Earlier this year a group of concerned citizens presented to the Piedmont City Council on reasons for the city to urge CalPERS to Divest from fossil fuels. While there are many ethical and environmental arguments to consider, as a fossil fuel free portfolio manager, I was asked to speak to the council about the economic risks at hand.
As a founding signatory for the Divest-Invest movement, I have been quite vocal about the choice to divest from fossil fuel companies as a significant lever for affecting change. 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. We 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 technologically advanced global economy we live in today, the current 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 the costs for renewable energy 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 this energy source 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 wind become less expensive and more popular, fossil fuels will continue to lose market share to these renewable options. subsidies for 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 diminish overtime, decreasing any competitive pricing advantage for extracting companies. As renewable technologies such as solar and governments
In the short term, for stockholders, dividend pay outs 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 off shore 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 keep that oil in the ground, the under and aboveground reserves of coal, oil, and gas currently held by many fossil fuel companies on their balance sheets may become devalued or "stranded assets," serving to further devalue these companies.
Interesting to note, a 2015 analysis by global finance 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.