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.
- 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!
Congratulations. It's great to read this and is such a contrast to other blogs and forums where the subject of ESG investing is rarely mentioned.ReplyDelete
My pf consists of Vanguard's global equity tracker (VWRL) as a core holding with various other funds as satellites, most of which are fossil fuel and banking sector free. My problem is finding a suitable 'green' alternative to VWRL whilst at the same time keeping platform fees and other costs to a minimum. As we've both discovered Vanguard seem loathe to introduce a serious green tracker in the UK.
What to do?
Thanks bernie, I guess we can all do our bit once we become aware of the problem. My core holdings were the two global, multi-index funds - Vanguard Lifestrategy and HSBC Global Strategy. As you say, finding a climate-friendly alternative is the problem. I am sure the industry will be bringing some tempting offers to the market in the near future as the penny drops but I guess for the time being I will have to be patient and sit on the cash proceeds for a while.Delete
If readers have any suggestions, please feel free to chip in!
Well done, diy - I didn't think you were going to be able to divest so quickly but I guess you have the luxury of being able to hold cash out of the market and not worry about 'time in the market'.ReplyDelete
I've opened a small investment in UKW, so that and my investment in TRIG are a small step to more sustaiable investments. Bluefield Solar and Nextenergy are both now available via Freetrade so I will pick one of those at some point to invest in. I haven't the luxury to be able to hold a lot of cash so will be keeping my current investments until there are viable alternatives in the market.
At the end of last year I was thinking maybe increase my 'green' weighting to 10% but the scale of the problem was brought home after reading 'The Uninhabitable Earth' (write up in March... http://diyinvestoruk.blogspot.com/2019/03/the-uninhabitable-earth-review.html) and also I have been inspired by the actions of the young people led by Greta Thunberg. As the year has unfolded it felt increasingly the right thing to just remove fossil fuels from my portfolio even though there are not yet the climate-friendly comparable alternatives.
Well done with your small steps and good to see these renewable infrastructure trusts are now available on your platform.
A recent addition available to invest in is IShares Global Clean Energy ETF (INRG) - is this something you'd be interested in?ReplyDelete
Yep certainly am interested and picked up the shares for both ISA and SIPP earlier this year. It represents around 10% of my 'green' allocationDelete
Have you calculated an OCF for your portfolio? I'm keen to divest from oil & gas and have selected funds with a minimal amount (or so I believe).
However, this is often difficult with funds, as often they only publish the top 10 most significant holdings by the percentage of the fund.
What platform(s) have you used? Do you hold these in a pension or S&S ISA?
Thanks Greg. As you say, it's difficult to avoid O&G as you need to check the latest results for a full list of portfolio holdings.Delete
I hold my portfolios in 2 ISAs - AJ Bell Youinvest and Halifax Share Dealing and also my SIPP in drawdown with AJ Bell.
As for charges, they are higher with the renewable infrastructure but none with the individual shares so probably averages out at 0.5% plus platform charges of £12.50 with Halifax and £30 with Youinvest.
Good luck with your efforts to divest your portfolio!