Since the December Paris COP21 agreements, global leaders, national, state and city governments, as well as concerned citizens around the world are meeting to take collective action to reduce carbon emissions. From turning the heat down, to driving less often, doable action steps specifically to cool our planet are the topic of conversation. One of the major levers we as citizens and local governments can have is divesting our money and our retirement funds from companies that benefit from fossil fuel production.
As a founding signatory for the Divest Invest Movement, I have been quite vocal about the need to divest from fossil fuel companies as a significant way of affecting change. While there are many ethical and environmental arguments for divesting, the financial reasons are actually quite significant. At Green Alpha Advisors, we recommend divestment from stocks of any firm engaged in the prospecting, extraction, refining, transporting or distributing of fossil fuels due to both the financial and environmental risks. I specifically build solutions focused portfolios, all of which include clean and renewable energy technologies based on the belief that economic opportunities lie in the solutions needed for both people and planet.
While the extraction and burning of fossil fuels has (literally) fueled the building of the advanced global economy we live in today, at this time, the portfolio risks of holding fossil fuels securities over the medium and (especially) long term have become increasingly apparent. The first compelling risk to consider is that oil is a commodity, one that requires complicated methods to extract, refine, transport, and ultimately burn. Prices of commodities have historically been volatile and despite currently low prices of oil, as drilling and extraction become more remote and expensive, prices stand to rise again. Whereas renewable energy company products are based on technologies designed to harvest energy from the sun, wind and waves. The costs for harvesting renewable energies, particularly solar, are comparable to electronics and other semiconductor-based technologies, and have been decreasing for decades. With batteries being developed to store solar energy, the need to transport energy is reduced, and in some cases eliminated. As technologies improve, renewables are becoming more competitive, and more popular, while fossil fuels have, and will continue to become less relevant over time, putting shareholders of these companies at financial risk.
The fossil fuel industry has already lost considerable market share to the renewable energy sector, despite our governments subsidizing the production and sale of coal, nuclear, oil, and gas. Each year, as we see in the news, there is increasing public awareness that any protective expenditure may not be a prudent use of public dollars, and will likely decrease overtime, decreasing any competitive pricing advantage from which extracting companies have benefitted. As renewable technologies such as solar and wind become less expensive and more popular, fossil fuels will continue to lose market share to these renewable options.
In the short term, for stockholders, dividend payouts from fossil fuel companies are at risk as these firms, in an effort to stay competitive, spend significant money on new, high-cost projects such as offshore drilling instead of returning money to shareholders. For the longer term, an important risk for investment portfolios is that fossil fuel companies count their yet undrilled reserves on their balance sheets as assets. With popular and political pressure mounting to restrict carbon emissions and to keep that oil in the ground, the under- and above-ground reserves of coal, oil, and gas currently held by many fossil fuel companies on their balance sheets will likely become devalued or stranded assets, serving to further devalue these companies.
Interesting to note is that a 2015 analysis by global indices firm MSCI showed that fossil-fuel-free stock portfolios have outperformed conventional portfolios each year for the last five years. While climate change stands to affect all holdings in a given index portfolio, this a good time for the financial advisors, wealth managers, pension plan participants, as well as each of us as individuals to know what we own and to make prudent decisions according to our values and goals.
Kristin Hull is a partner at Green Alpha Advisors and is an investment committee member on all Green Alpha products, including serving as co-portfolio manager on the Nia Global Solutions investment strategy.