Monday, 12 August 2019

Legal & General Revisited

L&G is a large FTSE 100 company with a market cap of £14bn employing over 8,000 people serving 10 million customers. It is the UK's largest life insurer and has assets under management of over £1 trillion.

The shares were first acquired for my income portfolio back in 2014 and held for several years until a change of strategy prompted a sale in 2017. 

However, I tend to keep tabs on various investments held over the years and I have decided to embrace the shares once more as I wish to support companies that are making a positive contribution on the climate front especially those on the same page as myself in relation to coal and oil stocks.

Climate Divesting

In 2016, the company introduced its Climate Impact Pledge including a commitment to engage with the world's largest companies in six sectors which are key to meeting climate change goals in accordance with the Paris Agreement. These are oil & gas, mining, electric utilities, autos, food retail and financial.

The company's investment management arm, LGIM takes its responsibilities towards sustainable strategy very seriously and will frequently push the boards of the large multinationals to comply with obligations under the Paris Agreement.
However, when these companies fail to respond in a positive way, action has to be taken and LGIM are now starting to adopt a more aggressive response by divesting away from these companies.

Head of commodities research, Nick Stansbury has developed a model to rank the companies most at risk from the climate emergency. He has deep misgivings about the future of oil and says “Uncertainty around the level of demand growth creates massive instability in the way oil markets work, and that has all sorts of implications for investors"

LGIM started to divest some oil stocks in 2018 and have continued to drop some of the larger players in recent months. As an example, in June LGIM announced it had sold off $300 million of shares in Exxon Mobil and use its remaining holding to vote against the reappointment of CEO Darren Woods. LGIM is one of Exxon's top 20 shareholders.

This is the sort of action which is most likely to have influence in the boardrooms where big decisions are being taken so I want to support L&G in their endeavours.


The other reason for taking another look at the shares is the recent share price weakness and increasingly attractive dividend. 

Last week the company announced interim results showing profits up 11% to £1bn and half-year dividend up 7% to 4.93p which puts the shares on a fwd yield of 7% at my current purchase price of 240p.

The company are working towards a low carbon future and head of Sustainability and Responsibility Strategy, Omi Meryam has recently set out a comprehensive action plan and says "Climate change carries significant financial risks, so protecting the planet and protecting our clients’ investments go hand-in-hand".


I decided to give up on holding individual shares some time back as I moved toward the globally diverse index funds such as Vanguard Lifestrategy. However, as I now look more closely at the environmental and climate-related aspects of these large index funds, I am becoming more circumspect. I do not expect to be adding many more single company shares but, at the same time, do not have a hard and fast rule about not holding them and remain open to opportunities when the circumstances appear attractive.

One Year Performance v FTSE All Share Index
(click to enlarge)

L&G is the UK's largest defined contribution pension manager following the introduction of auto enrolment and serves 3.4 million workplace customers. The share price was approaching 300p not so long back so I believe they offer the potential for significant capital appreciation, maybe after Brexit is resolved, and in the meantime I can sit back and gather a nice 7% dividend income tax free in my ISA.

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!

Thursday, 8 August 2019

Orsted - Half-Year Results

This energy company based in Denmark is a global leader in offshore wind with around 30% of global capacity and operations in Denmark, UK, Germany and Holland. It also operates several wind farms outside of Europe in the US and also Taiwan. The company's vision is to see a world run entirely on renewable energy.

The shares were added to my portfolio in April at 495 DKK and have advanced nicely over the past few months to 630 DKK. They also now feature in some of my other holdings - Mid Wynd Trust and Baillie Gifford Positive Change.

Renewable energy is very much in the ascendancy due to concerns about our climate emergency. It is estimated the global wind energy sector will attract investment of $1 trillion over the next 10 years as the world makes the transition from fossil fuels to low-carbon clean energy.


The company has today announced half year results to June 2019. Operating profits increased to DKK 8.8bn (2018 8.5bn) and expectations for the full year are well on track.

CEO and President Henrik Poulsen says:
"2019 has been a very good year for ├śrsted so far. Operating profit for the first half of the year amounted to DKK 8.8 billion, which was in line with our expectations and keeps us well on track to deliver on our full-year guidance of DKK 15.5-16.5 billion.  
We were selected as preferred bidder in the auctions in both New Jersey with our Ocean Wind project (1.1GW) and New York with the Sunrise Wind project (880MW) which we own in a JV with Eversource. Subject to final investment decisions, the wind farms are expected to be completed by 2024. We are very pleased with these awards and are well on track to reach our ambition of 15GW offshore wind capacity by 2025 as we continue to pioneer the global offshore wind industry.
In June, we officially inaugurated the Borkum Riffgrund 2 offshore wind farm in Germany and in July, we commissioned the Lockett onshore wind farm in the US well ahead of schedule.
In June, we acquired the 103MW construction-ready onshore wind project Willow Creek in South Dakota in the US. The project is expected to be commissioned by Q4 2020 and will expand our operations in the Southwest Power Pool market, covering the central US".

