Most people think that coal, oil and gas stocks issued by companies like Shell, Exxon, Chevron, Arch Coal and others are reliable investments. In the past five years, however, a number of trends are challenging that conventional wisdom.
Well-known and reputable financial firms in the U.S. and abroad have published reports highlighting a number of ways fossil fuel companies may have peaked as good investment options. Just in the past month, the $850 billion Norwegian sovereign wealth fund — money earned from oil extraction — announced it would consider screening out fossil fuels for purely financial reasons. And the British Parliament warned the Bank of England that it should consider the threat that climate change poses to its investments.
Regardless of what warnings experts offer, some experts and lay-investors alike will be resistant to change. They’ll prefer to rest their faith in the status quo – that “if it’s worked up until now, it’s probably a safe bet.” On the other hand, memory of the devastating impact of the housing bubble and the consequent recession may be enough to spur investors to heed these new warnings.
1. Fossil fuel stocks have underperformed for several years
You won’t find the oil and gas industries listed among Morningstar’s top 20 best-performing stock sectors over the past year (or three years or five years). And coal is near the bottom of the list! What sectors are doing better? Computer systems, pharmaceuticals, apparel manufacturing…even solar has done better in the past year.
a) Morningstar.com, Cap-Weighted Industry Returns. http://news.morningstar.com/stockReturns/CapWtdIndustryReturns.html (The Oil & Gas Refining and Marketing sector is excepted because it does not extract or hold fossil fuel reserves.)
b) Trillium Asset Management, Extracting Fossil Fuels From Your Portfolio. Lists major profitable companies which could mirror coal, oil and gas stocks as far as return. http://www.trilliuminvest.com/news-articles-category/recent-commentary/extracting-fossil-fuels-from-your-portfolio-a-guide-to-personal-divestment-and-reinvestment/
2. Studies show screening out fossil fuels is safe
Studies by financial firms show that the risk added by taking coal, oil and gas stocks out of retirement funds is very low. A study by the Aperio group puts the added risk (just risk) at 0.0101 percent.
a) Aperio Group, Do the Investment Math: Building a Carbon-Free Portfolio, 2013. http://www.aperiogroup.com/system/files/documents/building_a_carbon_free_portfolio.pdf (p.4)
b) Impax Asset Management, Beyond Fossil Fuels: the Investment Case for Fossil Fuel Divestment, July 4, 2013. http://www.impaxam.com/media/178162/20130704_impax_white_paper_fossil_fuel_divestment_final.pdf
c) Advisor Partners, study (free registration to view it) http://www.advisorpartners.com/fossil-fuel-divestment-risks-and-opportunities/
3. Fossil-free portfolios are performing well
A number of individuals and organizations, like Unity College, Sterling College and the Wallace Global Fund, have divested from fossil fuels already, and they’re doing better than the market average. Several financial firms have run simulations showing that if you had screened coal, oil and gas stocks out of your portfolios five to ten years ago, you’d have gotten as good of a return — or better.
a) Unity, Fall 2013. “[D]ivesting from investments in fossil fuels have not harmed Unity’s portfolios.” http://issuu.com/unitycollege/docs/fall_magazine/1, p18.
b) Aperio Group, Do the Investment Math: Building a Carbon-Free Portfolio, 2013. http://www.aperiogroup.com/system/files/documents/building_a_carbon_free_portfolio.pdf (p5)
c) Stephanie Leighton, email, January 15, 2014: “At Trillium Asset Management, Fossil Fuel Free portfolios have performed in line with the S&P1500 benchmark —net of fees — since inception in January of 2007.”
d) Impax Asset Management, Beyond Fossil Fuels: the Investment Case for Fossil Fuel Divestment, July 4, 2013. Impax Asset Management tracked the past seven years of international equity markets, showing that if fossil fuel companies are removed from the MSCI World index, then the resulting portfolio would have made 2.3% per year. A portfolio with fossil fuel companies like Exxon and Chevron would net an average annual return of 1.8% for the same period. http://www.impaxam.com/media/178162/20130704_impax_white_paper_fossil_fuel_divestment_final.pdf (p.5)
e) MSCI looked at the impact of excluding companies owning carbon reserves from the MSCI All Country World Index (MSCI ACWI). It determined that over a five-year period the active return differential was 1.2% better for the same index without the fossil fuel investments. (June 2013; updated December 2013) http://www.msci.com/resources/factsheets/MSCI_ESG_Research_FAQ_on_Fossil-Free_Investing.pdf (p.5)
f) MSCI published a broader analysis in December 2013 looking at several investment scenarios that reduced exposure to fossil fuels, and a backtest of a fossil fuel divestment scenario outperformed the MSCI ACWI benchmark. http://www.msci.com/resources/factsheets/MSCI_ESG_Research_Issue_Brief_Options_for_Reducing_Fossil_Fuel_Exposure.pdf (p.3)
4. Coal is in decline
Given that all the cheap coal has been mined, and that the U.S. and other countries are imposing clean-air and emissions restrictions on power plants and mines, financial experts are downgrading the investment prospects for coal.
