For some time now, I have been concerned about the
impact of the major oil companies in relation to global warming. Here's an
article from earlier in the year outlining some concerns about investing in
fossil fuels.
The extraction and burning of fossil fuels is the
main cause of our climate crisis. The message is fairly simple, to have any
chance of keeping warming below the 1.5C or more likely 2.0C, we can no longer
afford to use coal, oil and gas.
The goals set out in the Paris Agreement to tackle
our climate emergency require a complete decarbonisation of the global economy.
Clearly the first stage of this process is to switch our energy production. The
IPCC have indicated that the world needs to make a speedy transition from fossil
fuels to renewables to limit warming to 1.5C but the message is largely ignored
by the industries who have a vested interest in maintaining business as usual.
The governments of the large industrialised nations, including the UK, spend
over $100 bn each year to subsidise large fossil fuel extraction companies.
The large oil companies acknowledge the threat and
in their annual report last year Shell said :
“Rising climate change concerns
have led and could lead to additional legal and/or regulatory measures which
could result in project delays or cancellations, a decrease in demand for
fossil fuels, potential litigation and additional compliance obligations.”
The report specifically identifies
fossil fuel divestment campaign as a material risk:
“Additionally, some
groups are pressuring certain investors to divest their investments in fossil
fuel companies. If this were to continue, it could have a material adverse
effect on the price of our securities and our ability to access equity capital
markets.”
It also highlights the risk of
climate litigation efforts: “Further, in some countries, governments and
regulators have filed lawsuits seeking to hold fossil fuel companies liable for
costs associated with climate change. While we believe these lawsuits to be
without merit, losing any of these lawsuits could have a material adverse
effect on our earnings, cash flows and financial condition.”
So long as these industries continue to explore
for new oil reserves and exploit the environment, I have no desire to support
their activities or invest my money in their shares. Likewise the big global
banks which finance their activities.
I believe the most effective way to get their
attention is to divest away from big oil. For a start, these are becoming
increasingly risky assets to hold in a portfolio and secondly, continuing to
derive profits and dividend income from such companies is ethically unacceptable
if you understand the role of fossil fuels and our climate crisis.
Does It Work?
Some people suggest that selling shares in these
big oil companies has no effect because the shares are merely bought by someone
else. However, as Bill McKibbin argues in this article for the Guardian,
divestment can weaken the reputation and financial creditworthiness of these
companies that continue with business as usual. The US trade association spend
millions on lobbying governments and media campaigns to discredit the
divestment movement.
The acid test will be share price performance and
we have seen this year that Exxon has fallen out of the S&P 500 index top
ten for the first time in over 90 years. In fact oil and gas accounts for just
4% of the index compared to 12% just a decade earlier. The S&P is up around
15% this year to date, but the oil stocks are down 3%.
According to this latest report from 350.org
$11trillion has so far been committed to divestment by institutions worldwide.
For me, it just feels better being part of the
solution rather than continue to support the pollution.
In recent years over 1,000 institutional
investors have decided to divest their
portfolios of fossil fuels. Many of these large
organisations are beginning to understand the risks of investing in fossil fuels.
Our Parliament's pension fund have agreed to develop a new climate change
investment policy following representation from 200 MPs. Two thirds of UK
universities have pledged to divest from fossil fuel companies. New York City
$200 billion pension fund has put forward legislation to divest from oil and
gas stocks. Norway's $1 trillion sovereign wealth fund - the world's largest -
has started to divest from oil and gas exploration companies.
The ball is rolling and will only get more
momentum as the protests from the likes of Extinction Rebellion and School
Strikes for a Future grow in popularity...an estimated 6 million worldwide took to the streets last week.
However, ditching these fossil fuel companies is
not straight forward. Sure if you hold shares in the individual companies likes
of Shell Oil or BP, it's easy to sell them and reinvest the proceeds elsewhere.
But many investors hold collective investments such as investment trusts or
maybe in their pension scheme and are simply unaware of what shares are held by
the manager. Furthermore, as I established at the start of the year when I put my global index
funds under the spotlight, multi-asset tracker funds such as Vanguard Lifestrategy can hold a surprisingly
high proportion of these undesirable assets when you drill down under the
surface (pun intended!).
The FTSE 100 for example holds 17% from the oil
& gas sector - principally oil majors Shell and BP. Vanguard's Developed
World Index (ex UK) holds 5.2% oil and gas stocks including Exxon Mobil,
Chevron and Total SA.
Globally diverse index funds have gained in
popularity in the past decade, in part due to their lower costs compared to
managed funds. However, the likes of Vanguard and Blackrock need to react
quickly to the climate emergency otherwise they continue to be part of the problem.
My Personal Divestment
Obviously if we maintain a portfolio of individual
shares, something I used to do, it will be obvious what shares we hold and most
investors will keep track of dividends and the annual report. If we hold
investment trusts or OEICs, it can be a little more tricky to know what
individual investments the manager holds but this information should be
available from perusal of the annual results or failing this by contacting the
fund managers.
Over the past year I have sold my investment trust
which hold oil shares - so, City of London and Aberforth Smaller were disposed
of in February. Later in the year I sold my global index funds - Vanguard
Lifestrategy 40 & 60, Vanguard SRI Global and HSBC Global Strategy and also
my Baillie Gifford Managed fund. I also sold Edinburgh Worldwide trust and
Scottish Mortgage which both recently acquired Elon Musk's SpaceX and related
companies involved in rocket development and space exploration.
The proceeds have been reinvested in my growing
green portfolio and some remains in cash awaiting further climate-friendly
opportunities. However, my portfolio is now fossil-free and also divested out of
the big banks which provide the life support for these big oil
companies...finance. Some people will regard the transition of divesting fossil fuel companies and their backers as more risky but I would contend it is probably more risky to continue holding them, regardless of the moral and ethical considerations. But everyone must make their own decision.
So,
- energy generation from oil & gas (also
coal) is now more expensive than renewables such as wind and solar,
- continuing
to use oil and gas is morally unacceptable due to the climate crisis,
- the fossil fuel
sector has underperformed the wider market for the past decade,
- there are
increasing number of law suits filed against big oil.
Remaining invested in this sector is increasingly
risky, so I am pleased to have finally managed to secure a more
climate-friendly investment portfolio.
For further reading/reference :
As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!
It has recently announced results for the full
year to end April 2019 (link via ITM website). Sales increased by 40% to £4.6m and grant revenue was
up 75% to £7.2m.
