Is it Time to Review Your Own Energy Investments?
In August the LA Times reported over $5 billion lost between CalPERS and CalSTRS respective portfolios due to the recent fall in oil and gas companies’ stock prices.
A spokesperson from the investment firm which led the analysis commented that “fossil fuel stocks are volatile investments. Investors and fiduciaries should take this moment to reassess their financial involvement in carbon pollution, climate disruption and the financial risk fossil fuels plays in their portfolio.”
In addition to the financial risks, many are motivated to make adjustments to their
portfolios due to concerns of the ecological or political complications inherent in the fossil fuels industry. The increased pollution of the air, water and soil are serious considerations that tend to be overshadowed by the climate change threat because of its scale and effect on the entire globe. Politically, the dependency on foreign oil has been a charged issue with social significance that can be equally alarming for the human health and economic insecurity of our society.
A report from Carbon Tracker and the Grantham Research Institute, Unburnable Carbon 2013: Wasted Capital and Stranded Assets, suggests that 60-80% of the oil, gas and coal reserve on the books of the global energy companies could become worthless if serious climate change regulations are implemented. This would mean $4 trillion dollars in share values and $1.27 trillion in debt would suffer losses due to stranded carbon assets.
Adding these arguments together has more and more investors demanding their portfolios be free of oil, coal, and gas companies while oftentimes redirecting investment dollars into renewable and energy efficient funds instead.
One very popular organization behind the fossil fuel divestment movement is 350.org. With chapters in cities across the globe, they are committed to reducing the Earth's carbon dioxide atmospheric content from its current level of 400 parts per million down to 350, which is a number considered safe for the planet by climate scientists. As part of its mission to help citizens go fossil fuel free, the group encourages divestment from nonrenewable energy investments and provides information on the top 200 fossil fuel companies around the world.
In addition to divestment, many investors are also looking at actively engaging oil, coal and gas companies with an aim of encouraging more sustainable practices. These active shareholders argue that divestment alone will not be a solution, and they point to some successes from engagement efforts over the years.
Whether it’s divestment or shareholder activism, government regulations play an important role in the future of our energy system. In 2010, with the Dodd Frank Act for financial reform, the Cardin-Lugar Amendment passed into law, requiring extractive companies listed on American stock exchanges "to publicly disclose all payments made to governments around the world on a project-by-project basis." Natural resources often have the worst exploitation in fragile states, so shining a light on these transactions allows citizens in these nations to track where their resources are going and who is profiting, which are key pieces of information for responsible shareholders. After five years of challenges to, and inactivity by, the SEC regarding its implementation, the US Federal District Court ordered earlier this month that an expedited ruling be issued by the federal agency for how corporations disclose this information.
On the flip side, the US government has not been able to pass any meaningful, comprehensive, long-term energy policy that integrates support for a greater weight on renewables. However, in the absence of national leadership in this regard, 30 states have taken sovereign action, passing some form of Renewable Portfolio Standards that require an increased production of energy from renewable sources.
This growing demand driven by state laws is creating opportunities for investors and developers. Responding to these regulations, utility companies sometimes will develop their own facilities but will also often diversify their sources by contracting long-term purchasing agreements with third-party wind and solar farms, to buy their energy for 20 or 30 years at a fixed prices, including inflation. These high yielding, tax efficient income streams are attractive in a world where income-oriented investors might only achieve 3-4% yield on their municipal bond funds.
With all of the financial volatility, recent drop in oil stock prices, ecological reasons to invest in clean energy, and mounting political pressure, now is an opportune time to consider your long-term energy investment strategy.