Are fossils lucrative for investors?

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G20 Summit: India and Saudi Arabia rejected world climate ambitions

Are fossils still lucrative for investors? Does the divestment campaign have a material effect on the industry that they are attacking, and thus the transition to sustainability and the reduction of CO2 emissions?

Carbon bubble

To assess this, we must consider the financial arguments behind the divestment campaign. The core value of the divestment is “carbon bubble‘. Campaigners think that if the world is taking radical climate actions, the fossil reserves and therefore the fossil businesses will be worthless.

The Paris Convention, for example, could cause a shock among investors who suddenly realize that the fossil economy is history. If investors are gonna sell en masse, the carbon bubble will burst – with billion losses for fossil companies and their investors as a result.

But isn’t that a much too simple misrepresentation?

Climate economist Richard Tol told the press earlier this year:

“The carbon bubble is an urban legend. Oil companies make their money not by owning their reserves, but by exploiting them. And they can continue to do so at least the next few decades. International demands will not suddenly be gone. Their market value is also safe, because it “is determined by the expected earnings over the next few years. ” Loze talks about a carbon bubble make fun for a general audience, but it undermines the credibility of the environmental movement,” according to Tol.

He is not the only one who thinks like this. The fair value of fossil energy companies is based on the proven fossil fuel reserves, the authors of the report deflating the carbon bubble, according to the authors of the report ‘Deflating the carbon bubble‘.
90% will be redeemed in the next ten to fifteen years – and the fossil industry will be ‘safe’ during that period. “It is unlikely that new policies will be implemented so quickly that investors do not have time to react,” said one of the authors of the report.

The oil and gas industry is also downplaying the risk.

  • Shell expects’ a growing population, increasing wealth and growing demand for energy. According to the oil giant
    “A fundamental transition of the energy is needed, but it will take a much longer period of time than the divestment movement is telling the public.
  • Oil company Exxon Mobil told the shareholders that it does not believe that its reserves will remain untouched by stricter climate policies of governments.
  • BP: “Unlikely that all oil will be consumed.”
  • The president of Shell believes that solar power will be the backbone of energy supply later this century.
  • Patrick Pouyanne,CEO of oil company Total in Paris: “It is clear that we are in danger.”

But looking at the oil and gas industry operations, they still say they can not imagine a world without fossil fuels. They keep drilling and slurping.

Gap

There is a fundamental gap between what the world has agreed in Paris and how fossil energy companies are considering the future.

The increasing demand for oil and gas can not coexist with a world that is trying to reduce emissions in the second half of the century to zero.

If all countries keep to their promesses and limit warming to 2 degrees Celsius, no new coal mines will be needed and the demand for oil and gas will peak much sooner than the industry thinks. Fossil energy companies are expected to spend 2.2 trillion dollars on projects that are unnecessary and unprofitable by the new climate target and technological development of green energy.

Kodak

Whether you call it a ‘bubble’ or destruction of capital from shareholders, the effect is the same:

The oil industry is throwing money into fossil projects that we no longer want.

We can compare this with Kodak: this company recognized the end of analog period of photography but did not invested in digital technology because the films were quite profitable.

Fossil energy is becoming less attractive

  • Bank of England Minister Mark Carney warned in September during a much-discussed speech that the losses in the fossil industry will be ‘potentially huge’.
  • The World Bank and the G20 have discussed the risks
  • Dutch Central Bank president Klaas Knot told the press in November that “there’s such a thing as a carbon bubble”. We invested too much in CO2-containing raw materials and technologies. The risk is real that it will be depreciated significantly.

It’s already going on with the dirtiest form of energy: coal.

Companies depending on coal – energy suppliers and mining companies – have made a tremendous fall at the stock exchanges, the last years.

Large financial institutions such as ING Bank and Anglo American told their shareholders that they no longer will invest in coal.
US energy giants BHP and Rio Tinto are reducing their shares in the coal sector.

Analysts warn that the dirtiest coal plants are investment risks. Two thirds of all mining companies in the coal sector is now producing with red figures. The financial sector and the large asset managers have already ben withdrawing their billions from this sector.

Carbon risk

And this will not be the end. More and more investors and companies are shifting from fossils to green power. They start researching the “carbon risk” in their investment portfolios. This was clearly visible in Paris. Former mayor of New York, Michael Bloomberg is now head of the Task Force Climate Change, initiated by the Financial Stability Board. He will lead the risks of climate change to financial stability.

