The sun sets on fossil fuels: Norwegian pension fund divests from financially worthless assets – Gabe McHugh
Investment in fossil fuels is increasingly being seeing as a liability, not an asset.
Foundations and individuals divesting from fossil fuels because they are damaging the environment is nothing new; just last week, Dutch Bank Rabobank pledged to exit all its positions in shale gas drilling after citing issues with water and soil contamination from fracking that pose unacceptable biodiversity risks, and risks to ecosystems and local residents.
However, in a more unprecedented move, the Norwegian pensions and insurance giant Storebrand divested from 19 fossil fuel companies for purely economic reasons, citing the divestment was to “secure long term, stable returns for our clients” and that eventually those fossil fuel companies would be “worthless financially.
Storebrand reports that they have no socially responsible devoted funds, but rather a high standard that they hold their assets to, making this decision one based purely on financial rationale.
This move follows a series of reports, one by Carbon Tracker, which demonstrates that for the world to prevent the global temperature from rising 2 degrees Celsius, global CO2 emissions must be limited to under 565-1,075 Gt CO2 (billion of tons of CO2) until 2050.
This limit is only a fraction of the carbon embedded in the world’s fossil fuel reserves, which amounts to 2,860 Gt CO2, meaning that only around a third of fossil fuel reserves would be able to be burned before 2050. Compliance with these goals would waste close to $7 trillion in fossil fuel industry capital expenditure. These unusable reserves, and the equipment deployed to exploit them, known as stranded assets, could have large, negative implications for equity valuations.
The effect of stranded assets on fossil fuel companies is detailed in another report issued by HSBC Holdings. Their report estimates, to uphold climate targets, the energy supply mix must shift from 81 percent reliance on fossil fuels to just 43 percent by 2050, creating a 40-60 percent downside in the market capitalization of some oil and gas companies. Fossil fuel companies are ignoring these predictions as evidenced by Exxon Mobil’s belief that fossil fuels will still provide over 80 percent of global energy generation in 2040. This compounds the worries that fossil fuel companies will be caught off guard by new restrictive legislation.
The political attention comes as greenhouse gas emissions and climate change are back on the political agenda, spurred by recent increases in extreme weather. There have been droughts in the Midwest, floods in Pakistan, typhoons in Asia and severe winters in Europe. The Financial Times (FT) reports that President Obama has announced plans to “limit emissions from power plants, to stop financing coal-fired power stations abroad and to ensure that the US uses less dirty energy, uses more clean energy and wastes less energy throughout our economy”.
Meanwhile, on the other side of the globe, the FT also reports that commentators in China have started to hint that the country may accept binding international targets on its emissions. As governments are beginning to recognize the severe consequences climate change could have on their ability to govern during mass migrations and food and water shortages, they are beginning to act, with investors starting to notice and adjust accordingly.
Divesting from fossil fuels is only the first step; money previously invested in fossil fuels can be reallocated towards a clean energy future. Energy invested in renewables can serve as a climate hedge. To maintain climate goals, it is estimated that renewables would have to meet approximately 67% of world energy demand, up from around the 10% today. This would require a massive reallocation of capital towards green industries, creating tremendous amounts of growth in the clean energy industry as fossil fuels struggle.
Gabe McHugh works for Mosaic, which funds solar investment. He has experience with Morgan Stanley in portfolio construction and the California Lighting Technology Center.