Oil & gas and coal companies form one of the world’s largest asset classes, worth nearly $5trn at current stock market values. In the past two years, dozens of public and private institutions have announced plans to divest fossil fuels from their portfolios – a movement one executive described as “one of the fastest-moving debates I think I’ve seen in my 30 years in markets”.
Fossil fuels are investor favourites for a reason. Few sectors offer the scale, liquidity, growth, and yield of these century-old businesses vital to today’s economy. This White Paper explores the motivations behind fossil fuel divestment, the scale of existing fossil fuel investments, and potential alternatives for investment re-allocated from oil, gas, and coal stocks.
- “Fossil fuel divestment” is a concept that can reflect various societal or practical considerations. Environmental concerns, moral and ethical stances, concerns about asset stranding, and portfolio diversification are all potential rationales.
- Fossil fuel investment meets numerous institutional investor imperatives. Fossil fuels offer four attributes (overall scale, liquidity, value growth, and dividend yield), a more complete investment package than that provided by most other sectors.
- Fossil fuels are an enormous asset class. The current value of the 1,469 listed oil and gas firms is $4.65trn; 275 coal firms are worth $233bn. ExxonMobil, the largest oil and gas firm, has a market cap of $425bn.
- The world’s largest investors – and many governments – are the key shareholders in fossil fuel companies. BlackRock, the largest investor in oil and gas equities, controls $140bn via just its largest 25 holdings. Governments of many countries, including China, Russia, and India, are strategic investors in public companies as well.
- Divesting from fossil fuels does not equate to investing in renewables. Clean energy will attract $5.5trn in investment between now and 2030, according to Bloomberg New Energy Finance, but not every dollar will be suitable for every institution. Projects, public equities, YieldCos and green bonds offer stability, growth, and yield, but not all in one package.
- Other major sectors offer some of the attributes of oil and gas companies, but not all of them. Information technology is significantly larger than oil & gas as a sector – $7trn – but pays low dividends as a proportion of post-tax profits. Real estate investment trusts are only $1.4trn in total market cap, but currently have average dividend yields of more than 4%.
- Significant divestment from coal would be much easier than significant divestment from oil and gas. Listed coal companies are small enough in aggregate that investors could divest and re-invest without unbalancing portfolios. Oil and gas companies are too large, and too widely held, for divestment to be easy or fast.
- A robust architecture for fossil fuel divestment will require alternative investment structures or asset classes, not just “alternative energy”. In order to attract trillions of re-invested institutional dollars, clean energy will need a vast expansion of its YieldCo and green bond structures, or indeed, new, as-yet-unbuilt instruments.
To access the full report, please click on the PDF download button below.