How should USS divest

Some thoughts from members of the Ethics for USS team (Andrew Jarvis, Keith Pitcher, Ceri Sullivan, Paul Kinnersley and Jay Ginn)

We need an energy transition, not a cliff

Here we are, pension owners with Shell as the primary asset securing our retirements, along with plenty of other high carbon investments in the USS portfolio. For a while now we have witnessed either ambivalence or embarrassment when members are presented with this information. We also understand the recent calls by some to immediately ‘divest’ from these holdings, but our response needs to acknowledge we have to build the low carbon future we want and need and how we behave as responsible investors plays a critical role in this. Like it or not, this low carbon future is built using our current fossil fuel endowment, and the Paris Agreement recognises this fact. This is why it is called an energy transition rather than a cliff. If so, our strategy should not be wholesale and immediate divestment from our fossil fuel holdings, but rather progressive divestment allied to wise re-investment of the proceeds from using fossil fuels.

Although it is the biggest private pension scheme in the UK, USS is small on the world stage. However, it can show genuine leadership by executing its fiduciary duty in ways that reflect the needs of the energy transition. Adopting a proactive strategy would certainly mark a significant and meaningful departure from the somewhat reactive strategy USS currently deploys in this space centred on using the global portfolio of Nationally Determined Contributions as a compass to follow. That strategy could easily result in a significant proportion of members’ investments becoming stranded by a rapidly changing political landscape.

We need to start with immediately preventing all future investment by USS in the development of any new coal, oil and gas reserves, because the there is no more head room in the Paris Agreement for expanding the drilled reserve. Starved of investment, Shell’s oil and gas reserves should deplete within about 10 to 15 years i.e. well within the 2050 time horizon called for by Paris. Currently Shell invests approximately three quarters of its one billion dollar R&D budget on developing its oil and gas business, in addition to buying up new reserve prospected by third parties. This suggests USS’s strategy of shareholder engagement to change Shell’s practices has had very limited effect. Actively withholding investment is likely to speak far more meaningfully, and if Shell continue drilling then USS should wholesale divest. 

If drilling stops, USS could wind down its position in its fossil fuel holdings in line with the required exhaustion of the the reserve over the next decade i.e. by 2030 USS should hold no such assets. Again, if Shell fail to honour this climb down then USS should wholesale divest. Of course USS will need to find alternative holdings to replace the likes of Shell and the responsible thing to do would be to invest in growing low carbon energy providers so that they can fill this space. This is not only responsible with respect to climate risks, history has shown us that energy investments appear to have the kind of return characteristics investment-based pensions demand. Over the last decade we have seen significant improvements in technical and economic performance in renewable energy technologies. These, coupled with emerging policies for renewables to replace fossil fuel usage in energy generation, heating and transportation, provide real opportunities for USS to realign its investments at scale.

Of course, if Shell is willing to now exclusively invest in developing carbon free energy sources, in the process turning itself into an exclusively renewables provider by 2030, then it could remain a primary asset in the USS portfolio. It’s relatively poor track record to date argues against this, but the scale of the required transition means we shouldn’t disregard the likes of Shell from playing their part in the transition. Similarly, the members should be encouraged to source their energy in line with this strategy to help provide the required demand.

This strategy causes us to reflect on how other USS holdings are associated with consuming the remaining fossil fuel endowment without contributing meaningfully to the transition. Of these Heathrow is the biggest and most notable example. It also suggests USS needs to use better the influence it does have in the sector to help create the necessary momentum, something we should be demanding as members. Pensions are now up there with governments as primary sources of the investments that shape the future. One would hope that University pensions would lead on shaping this future for the better.

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