a) Goldman Sachs, The window for thermal coal investment is closing, July 2013. http://thinkprogress.org/wp-content/uploads/2013/08/GS_Rocks__Ores_-_Thermal_Coal_July_2013.pdf
b) Wall Street Journal, Chinese Demand for Coal is Cooling, September 22, 2013. http://online.wsj.com/news/articles/SB10001424127887324886704579052970699081290
c) Seeking Alpha, King Coal: Fading U.S. Coal Exports Does Not Augur Well for the Industry, September 19, 2013 (free registration required). seekingalpha.com/article/1703072-king-coal-fading-u-s-coal-exports-does-not-augur-well-for-the-industry
d) Bloomberg, Coal Seen as New Tobacco Sparking Investor Backlash: Commodities, November 20, 2013. http://www.bloomberg.com/news/2013-11-20/coal-seen-as-new-tobacco-sparking-investor-backlash-commodities.html
e) University of Oxford, Smith School of Enterprise and the Environment, Stranded Assets Programme, Stranded Down Under: “In summary, for a number of reasons China’s coal consumption is unlikely to grow as fast as expected. As China has a significant influence on coal prices this will result in downward pressure on coal prices. ” http://www.smithschool.ox.ac.uk/research/stranded-assets/Stranded Down Under Report.pdf (p.65)
f) ThinkProgress, Goldman Sachs Sells Its Stake In What Would Be The Largest Coal Terminal On The West Coast, January 8, 2014. http://thinkprogress.org/climate/2014/01/08/3132821/goldman-sach-divests-coal/
g) Investing Daily, The Outlook for 2014, January 7, 2014: “There are a few US coal [Master Limited Partnerships], many of which have seen their market caps decimated in the past 2 ½ years. Most MLP investors should avoid this sector, as more restrictive EPA regulations and competition from natural gas and renewables will continue to put pressure on coal producers.” http://www.investingdaily.com/19171/the-outlook-for-2014/
h) Energy China Forum, China shift may mean coal days are numbered, August, 21, 2013: “Mr Paolo Coghe warned that if the Chinese economy was slowing down, China could become a net exporter of coal, which would be very negative for prices.” http://www.energychinaforum.com/news/74804.shtml
i) Washington Post, Coal’s burnout: Have investors moved on to cleaner energy sources?, January 1, 2011. “’Coal is a dead man walkin’,’ says Kevin Parker, global head of asset management and a member of the executive committee at Deutsche Bank. ‘Banks won’t finance them. Insurance companies won’t insure them. The EPA is coming after them. . . . And the economics to make it clean don’t work.’” http://www.washingtonpost.com/wp-dyn/content/article/2011/01/01/AR2011010102146.html
5. Natural gas’ future is unpredictable
Hydraulic fracturing (fracking) technologies led to a recent boom in natural gas extraction in the U.S., but natural gas’ future doesn’t look so bright. With fracking putting more local water supplies at risk of contamination, homeowners, insurance companies, and local governments have begun to fight back. As citizens and governments rein in an industry gone wild, gas won’t be as good an investment.
a) Financial Times, Shale boom leaves investors underwhelmed, January 5, 2014. http://www.ft.com/intl/cms/s/0/127effba-73ca-11e3-beeb-00144feabdc0.html (free registration required)
b) Bloomberg, Shale Grab in U.S. Stalls as Falling Value Repels Buyers. August 18, 2013. http://www.bloomberg.com/news/2013-08-18/shale-grab-in-u-s-stalls-as-falling-values-repel-buyers.html
c) Philly.com, Pa. Supreme Court jolts shale industry. December 21, 2013. http://articles.philly.com/2013-12-21/news/45419865_1_gas-act-act-13-marcellus-shale-coalition
d) Rolling Stone, The Big Fracking Bubble, March 1, 2012: http://www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301
e) Headwaters Economics, Long-Term Energy Development Has Negative Impacts on Western Counties, December 2013: “[W]hen fossil fuel development plays a role in a local economy for a long period of time there are negative effects on per capita income, crime rates, and educational attainment.” http://headwaterseconomics.org/energy/western-counties-fossil-fuel-development
f) Food and Water Watch, The Social Costs of Fracking: A Pennsylvania Case Study. http://documents.foodandwaterwatch.org/doc/Social_Costs_of_Fracking.pdf
g) There a number of studies either completed or underway which show methane emissions could potential negate any climate benefits from a shift away from coal and even accelerate climate impacts in the long run. http://www.climatechange2013.org/images/uploads/WGIAR5_WGI-12Doc2b_FinalDraft_All.pdf http://link.springer.com/article/10.1007%2Fs10584-011-0061-5
h) The White House, A Strategy to Cut Methane Emissions, March 28, 2014. http://www.whitehouse.gov/blog/2014/03/28/strategy-cut-methane-emissions
i) Food and Water Watch, Anti-Fracking Movement Map, accessed March 20, 2014. http://www.foodandwaterwatch.org/water/fracking/fracking-action-center/map/
j) CBS Los Angeles, City Council Passes LA ‘Fracking’ Ban, February 28, 2014. http://losangeles.cbslocal.com/2014/02/28/city-council-to-vote-on-la-fracking-moratorium/
k) Boulder Weekly, The fracking/real estate conundrum, December 12, 2013. http://www.boulderweekly.com/article-12047-the-fracking_real-estate-conundrum.html
6. Renewable energy will soon be cheaper than fossil fuels
By 2020, in most places, it will be more profitable and faster to install renewable energy than to build a coal, oil or gas plant. This will reduce the value of coal, oil and gas stocks.
