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Crude exit: Do pension funds stake returns when divesting gas, oil stocks?

13:23, 8 August 2022

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A businessman at a wind farm with a gasoline pump in his hand.
Pension funds NGS Super, NYCERS and ABP to shun fossil fuel stocks - Photo: Getty Images

Australian pension fund NGS Super announced last week that it has exited 12 international and six domestic oil and gas stocks in a bid to build a carbon-neutral portfolio by 2030. It is the latest to take their funds in this direction.

The industry superannuation fund dumped stakes in companies including Apache Corporation, Coterra Energy, Devon Energy, EOG Resources, EQT Corporation, Hess Corporation and Marathon Oil, in a move worth $133m, according to a 4 August statement to shareholders about the divestment.

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The divestment has been redistributed to other holdings within the NGS equities portfolio, NGS chief investment officer Ben Squires told stakeholders in the statement.

Why dump fossil-fuel stocks?

Pension funds, into which contributions are paid to build a lump sum, are increasingly avoiding bets on oil and gas stocks, whose investments tend to cause more harm to the environment.

The world needs to ‘rapidly transition to energy sources that don’t emit carbon and methane into the atmosphere’, to stall climate change Squires told investors on 4 August.

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Coterra Energy Inc - CTRA CFD

Devon Energy

Squires added: "We have taken the view that companies whose revenues rely on further oil and gas exploration and production are at risk of becoming stranded assets as the world decarbonises."

Will these moves hurt returns?

A pension fund’s position against fossil fuels should not hurt its long-term yields.

"In the long run, by divesting companies that are most exposed to stranded asset risk (because they are solely focused on upstream oil and gas production), we expect to generate higher returns from allocating capital elsewhere," Squires stated.

Oil, natural gas rally: Sitting it out?

NGS also said it isn’t giving the year’s rally in oil and gas equities a miss.

The Sydney-based fund noted there could be ‘short-term rallies in oil prices and share prices/earnings of upstream oil and gas firms, (on the back) of geo-political tensions, supply chain constraints, significant increases in demand, or underinvestment in fossil-fuel extraction’.

US natgas price chart

The war in Ukraine is an example of how the above-mentioned determinants got together to drive a rally in the sector.


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NGS, which manages over $13.4bn in super savings, said its investment team "does take this into account when constructing portfolios and communicating with investment managers, to make sure (it) participate(s) in these rallies via other proxies in the portfolio."

World’s biggest investor class

Pension funds are the world's largest investor category, ahead of mutual funds, insurance companies, and hedge funds.

Late last year, the New York City Employees’ Retirement System (NYCERS) and the New York City Board of Education Retirement System (BERS) announced a massive sale of securities related to fossil fuel companies, bringing the total divestment across all funds to an estimated $3bn.

"The divestment, one of the largest in the world, will address the significant financial and environmental risks that these fossil fuel holdings pose to the funds and to our planet," said a 22 December statement.

The decision followed ‘an extensive and thorough fiduciary process to prudently assess the portfolio’s exposure to fossil fuel stranded asset risk and industry decline and other financial risks stemming from climate change’, it added.

In October 2021, Dutch pension fund ABP declared it will stop investing in producers of crude oil, natural gas and coal. ABP said the divestment will be carried out in phases, ‘the majority of which is expected to be sold by the first-quarter of 2023. This concerns more than EUR15bn in assets, almost 3% of ABP's total assets’.

ABP emphasized it does not expect the decision to have a negative impact on long-term returns. Chairman of the Board Corien Wortmann said that “where possible, (ABP) intend(s) to increase (its) investments in renewable energy, already more than EUR4bn, and (its) involvement in smart solutions for the energy transition,” 

“Naturally, our criteria for return, risk, costs and sustainability also apply here. Our goal is and always will be to realize a good pension for our participants in a livable world.”


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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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