Source: Fossil Free Indexes, Bloomberg Note: Rebased to 100 on 2 January 2004

Where Can Fossil Fuel Investments go?

A Review of the BNEF White Paper, “Fossil Fuel divestment: a $5 Trillion Challenge”

By Roy L Hales

Screen-shot-2014-03-18-at-3.43.47-PMFossil fuels have been a financial cornerstone for decades. More than $5 trillion is invested in 1,469 oil and gas companies and 275 coal companies. Dozens of public and private institutions are now divesting their money because of environmental concerns, strategic planning or fear that their assets might become be stranded because of emission regulations. A Bloomberg New Energy Finance White paper asks where can fossil fuel investments go?

The author,  Nathaniel Bullard, provides valuable background material that is of interest regardless of personal opinions about fossil fuels.

“Fossil fuels are investor favorites for a reason,” he writes in the associated press release. “Very few other investments offer the scale, liquidity, growth and yield of these century-old businesses with economy-wide demand for their products.”

His paper is not a prediction that the market will divest itself of fossil fuels,  but rather an investigation of what such a scenario would look like.

One of the most vocal proponents of fossil fuel divestment is Bill McKibben, co-founder of 350.org. The movement gained momentum when Stanford University and the World Council of Churches jumped on board.

If divestment continues, financial institutions will need to find new investment vehicles for billions of dollars.

Bloomberg World Oil & Gas Index and Bloomberg  World Coal Index, rebased to 100 on 1 July 2009 - Courtesy Bloomberg
Bloomberg World Oil & Gas Index and Bloomberg World Coal Index, rebased to 100 on 1 July 2009 – Courtesy Bloomberg

Institutional investors require the liquidity that fossil fuel stocks  provided. More than a billion shares traded every day for the past five years. Though coal stocks have declined in value, oil and gas have outperformed every other sector.

Bloomberg concluded that the necessary attributes were found in seven different sectors, ranging from information technology to real estate. Only real estate has been more profitable. Information technology is larger, already worth $7.64 trillion, but pays low dividends.

Three of the world’s four largest companies are IT’s: Apple ($588 billion), Google ($400 billion) and Microsoft ($360 billion).

Other sectors to watch: Pharmaceuticals ($3.9 trn), Food & Beverages ($3.34 trn), Engineering ($1.66), REITs ($1.39), Automobiles ($1.23), and Industrials ($1.17 trn).

Source: Bllomberg New Energy Finance 2030 Market Outlook
Source: Bllomberg New Energy Finance 2030 Market Outlook

Every one of these sectors dwarfs clean energy. There are currently 106 clean energy companies, whose cumulative worth is $220 billion. Bloomberg predicts this sector will grow $2.8 trillion over the next decade, reaching more than half the size of the present fossil fuel market size.

The easiest of the fossil fuels to let go of is coal. There is no competitive alternate for oil yet. Bullard is among those who believe natural gas is a bridge technology, to the technology of the future.

Dr Allan Hoffman offers a more cynical perspective. There is too much money behind the fracking revolution. It will be with us for decades to come. However he believes the excesses can be greatly reduced through proper regulation and enforcement.

Bullard’s focus is financial.

The chart at the top of this page shows how a diversified portfolio, divested of fossil fuel stocks, performed on par with those that contained gas, oil, coal and high carbon reserves.

“Fossil fuel divestment is neither imminent nor inevitable,” he concluded, “but neither is it impossible for motivated investors.”

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