When Selling Emissions-Intensive Assets Doesn’t Reduce Climate Risk: A New Discussion Paper

Key contingency factors include whether the buyer has weaker environmental and social commitments than the seller, and has the capital required to fulfil these commitments.

In other words, will the asset be more, or less, responsibly managed on its way to eventual closure?

Regardless of the answer, a company or investor’s fiduciary duties may still require them to divest so as to manage their exposure to asset- or stock-specific climate-related investment risks.

This discussion paper explores that tension.

It draws on discussions at an Investor Group on Climate Change (IGCC) member roundtable on 28 April 2023. Noting that a diverse range of views were expressed, this paper covers the majority of views expressed by the participants.

The initial roundtable discussion identified four broad areas in which investors can act to alleviate potential, unintended negative consequences from the sale of emissions-intensive assets.

Specifically, investors can:

1. Ensure that investment strategies consider the potential consequences of blanket fossil fuel exclusion policies and ensure that the role of ‘managed decline’ is considered as a climate risk-management strategy
2. Consider developing contingency factors that can be used to assess the relative merits and risks associated with emissions-intensive asset sales by investee companies
3. Engage with investee companies to encourage the buyer of an emissions-intensive asset to implement climate change commitments and strategies that are at least equivalent to those of the seller
4. Engage with regulators and government on a range of issues, including
   1. the need to minimise the ability of asset buyers to arbitrage the climate change expectations that are placed on large, listed entities, and
   2. ensuring the costs of a just transition and asset decommissioning and rehabilitation are appropriately provisioned for throughout the sale process.

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