The board of Ethos Foundation has decided to amend the eight Socially Responsible Investment principles of Ethos. All companies that generate more than 5% of their turnover with unconventional oil and gas are now excluded from the investment universe. Companies that transport these energy sources by oil or gas pipeline are also excluded. This decision will have no impact on Ethos' funds as the concerned companies had insufficient ESG evaluation to be part of Ethos’ investment funds.
Taking climate change into account is an integral part of the investment strategy at Ethos. In addition to its traditional ESG ratings, Ethos has introduced a carbon rating which allows to invest in priority in companies that have low carbon emissions or have implemented credible emission reduction strategies. Companies generating more than 5% of their revenues from coal extraction and thermal coal have been formally excluded from the investment universe since 2017. Furthermore, Ethos has been publishing the carbon footprint of all its equity funds since 2014. This carbon footprint is between 20% and 80% lower than that of its benchmark indices.
Amendment of the exclusion criteria
By formally excluding all companies that generate more than 5% of their revenues from unconventional oil or gas (oil sands, shale oil and gas, drilling in the Arctic), Ethos Foundation’s board of trustees aims to clarify Ethos' investment strategy. Companies involved in the transport of such energy sources are also excluded. In total, around 40 companies in the MSCI World Index are concerned – including Noble Energy, ConocoPhillips and Suncor Energy – which represent approximately 1% of the index in terms of market capitalisation.
This decision has no impact on the composition of Ethos' investment funds as the companies concerned have already been excluded due to major controversies related to their activities or unsatisfactory ESG ratings. However, "this decision allows to formalise such exclusions and to send a clear signal to both investors and the civil society", explains Vincent Kaufmann, CEO of Ethos.
Environmental and financial risk of the sector
The burning of fossil fuels is a significant anthropogenic source of greenhouse gas emissions causing climate change. The ratification of the Paris Agreement of 2015, which aims to limit warming to well below 2° Celsius compared to pre-industrial levels, means that a large part of the current fossil fuels reserves will no longer be extractable.
For this reason, companies operating in the unconventional fossil fuels sector not only have a far above-average environmental impact, but also represent an increased economic and financial risk, as their assets could become “stranded assets”.
Decarbonisation of the real economy through shareholder dialogue
Ethos recognises that the decarbonisation of the economy requires a transition period. Ethos will therefore continue to conduct a shareholder dialogue with companies that are not directly affected by these exclusions and that implement credible strategies to reduce their environmental impact. This combination of exclusions and shareholder dialogue is beginning to bear fruit, as the international initiative “Climate Action 100+” example shows.
More than 450 institutional investors are involved in this global initiative, including Ethos and the members of its EEP International programme. They are calling on the 161 companies that generate the most greenhouse gas emissions worldwide to reduce their emissions. In December 2019, Repsol, one of the companies targeted by the initiative, became the first oil company to announce a strategy to achieve climate neutrality by 2050. This led to an impairment of assets of around 5 billion euros, mainly in North America.
In order to measure the progress made by companies and their willingness to implement a credible strategy for the energy transition, Ethos will expand its current CO2 rating and develop an ‘Energy Transition’ rating. This energy transition rating will give greater weight to the climate change strategy of companies and their efforts to reduce CO2 emissions than in the past.
Provision of exclusion lists
In order to allow the members of Ethos to define their own exclusion criteria, Ethos will disclose the information regarding the companies affected by these new exclusions and the degree of involvement, measured as a percentage of turnover on its client platform. All members of Ethos’ engagement pools (EEP Switzerland and EEP International) have access to these exclusion lists.