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Employee playbook: denying debt to fossil fuel expansion

How to help your workplace transition its fixed income portfolio away from coal, oil and gas companies.

What are you asking for, and why?

Corporate bonds are a critical source of finance for coal, oil and gas companies. Yet, compared to the stock market, few financial institutions have addressed their fossil fuel bond investments.

Over half of coal, oil and gas financing comes from bond issuances on the primary market, and all of the 100 biggest emitting companies are dependent on the bond market for their financing – while only 30 are listed on stock markets.

There are over $7 trillion of coal, oil and gas bonds on the market today

  • $3 trillion coal bonds (companies along the coal value chain)
  • $4 trillion oil and gas bonds (upstream and midstream companies)

Of the total amount of fossil fuel bonds, around $5 trillion have been issued since the Paris Agreement. Meaning issuance and investments in corporate bonds of fossil fuel developers haven’t been slowing down in line with political agreements on climate change.

The majority of these bonds are ordinary bonds (sometimes called vanilla bonds). Only around 2% have any type of green or sustainable label. In other words, these are not bonds that are trying to help companies transition – they are fresh cash for continuing business as usual.

What are you asking for?

Investors transitioning their fixed income portfolios would:

  • Deny new debt: Adopt coal, oil and gas policies that immediately stop all new investments in companies expanding fossil fuel output and infrastructure. These policies must cover passive holdings and third-party assets.
  • Divest from bond holdings in fossil fuel companies, unless the company has demonstrated proof of no new fossil fuel output / infrastructure and announces a complete phase-out strategy aligned with principles of equity, a 1.5.˚C timeline that is certified by globally recognised science-based professionals and in alignment with the goals of the Global Biodiversity Framework (GBF).

Asking financial institutions to immediately divest from their existing bond holdings is a less crucial demand. Though companies holding bonds with maturity dates after agreed upon fossil fuel phase out dates will need to divest unless the company transitions.

An example of a strong fossil fuel exclusion policy may look like:
Company A commits to immediately make no new investments in bonds and sale of existing bonds issued by:

  • Companies developing thermal coal mines/plants/infrastructures
  • Mining and power companies based on a strong relative threshold (15% of revenues or power generation from thermal coal) and strong absolute threshold (10 Mt of coal production and of coal power producers over 10GW)
  • Oil and gas companies based on a strong threshold (5% of their revenues from fossil fuels activities (upstream, refining and electricity generation)).
  • Oil and gas companies developing unconventional oil and gas projects.

Deny debt versus divestment

Bonds traded on the secondary market do not impact the current interest rate or face value of the bond when it reaches maturity. Thus, asking investors to divest from their existing bondholdings has less of a direct impact on money flowing to the issuing company, although it can send helpful market signals and lead a fossil fuel company to pay out higher interest rates on future bonds.

This brings nuance to the divestment vs engagement debate. Investors may wish to engage with companies to support their transition (though we have yet to see any cases of this being effective), in which case they could do so via shareholder rights. But, as a bondholder, investors have very little influencing power on the issuer. For this reason, investors do not have to counter arguments of whether divestment from a company frees up space for ‘worse’ investors to come in that do not engage.

In other words, engage via equities if you must, but deny debt.

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