Not all roads lead to Paris: PFZW on navigating climate risks and engagement strategies

Investors universally acknowledge the profound impact of physical and transitional climate risks on future financial performance. PFZW, the pension fund for the Dutch health care sector, shares this perspective and is committed to contributing to the Paris Agreement's goal of limiting global warming to 1.5°C. However, not all roads lead to Paris. When does engagement work? Which companies should be targeted? And when is it time to sell positions in companies that are not significantly addressing climate risks?

In early 2022, PFZW initiated a two-year engagement program with the oil and gas sector. The program set a criterion: oil and gas companies failing to present a convincing climate transition plan within this period would be divested. Recently, we announced that only seven listed oil and gas companies remain in our portfolio after the conclusion of this program.

To engage, or not to engage, that is not the question

The discussion surrounding engagement versus divestment should move beyond a simple yes-no debate. Sometimes engagement works, sometimes it doesn’t. It all depends on who is asking what (and when). When Shell announced its new strategy, Reuters headlined “Shell pivots back to oil to win over investors”. For the investors that wanted Shell to slow down its transition, in the backdrop of high oil and gas prices, engagement worked.

Although we continue to believe that engagement is a first-best solution, we cannot keep talking forever. We need to see potential for continued dialogue to contribute to companies aligning their transition plans with our risk and social preferences. At many oil and gas companies, we did not see this potential.

Choosing the right companies

Despite the transition imperative, demand for oil and gas remains high. To align with Paris, a significant uptick in alternative energy supply is essential. Our selection criteria for retaining oil and gas companies centered on (1) whether a majority of their anticipated 2025 capital expenditure is directed towards low-carbon solutions and (2) if their projected 2030 energy mix includes at least 30% low-carbon solutions. The increased availability for low-carbon alternatives can erode demand for fossil fuels, ultimately leading to a decline or smaller increase in their production. Seven companies, including Galp, Neste, OMV, and Worley, meet these criteria.

Shifting focus to major consumers

Our future engagement efforts will pivot towards the largest consumers of fossil fuels. Recognizing that the responsibility for transitioning away from fossil fuels extends beyond oil and gas companies, both suppliers and consumers must evolve. Crucially, this also requires a supportive policy environment.

We focus on carbon-intensive sectors, such as materials, utilities, and transportation, taking a value chain approach. For instance, in the transportation program, we engage with both vehicle producers (e.g., truck manufacturers) and users (e.g., shipping and logistics). This holistic approach signals to companies that we are not targeting them in isolation but are also urging their suppliers and consumers to improve.

The key to moving forward is that all stakeholders must engage in constructive conversations and, most importantly, follow through on their commitments.