Right now there are lots of very clever and well paid people trying to work out when investors in fossil fuels will realise that such commodities may one day become worthless.
Two news stories today suggest that, whenever it comes, it is not here yet.
On the one hand, there are the terrible and deadly bushfires raging in Australia. There have been predicable arguments about how much one natural disaster can be linked with the global trend of climate change, but it’s true to say that Australia is experiencing an historic heatwave and saw its hottest ever day in December. The fires have galvanised calls for much firmer action from governments on climate change, including moving away from fossil fuels.
On the other hand, there is the market response to the equally worrying news this morning that the confrontation between the US and Iran has entered a more dangerous phase after the assassination of Iranian General Qasem Soleimani by Trump-ordered drone strike. The events triggered a jump in the price of Brent Crude oil suggesting markets expect supply to be disrupted - and oil buyers to have to pay more.
It seems, then, that whatever the evidence that cleaner energy is needed now, the world is not yet ready or able to move away from fossil fuels.
But that day is surely coming. The outgoing Bank of England Governor is the latest to warn on the issue, in particular warning investors that the value they assume to be in fossil fuel companies may never materialise. Meeting current climate targets, he said this week, means as much as half of the oil that investors assume will be pumped and used by the global economy will, in fact, have to stay in the ground.
Once this dawns on investors, the flight from fossil fuel companies could be fast and devastating for anyone left investing in those companies. That’s why all those clever people are thinking so hard about it - rush for the door too early and you risk missing out on spectacular income from unfairly undervalued companies, but stay too late and you’ll take a heavy loss.
Mark Carney told the BBC: “If we were to burn all those oil and gases, there’s no way we would meet carbon budgets. Up to 80% of coal assets will be stranded, [and] up to half of developed oil reserves. A question for every company, every financial institution, every asset manager, pension fund or insurer: what’s your plan?”
The question is pertinent for investors in the UK, where an outsized share of the income paid out by the stock market is accounted for by fossil fuel companies, and oil majors Shell and BP in particular.
Whether it’s due to worries about lost profits or concerns about the environment more investors are pursuing a sustainable approach. ESG investing stands for Environmental, Social and Governance. SRI is another acronym you will hear - that’s Socially Responsible Investing.
Dozens of funds now exist promising to invest with these aims in mind. Their approaches can differ markedly - some will apply broad screens to filter out companies that operate in certain sectors, or profit from doing certain activities. Others will be far more discerning, investing only in enterprises they believe do good in the world.
An alternative option for those looking to invest into the trend towards renewable energy sources is the Foresight UK Infrastructure fund, which invests a significant weighting into renewable energy projects from around the world.
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