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.


  1. But isn't it the case that a world tracker will automatically reduce its exposure to Oil and Gas as the demand declines?

    I am sure fossil fuels for ground transportation will all but disappear and faster than most people think, sadly its difficult to see how air, sea and agriculture will see the same kinds of fossil fuel reductions.

    I have quite a few investment trusts in renewables including FSFL,BSIF,UKW,JLEN etc, one thing that bothers me slightly is that as solar farm developments become cheaper the assets held by these trusts could fall, but at the moment BSIF and FSFL up around 20% with nice dividends.


    1. Good to hear your (and mine) renewable infrastructure trusts are doing well - let's hope it continues.

      I think there is quite a bit of research into alternative fuels for shipping and airplanes. Maersk, the worlds largest container company has pledged to introduce carbon neutral ships by 2030

      I think the business community has woken up to the emergency and it will be the more responsible companies which benefit from the transition in the longer term.

  2. Your closing paragraph calls out Blackrock, doesn't their "iShares II plc S&P Global Clean Energy" match your new green requirements?

    1. Thanks. Yes, I hold this ETF in my ISA. What I was getting at was a climate friendly, global index fund. As it happens, I had an email from Blackrock just yesterday advising that their new MSCI World ESG Enhanced fund launched in April will shortly be available via my Youinvest platform.

      I will do a little more research on this and post something maybe next week.

  3. I suspect there will be dip in interest in another oil industry product - plastics - given the level of concern about waste. It's not inconceivable that there will be plastics divestment campaigns in the future.

    1. Yes, since the global outrage to plastic following the Blue Planet series last year, the industry is under pressure.

      Again, there are plant-based alternatives to oil for these products so where there's the will to make changes, there's usually a solution to be found. In the meantime, I'm sure many people will try to go plastic free - especially single-use plastic.

      Of course, there are many other everyday products made from oil - clothing, lipstick, sports equipment, children's crayons etc. I guess all these will come under the spotlight, but again, I suspect there are plant based alternatives...and market opportunities!

  4. I'm thinking of adding a clean energy fund to my portfolio. Your post is informative. But BP and Shell are very profitable and cash generative. BP just announced Q2 profits above forecast. I think your assessment may not match current reality. In future yes, but now nearly everyone drives cars powered on oil and homes heated with gas.

    1. That's a fair point Adam. All I would say is that this rosy situation could change very quickly but only time will tell how it all unfolds.

      Good luck with your clean energy fund. Have you settled on which one to go for yet?

  5. As great as it is to see the fraction of energy generated by renewable or low-carbon technologies - and the transition is truly underway! - there is still a lot more to do regarding our entire energy mix.
    Natural gas for heating our homes, liquid fuels for fueling our cars and plastics for all of our consumer goods - there's so much more to do.

    Fundamentally we consume more than we can sustain - so you can't shift from using petroleum based oils to vegetable based oils. How we solve this problem will be the defining problem of our times. The simple answer of fewer people, consuming less and recycling more is much harder to implement. At least greening our power supply is relatively straightforward.

    1. Yes GFF, the transition to clean electricity is gathering pace but as you rightly point out, we need to now address other areas which may prove more difficult.

      With transport, electric vehicles seems to be the way forward but generally learning to make do with far less consumption in the West will be a big challenge. There's a lot to be said for voluntary simplicity but I imagine most people would not be prepared to buy into that so I guess there will need to be a degree of government intervention which is not what we are used to.

      As for population, I don't think even the IPCC are prepared to flag that up but since I was born in the 1950s, the world population has increased from 2.5bn to 7.5bn so yes, this must be addressed for a sustainable future.

      Of course, if we don't manage to work it out for ourselves, nature will do it for us!

  6. Hi, very good articles on moving away from fossil fuels and towards clean energy. What are your thoughts on ETFs in this area? I am investing on behalf of my 27 year old son in ISA and SIPP (so long term) I recently bought some Renewable Energy Trust shares in his ISA and now exploring ETFs for a more global reach in his SIPP. iShares Clean Energy ETF is one option although charges at 0.65% on the high side for an ETF. Any thoughts on ETFs for Clean Energy?

    1. Thanks Bellabeck. I am sure renewable energy is the future but at present, the opportunities are very limited.

      The only ETF that I know is the iShares Clean Energy but I am sure there will be many more coming to the market over the coming year. I hear Schroders will be launching a new Global Energy Transition fund so that may be one to look into?

      If other readers have suggestions in this area maybe they could help out.