a) International Energy Agency, Renewable Energy Medium-Term Market Report 2013. “[O]nshore wind and solar PV – have reached, or are approaching, competitiveness in a number of markets without generation-based incentives. In some markets with good resources, the levelised cost of electricity (LCOE) for onshore wind is competitive or close to competitiveness versus new coal- and natural gas-fired power plants.” http://www.iea.org/Textbase/npsum/MTrenew2013SUM.pdf
b) TheEnergyCollective.com, Why have IEA Renewables Growth Projections Been So Much Lower Than the Out-Turn?, October 14, 2013. http://theenergycollective.com/onclimatechangepolicy/286586/why-have-iea-s-projections-renewables-growth-been-so-much-lower-out-tur
c) Bloomberg, Renewables Investment Seen Tripling Amidst Supply Glut, April 21, 2013. http://www.bloomberg.com/news/2013-04-21/renewables-investment-seen-tripling-amid-supply-glut.html
d) Energy Post, How the IEA exaggerates the costs and underestimates the growth of solar power, March 4, 2014. http://www.energypost.eu/iea-exaggerates-costs-underestimates-growth-solar-power/
e) RenewEconomy, Bugger the utilities: wind and solar will be built anyway. July 25, 2013 http://reneweconomy.com.au/2013/bugger-the-utilities-wind-and-solar-will-be-built-anyway-74216
f) ThinkProgress, Solar is Ready Now, “Ferocious Cost Reductions” Make Solar PV Competitive, June 9, 2011. http://thinkprogress.org/romm/2011/06/09/241120/solar-is-ready-now-“ferocious-cost-reductions-make-solar-pv-competitive/
g) Wall Street Journal, Norway to Raise Oil Fund’s Exposure to Renewable Energy, March 13, 2014. http://online.wsj.com/news/articles/SB10001424052702304914904579437082858746804
h) U.S. Energy Information Administration, Levelized Cost of New Generation Resources in the Annual Energy Outlook 2013, January 28, 2013. http://www.eia.gov/forecasts/aeo/electricity_generation.cfm
7. When the carbon bubble bursts, fossil fuel stocks will plunge
Fossil fuel companies hold five times more coal, oil and gas reserves than can be safely burned without creating out-of-control climate change and more extreme weather. With countries establishing policies to curb climate change, these reserves most likely can never be burned. According to financial analysts at HSBC, Citi, the London School of Economics, and others, this will reduce the value of fossil fuel stocks by 40 to 60 percent. Remember how the housing bubble and subsequent recession forced people to delay their retirements when their pensions lost value? Experts estimate that this “carbon bubble” is at least twice as large.
a) The Guardian, Carbon bubble will plunge the world into another financial crisis – report, April 18, 2013. http://www.theguardian.com/environment/2013/apr/19/carbon-bubble-financial-crash-crisis
b) HSBC Global Research, Oil and carbon revisited: Value at risk from ‘unburnable’ carbon reserves, January 25, 2013. http://gofossilfree.org/files/2013/02/HSBCOilJan13.pdf
c) Standard & Poors, What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness, March 1, 2013. http://www.carbontracker.org/wp-content/uploads/downloads/2013/03/SnPCT-report-on-oil-sector-carbon-constraints_Mar0420133.pdf
d) Financial Times, Investors warn moves to curb climate change will hit fuel demand, October 24, 2013. http://www.ft.com/intl/cms/s/0/28b61824-3cb9-11e3-a8c4-00144feab7de.html
e) Salon.com, Beware of the carbon bubble: The biggest threat you haven’t heard of yet, December 23, 2013. http://www.salon.com/2013/12/23/beware_of_the_carbon_bubble_the_biggest_threat_to_the_environment_you_havent_heard_of_yet/
f) Financial Times, Norway spurs rethink on fossil fuel companies, March 4, 2014. http://www.ft.com/intl/cms/s/0/4b1c89dc-a313-11e3-ba21-00144feab7de.html