Do companies with fossil fuel exposure have a place within green funds?

Climate change has been one of DNB AM’s long-term focus areas for many years. We make a meaningful contribution towards the goals of the Paris Agreement and the Sustainable Development Goals by taking a long-term view and effectively managing the risks and opportunities associated with the transition towards a low-carbon economy.

Excluding companies is important to reducing exposure to unsustainable and carbon intensive businesses. However, it is important to pay attention to materiality. When reassessing its coal criteria in 2019, the Norwegian Government Pension Fund Global found that it was more impactful to supplement its existing relative coal criteria (30% threshold) with an absolute coal criteria (>20m tonnes thermal coal or power generating capacity >10,000MW) instead of lowering the threshold for its relative criteria. Its relative criteria already addressed approximately 74% of the total coal power capacity and 77% of total thermal coal extraction in the fund. With the introduction of an absolute coal criteria, it was able to address 50% of total remaining coal power capacity and 75% of remaining extraction. As this coal capacity and extraction is concentrated in a small number of companies, the added value of excluding additional companies by lowering the relative threshold was considered minimal. Moreover, our assessment is that some of these companies may be important transition companies with large exposure to renewables. We, in DNB AM, added the absolute coal criteria to our Standard for Responsible Investments in 2019. We place emphasis on forward-looking assessments of companies and follow up companies which are in the process of transitioning from brown to green. In addition to this, we consider the risks associated with heavy emitters by integrating climate-related risks and opportunities into investment analysis and investment decision making. ​

Being an active manager, our responsible investment approach places emphasis on positive selection. We invest in that stand to benefit from the green transition by providing products and services that reduce carbon emissions. One example of this is China Longyuan, a company that features in one of our actively managed funds. Though the company exceeds the 5% limit for coal set by some investors, it is an important contributor to the green transition as the largest wind power producer in China and Asia. The company adds 2GW of renewable energy capacity every year in China, thereby contributing to reducing the carbon intensity of one of the world’s most polluting national energy grids. We also practice active ownership towards the company, engaging in dialogue to encourage the closure of coal generating assets and by voting at company general meetings.​ Similar to China Longyuan, Enel is another company poised to deliver significant contributions towards the energy transition. Though the company still has some fossil-fuel based energy generation today, Enel has a clear plan for retiring this capacity over the coming years. Enel’s emissions reduction target is also certified by the Science-based Target Initiative. Our recent report assessing DNB Miljøinvest’s potential avoided emissions and revenue exposure to the UN Sustainable Development Goals highlights these topics further. DNB Miljøinvest is Luxembourg-domiciled DNB Renewable Energy’s sister fund.