Coal To Be Hardest Hit By Fossil Fuel Divestment Campaign
Originally published in Forbes
Much has been written in recent months about carbon-stranded assets – investments in fossil fuel projects that may turn out to be worth far less than investors or companies currently think they will because of measures to cut carbon emissions such as emissions trading schemes and regulation.
This has prompted organisations such as 350.org to campaign for shareholders to sell their shares in fossil fuel companies. “If you are investing in fossil fuels, you are essentially betting that we won’t ever take climate change seriously,” Jason Kowalski, US policy director for 350.org, says. As a result, many investors are reconsidering their investments in fossil fuel companies, with many choosing to move their money sooner rather than later.
But while divestment campaigns such as 350.org’s are gaining momentum among high-profile but relatively small investors such as Storebrand, the Norwegian fund, and Stanford University, for bigger institutions selling out of fossil fuels is more problematic, says a new white paper from Bloomberg New Energy Finance, the research group. The paper looks at what divestment on a trillion dollar scale would look like.
Oil & gas and coal companies form one of the world’s largest asset classes, worth nearly $5 trillion at current stock market values, the paper says. “Fossil fuels are investor favourites for a reason,” it adds. “Few sectors offer the scale, liquidity, growth, and yield of these century-old businesses vital to today’s economy.” It is no surprise, therefore, that the world’s largest investors – the likes of Blackrock and JP Morgan – and governments ranging from Norway and Russia to India and Colombia are key shareholders in the sector.
At the moment, divestment calls are not enough to move a needle calibrated in the trillions of dollars, BNEF analyst and report author Nathaniel Bullard says. Partly, this is because of the sector’s unique attractions to investors. The IT sector is significantly bigger than oil and gas at $7 trillion, it pays low dividends. Meanwhile, real estate investment trusts (REITs) pay out attractive dividends but the sector has a market capitalisation of only $1.4 trillion.
For campaigners seeking to cut emissions, investment in clean energy projects would be the ideal substitute to fossil fuel stocks but while some $5.5 trillion will be invested in the sector between now and 2030, “not every dollar will be suitable for every institution,” says Bullard. “Projects, public equities, yieldcos and green bonds offer stability, growth and yield, but not all in one package.”
In addition, as an asset class, clean energy equities are a small fraction of the size of oil and gas equities. The universe of clean energy equities, as measured by the WilderHill New Energy Global Innovation Index, is just 106 companies, with a total value of $220bn, while the green bond and YieldCo markets remain in their infancy – albeit with strong growth.
The report concludes that while divesting from oil and gas groups would be hard to do, investors would be able to sell out of the much smaller coal sector with little pain. Partly, this is to do with scale – the market capitalisation of ExxonMobil alone at $425 million is almost twice as big as the entire coal sector ($234 billion), which is just 5% the size of the oil and gas groups. Partly it is that coal companies are much less global than the main listed oil and gas groups and partly it is the fact that while the oil and gas sector has outperformed other sectors in the last five years, coal stocks have been “striking underperformers” partly as a result of the US shale boom. “Institutional investors are much less exposed to coal than to oil and gas – and as a result, divesting from coal would be much easier than divesting from oil and gas,” according to the paper.
In addition, the argument against investing in coal is much simpler – it is by far the most polluting fossil fuel and can be replaced by natural gas, which is seen by many as a bridge fuel to a lower-carbon power generation system while “oil companies sell a product in near-universal demand that is closely linked to global economic growth, at least in fast-growing economies. Oil may be substitutable in the long run in motor transport, shipping, and aviation, but for now it is indispensable.”
BNEF suggests that if institutions were to sell out of fossil fuels, they could invest instead in information technology, pharmaceuticals, food and beverage, engineering, real estate investment trusts, automotive and industrial stocks. The seven sectors were chosen “not just because of scale, but because each also includes companies where minimizing fossil fuel use, creating greater energy efficiency, or manufacturing and servicing a lower-carbon energy system is part of the growth strategy”, the report says, although it points out that they each have different growth profiles and yield.
If fossil fuel divestment is to expand, the movement requires orders of magnitude more financial commitment, Bullard says. And for the clean energy sector, the challenge is that “the marginal, disinterested institutional dollar does not automatically flow from an international oil company to a solar manufacturer or a wind project developer. The marginal dollar may find a more logical home in another trillion-dollar equity sector such as information technology or real estate.”
To build a robust architecture for fossil fuel divestment will require alternative investment structures or asset classes, not just “alternative energy”, the white paper concludes. “A robust architecture for fossil fuel divestment will require alternative investment structures or asset classes, not just ‘alternative energy’.”