Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

There were already question marks about the future of oil before Covid-19 but the pandemic has added to the case that demand for oil will now decline earlier than expected - and may have already peaked.

Those were the headline conclusions of the latest annual energy outlook from BP, published today, which lays out where the oil giant believes the market could be headed in the years and decades ahead.

Oil demand is currently down almost 10% on a year ago thanks to the pandemic due to reduced activity in lockdown. Lower levels of commuting to work and international travel are just two things contributing to lower demand for oil. While some of this demand is likely to return as economies recover, some may be lost forever as the world adjusts to a new way of working and living.

But these aren’t the only drags on oil demand. Government action to slow climate change threatens future oil demand and the development of renewables as an alternative energy source is gathering pace.

The BP report lays out three potential scenarios for oil demand. In a ‘business as usual’ scenario, in which actions against climate change proceed at their current pace but no faster, demand for oil would plateau at 2019 levels for around a decade before beginning to fall. Yet in the other two scenarios, where climate action accelerates, demand for oil never again breaches the level seen in 2019 according to the BP study - meaning we may have already seen ‘peak oil’.

The scenarios laid out by BP mark a shift from a year ago, when the company’s base case was for demand to continue to grow - as it has for 100 years or so - until 2030.

This clearly has ramifications for those companies drilling, refining and selling oil - and for investors in those companies. That is why companies like BP are working hard to ensure they can replace revenues from fossil fuels with revenue from renewables, and last month said it will reduce production by 40% and increase spending on renewable energy by 10 times by 2030. BP plans to become a net-zero emissions company by 2050.

The issue is especially 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. The fund features on our Select 50 list of recommended funds.

More on ESG investing

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered

ESG investing; Funds; Markets; Oil; Shares

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