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!