Institutional investors are under increasing pressure to justify their stance on fossil fuel extraction. Fully divesting from the sector has been criticised by some who say doing so would be ineffective. For the energy transition to have a shot at success, these critics say it should go hand in hand with economic growth. Others criticise this standpoint in turn, warning that the damage of climate change will exceed that of a swift and harsh transition.
In this third installment of Ethibel Viewpoint we advocate making a clear distinction between a sample-based approach (looking at the types of companies in an investment portfolio) and a strategy-based approach (looking at the direction the companies in a portfolio are taking). The former approach favours divestment, the latter active engagement with the energy sector. We discuss the pros and cons of both strategies, both of which we believe require unavoidable trade-offs. We conclude with some practical take-aways.