6 September 2022

HESTA warns four energy firms of potential climate-related divestment

HESTA has warned four energy firms they face heightened scrutiny and potential divestment due to their lacklustre decarbonisation strategies, as the Australian pension fund announced a strengthened 2030 decarbonisation target.

The AUD68 billion ($46 billion) fund has set a new target to halve Scope 1 and 2 carbon emissions across its portfolio by 2030, compared with 2020 levels, as part of its long-term target to reach net-zero emissions by 2050. The 2030 target is strengthened from its original aim of reducing emissions by a third, which was announced in 2020.

The pension fund – one of the largest superannuation funds in Australia – has also committed to investing 10% of its portfolio in climate solutions, including renewable energy and sustainable property investments.

The announcement follows HESTA intensifying its engagement with these firms after an assessment of key contributors to its portfolio emissions identified them as facing “significant decarbonisation challenges”.

HESTA chief executive Debby Blakey said the updated 2030 target reflects the updated scientific research and increased climate commitment made by the Australian government – which recently changed – since the initial 2030 target was set.

“The science is now telling us this is a critical decade and that mitigating climate change related risks requires an accelerated transition and a more rapid reduction in emissions,” Blakey said. “HESTA is committed to using active ownership with emissions-intensive companies to help drive down emissions in the portfolio and manage climate risk.”

HESTA has also written to the chairs of electricity firms AGL Energy and Origin Energy, and oil and gas production firms Santos and Woodside Energy, to warn them that they have been moved to a ‘watchlist’ as part of the investor’s engagement escalation process. Firms on the watchlist face closer engagement and monitoring and could be the subject of divestment.

The pension fund said the move reflects “heightened concern” about the “disparity between the companies’ strategic targets and a [Paris Agreement-aligned] 1.5˚C transition pathway”.

“HESTA has engaged with these companies since at least 2018,” Blakey said. “While we’ve seen some progress, there’s evidence of a gap between the companies’ commitments and their actions to transition their businesses in line with Paris Agreement goals.”

HESTA said it has asked each to explain how their climate strategies align with the goals of the Paris Agreement and how their future capital expenditure will support the transition to a low carbon economy. Fossil fuel production firms Origin, Santos and Woodside were also asked to demonstrate that their final investment decision (FID) on major production projects is “consistent with a carbon budget aligned with a 1.5˚C pathway”.

Australasian Centre for Corporate Responsibility (ACCR) climate lead Harriet Kater described the public signalling of engagement with fossil fuel firms by HESTA as an “extremely welcome development”.

“This level of transparency around engagement objectives with specific companies sets a new standard for best practice,” Kater said. “Forceful engagement is the most immediate option available to constrain the current and planned climate damage inflicted by listed fossil fuel companies. The boards of fossil fuel companies need to be held to account – and their jobs need to be on the line if they continue with strategies that are in direct contrast to what they have committed to.”

In July, HESTA became the lead engager with AGL for the $68 trillion investor engagement initiative Climate Action 100+. In this role, HESTA recently pressed AGL to ensure its climate strategy is ‘Paris-aligned’ – a move that would require it to close its coal-fired power stations by 2035.

This followed HESTA voting against the climate plans of Santos and Woodside in May. In the end, a significant minority of shareholders in both companies rejected their climate plans – 37% for Santos, and 49% for Woodside. It also opposed plans by AGL to demerge its coal-fired power plant business, arguing that its “future success is best served by a transparent Paris-aligned decarbonisation”.

If the escalated engagement by HESTA results in its divesting from the firms, it will not be the first Australian pension fund to exit investments in some of these firms. In August, AUD13 billion fund NGS Super announced it had divested from companies involved in oil and gas exploration and production – including Australian firms Santos, Woodside and Carnarvon Energy as well as international firms ConocoPhilips, Marathon Oil, and Hess.

Despite this, ACCR’s Kater said the shareholder advocacy group is “concerned with the disappointing trend in the institutional investment community, with funds backing away from 1.5°C ambition”.

“This is reprehensible as we observe the catastrophic flooding in Pakistan, the searing heatwaves and drought in China and wildfires in London,” she said. “These [institutional investment] funds clearly haven’t contemplated the full economic and societal impacts of warming beyond 1.5°C.”