  • Earlier, shareholders pressured Shell to report the effects of climate change to the companies financial results from 2016.
  • And a coalition of 11 Dutch financial institutions, including Banks and Pension Funds, will collaborate to develop methods for measuring the impact of climate action on investments

These are all steps that necessarily precede a shift of capital from fossil fuels to green power.

All the ‘big boys’ are driven by fear: the growing risks of fossil investments, and for possible lawsuits.

“Look at Exxon,” said Stephen Heintz from Rockefeller Brothers Fund after the press conference in Paris to a group of journalists. We are currently investigating whether Exxon has violated the law, because it knew already for 25 years that climate change is a serious problem, but they withheld information for investors. This was reported by two teams of investigative journalists this autumn. “ExxonMobil responds to attack the reporters,” says Heintz. “That’s a sign: it shows that they are nervous.And this nervousness spreads to investors. Because if the polluting companies must appear in court, why not their lenders?

Green investments are better

It’s not only fear that leads to a shift to green. It becomes increasingly clear that green energy projects are more profitable than fossil. (Thanks to subsidies, sure. But that goes for fossils)

In November 2015, the Corporate Knights and 350 reported their analysis showing that the 14 largest asset managers on Earth – including the Gates Foundation – would have earned $ 22 billion more when their shares in the oil, coal and gas industries had been replaced by greener investment.

British public pension funds lost almost one billion dollars by the decline of coal. In the long term, there is no doubt that green will be more profitable than fossil: renewable technology is getting cheaper while extracting fossil fuels become increasingly expensive.

“Fossil fuels are increasingly being seen as a bad deal, “said Heintz in Paris.

There are many reasons why the energy is moving and the coal industry receives hard knocks. The emergence of shale gas in the US for example. Asset managers respond, they are guided by risk analyzes. But they also feel the hot breath of 350, as most visible exponent of a much larger, global social movement for climate justice.

Influences of 350

  • In the Netherlands, the pressure on pension fund ABP was to dump fossil shares
  • The divestment campaigns against the City of Oslo, at universities in Britain, against the Norwegian oil fund have become resounding successes – and widely reported in the media
  • During the COP21 activists were arrested in Paris protesting the sponsorship agreements that the Louvre has with oil companies Eni and Total.
  • In the Netherlands, the focus-divestment campaigners showed the links between Shell and universities
  • All these small actions provide media coverage, which again ensures that the activists have a platform to subvert the fossil industry.

Imago matters

The direct impact of the divestment movement is underestimated. It is now clear that the sector of stigmatization is a direct impact. The reason is simple: imago matters.

For fossil companies, licenses to operate are under pressure. And because of that, it becomes more expensive to borrow money and governments find it easier to regulate against the sector.

A recent report by Cambridge University showed that the perceptions of the fossil industry and climate change is already affecting the performance of companies. That brings risks that even investors can not avoid. (they become ‘unhedgeable, “as it is called in financial jargon).

Governments

It’s not only important to tackle fossil companies. Governments who run the largest fossil states on earth should be stigmatized. Administrations from Saudi Aramco, Gazprom, Sinopec and Petrobras give hundreds of billions in subsidies to the fossil sector

20% richest countries subsidize fossil energy by $ 452 billion per year

How can we influence countries such as Saudi Arabia, Russia, China and India, to shift from oil, coal and gas to green?

According to Heintz, the global divestment movement is already impacting on those countries.

“The fast growth of the divestment movement, sends a very strong signal to the private sector, the community of investors, to governments and other asset managers.”
Countries like South Africa and Russia also started to invest in green energy, because they realize that their ‘energy portfolio should be divers. Are these countries moving fast enough? No, but they move. That is why we must keep pressure. “

The Paris Climate Deal pressures, just like the falling cost of renewable energy. In a TV documentary, German investor Jochen Wermuth, is showing there is little doubt:

  • “If the macro-economic view is that we entered the point that renewable energy is cheaper than fossil fuels without subsidies, you will get a macro- economic view on the world telling you that:
    Brazil will go bankrupt
    Russia becomes insolvent
    Indonesia and Saudi Arabia will go bankrupt
    And everyone else who relies on fossil fuels goes bankrupt. Individual oil companies will see their value collapse. “

Coral Davenport wrote in The New York Times: “Key to Success of Climate Pact Will Be Its Signals to Global Markets.” The agreement itself gives a massive capital shift from fossil fuels to green. Investors know where to invest their dollars, euros and yens: renewable energy and green economy.”

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