The share price has increased by 27% since purchase to DKK 630 and this is the second largest holding in my 'green' portfolio.

The shares yield around 1.7% based on the current price.

Share Price past 6 months

Green Transition

In the North Sea, 131 turbines have been installed and Hornsea 1 is due to be completed later this year and will become the world's largest offshore wind farm with a capacity of 1,218MW. Work has started on Hornsea 2 which is due for completion in 2022.

The company is on track to be carbon-free by 2025 and have plans for the sale of the remaining gas and fossil-based power operations which make up around 18% of the business. They have announced plans to phase out their company fleet of petrol/diesel cars and replace them will fully electric by 2025. The company has a strong commitment to the Paris Agreement and the UN Sustainable Development Goals.

The company has set ambitious targets to reduce greenhouse gas emissions in their supply chain by 50% by 2032.

So, although there are the inevitable currency considerations and the higher risks associated with single share ownership, I am happy with progress so far but it's early days.

The company is awaiting the outcome of various tenders on new projects in the US, Taiwan and Europe and news should unfold later this year. So, fingers crossed.

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!

Monday, 5 August 2019

iShares MSCI World ESG Enhanced ETF

I have been on the look out for a more globally diverse, ethically orientated fund for a little while and recently found this new ETF from iShares launched in April (ticker EDMW).

It is basically a developed world index fund however the fund rules out companies involved in unethical businesses such as weapons, landmines and tobacco for example. It also excludes companies involved in coal production and oil sands. It also scores the remaining constituents according to environmental, social and governance criteria - ESG - and therefore companies which may be smaller but come out with a higher score will get a larger weighting in the overall portfolio.

For example, one of my individual shareholdings Orsted, a global leader in offshore wind gets a higher percentage weighting 0.14%, than much larger companies such as Mondalez or Kellogg for example. By comparison the weighting for this company with my Vanguard SRI is just 0.03%.

Here's a short extract from the MSCI website:

"In recent years ESG investing trends have been driven by more investors seeking not only social benefits but also managing financial risks and opportunities. In fact, a recent survey indicated that most asset owners surveyed see the management of financial risks as the key benefit of ESG. In addition, after the COP 21 conference in 2015, many investors came to realize that climate change is not only an environmental topic but also a financial risk that will very likely have a material impact on many companies’ profitability during the global transition toward a low carbon economy. An estimated $25 trillion invested in carbon-related infrastructure is thought to be at risk from this transition".

The MSCI range of indexes measure the carbon intensity of each index to assist investors who wish to take such matters into consideration. They measure the carbon intensity for each company in the index and this can then be used for portfolio weighting. The global average is 198.3 tons of CO2e per million $ of sales. With this ESG fund, the figure is 120.7.

Here is a comparison of weighting of the large oil companies with my Vanguard SRI Global which I covered back in February. I am not sure why some companies such as Shell are held in the Vanguard fund and not the other whilst BP is in the iShares fund but not Vanguard.

Ideally I am looking for a global index fund that excludes these big oil company shares as well as some of the other high carbon polluting industries such as airlines and meat production - a truely climate-friendly alternative. It would be even better if it was multi-asset fund including government and green bonds! But for now this may be as close as I am going to get other than the managed options.

I have been asking my broker AJ Bell to list this ETF for a while. They initially told me they could set something up if I had £85,000 to invest however, after getting iShares involved, I have now had confirmation that they will now agree to do this for ordinary investors to purchase...thanks but it really should not be so difficult for investors to hold ESG funds!

I now need to do a little more research and also assess whether right now is the best time to invest in more equities given the rise of the markets and the fall in sterling compared to the US dollar.

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!

Monday, 29 July 2019

My Concerns About Investing in Fossil Fuels

Oil and coal, more recently natural gas have driven the global economy for the past 200 years. As recently as 2008, coal generated half of our electricity in the UK. However we are now entering a new age for power generation in response to the global climate emergency. The transition to clean energy such as hydro, wind and solar is well underway and will be disruptive.

Due to the activities of climate protestors such as Greta Thunberg, the oil industry can no longer maintain its 'business as usual' approach. The same goes for sectors dependent on oil as well as the banks who finance their operations and also their insurers who underwrite the risks.

The Transition

The oil industry now appears to accept the science of global warming but they maintain that the demand for fossil fuels will be there for several decades and this justifies their policy to continue with exploration for new oil fields and finding new areas to drill such as the Arctic. Investors who may well be sympathetic to the climate arguments, may well agree the transition will be a long and gradual process and therefore continue with a balanced allocation which contain oil and gas stocks - now renamed as 'non-renewable' energy.

However, I would suggest the transition is moving much more quickly than the oil industry cares to acknowledge. Governments around the world are developing policies to deliver a carbon-neutral economy by 2050. To achieve this, they will need to implement policies now to have any chance of meeting their goal. Here in the UK for example, there will be no more gas central heating boilers in new properties from 2025; coal-fired power stations will be history at the same date.

