasn’t a tough decision because that was never a focus.”

What’s more, AGF has taken down the energy weighting in the fund significantly. It was 20% in 2013, and 6% in 2014. Morningstar lists the fund’s current weighting at 2.8%, but Grosskopf says it may be even lower now, since he owns just two names in the traditional energy sector: Newalta and Secure Services, both energy services providers. The fund also contains alternative energy companies.

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It’s a similar story at IA Clarington, which recently eliminated all fossil fuels from the IA Clarington Inhance Global Equity SRI Class. Dermot Foley, manager of ESG investing at Vancity Investment Management Ltd., the sub-advisor, says the fund always light on fossil fuels, with a weighting of around 4%.

“We looked at the returns from oil and gas companies over the last 10 years and realized that with the ups and downs, they really added no value to the fund,” Foley says. He sees the recent oil downturn as a return to the norm rather than a drastic decline. “So we really didn’t think there was a lot of downside risk to the fund performance by divesting from fossil fuel companies. Plus we’ve had three or four renewable energy companies in the fund already.”

Vancity Investment Management has also eliminated the heaviest oil sands producers from the IA Clarington SRI funds it manages.* “We think there’s going to be more divestment, and that adds to the risk of oil and gas companies,” Foley says.

Choosing not to divest

But one company that won’t be going fossil fuel-free is NEI Investments, owner of Ethical Funds, the country’s largest RI fund family. “We don’t see the utility in that approach,” says Jamie Bonham, manager, extractives research and engagement.

“From a strategy perspective, lumping all the good and bad actors together is a mistake,” Bonham warns. “You take away the incentive for good actors if everybody is going to be treated as a threat to society.

“The reality is we have a dominant fossil-fuel system that will be dominant for a while, and we need good actors in the energy space.”

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Still, Bonham notes that NEI is not against excluding companies for carbon-intensity reasons, pointing out that the Ethical does not hold Exxon because they are purposely obstructing climate change regulations and policy, and muddying the waters on science.

Bonham adds investors are now talking about issues related to divestment and exclusions, creating pressure for companies to respond.

“It has forced some foundations which have not been going down the environmental, social and governance road to now tackle the issues. That’s a huge upside; our industry hasn’t managed to engage them for years and the student movement has done it over the course of two years.”

Doug Watt is an Ottawa-based writer and editor, covering the RIA conference in Banff.

*The original version of this article stated that IA Clarington had eliminated oil sands producers from its Canadian bond and equity funds. This is not the case. Return to the corrected sentence.