In a recent announcement, the European Investment Bank says it will no longer fund fossil fuel companies after 2020 as it aligns its strategy with IPCC climate targets. The UK government is now coming under intense pressure to stop providing finance to fossil fuel developments via its UK Export Finance agency. The tap is being turned off to an industry which is preventing the world from hitting its GHG reduction targets.

Secondly, the costs of renewables have fallen dramatically in recent years. It is now cheaper to generate electricity from wind and solar compared to traditional fossil fuels or nuclear. Introduce new battery technology to even out the lack of continuity associated with limitations of renewable generation, and it's difficult to make the case for new fossil fuel generation just on cost considerations alone.

As weather patterns - heatwaves, drought, wildfires, hurricanes - become more extreme, public opinion will harden against the fossil fuel industry.

There is no doubt about the transition from the old oil-based economy to the new, clean renewable energy economy. What is not clear at present is when the tipping point is reached. After this point, the old economy will fall away very quickly.
As can be seen from the chart covering the past 5 years, the commodities and oil sector has not performed well compared to the global equities market represented by the Vanguard fund.

Global Equities v Commodities & Energy Sector

How Will Investments be Impacted

As many readers know, the investing process is cyclical - some sectors do well one year and others another year. There is a reversion to mean - equities will outperform bonds for a period and this is reversed as government bonds provide stability during periods of uncertainty. The general advice to investors is to hold a diverse mix of assets.

However, the energy transition is not cyclical but structural - its a one way process which has implications for investors because the transition will cross the tipping point which will mean changes will happen far quicker than 'experts' predict and therefore relying on past performance will carry significant risks. The billions of dollars still being ploughed into coal, oil and gas projects will become a liability to the lenders and their insurers as these have a high risk of default and a legacy of worthless stranded assets. There are many examples throughout history where new technology has disrupted the traditional way of doing things.
Walney Extension Cumbria
providing clean power for 1.2m homes
Of course, the smart operators will have already adapted to the changes in energy. For example, one of my recent acquisitions, Orsted has transformed itself over the past decade from oil, gas and coal business under its previous name DONG (Danish Oil & Natural Gas) to become the world leader in offshore wind. Shell are trying to take tentative steps away from the oil and gas sector and into biofuels, carbon capture and wind/solar. They have signed a 5 year deal with BSR to provide solar power for its renewables arm Shell Energy. However 98% of their global operation is focussed on traditional oil & gas so I'm not sure how easy it would be to transform a global oil major or indeed how committed they really are to clean energy. Shareholders should certainly be concerned and pushing for change.

The projection for demand for their products from the oil majors is well into the 2040s but these projections have been overly optimistic in the past. I personally suspect we are already close to peak oil and the coming decade could well see a steep decline in all forms of coal/oil extraction which we simple cannot afford to use if we are to limit global warming to 1.5C or even 2.0C as recommended by the IPCC.


In February, I put my multi-asset global index funds under the spotlight and was a little surprised to see the level of exposure to oil majors in my Vanguard Lifestrategy compared to the HSBC Global Strategy. Since then I have made several changes to my portfolio to reduce this exposure to fossil fuel investments.

As I re-position my portfolio towards more climate-friendly funds, I am naturally looking to filter out coal, oil and gas however, with my global index funds, this is not so easy. Even the so called ESG 'green' options all hold oil majors such as Exxon Mobil, Shell and Chevron for example. My Vanguard Lifestrategy has 25% of its equity portion invested in the FTSE All Share index which has a high exposure to the likes of Shell and BP - currently 18% - so I have repeatedly asked Vanguard UK to consider lowering the allocation to UK equities and also to introduce some climate-friendly alternatives. Nothing so far...

I remember back in 2007/08, the investing community ignored or under-appreciated the risks posed by the sub-prime mortgage crisis in the US which led to the global market crash and governments having to bail out the major banks to prevent them going under. The effects are still being worked through a decade later. My concern is this could happen on a bigger scale as investors and lenders fail to appreciate the risks associated with this global energy transition. We have  President Trump who is openly skeptical about climate change and very supportive of coal, oil and gas - he could well be in power for another 5 years.

The past 5 years have been the warmest on record and it's looking likely this trend will continue and 2019 will be the second warmest on record as the heatwave rips across Europe and the Arctic wildfires burn for weeks. Its a paradox that these past few years will most likely be the coolest of the next 50 years due to the accumulated CO2 playing out through the system.

So, I will look to further divest fossil fuels and embrace the clean energy of the future. Hopefully the likes of Vanguard and Blackrock will respond to investor demands for climate-friendly funds and I hope readers will lobby their fund managers to offer environmentally friendly alternatives. I will keep a little more cash in reserve to maybe take advantage of any sudden downturn in the markets.

Feel free to share any thoughts on the energy transition in the comments below - all opinions and views welcome as ever.