business climate change energy

Three reasons to divest from fossil fuels, from HSBC

We’ve had warnings about the risks of fossil fuel investments from Carbon Tracker, and from climate change campaigners 350.org. The former have raised the issue of fossil fuel assets being stranded, and burning a massive hole in the economy. The latter have called for divestment as a matter of principle, arguing that nobody should profit from climate change. Those still committed to investing in fossil fuels might want to pay attention to a new voice on the subject – HSBC.

A stranded asset is one that has unexpectedly lost value. It’s not going to make any money, but nobody’s going to buy it off you either, and it just has to be written off. The problem we have with fossil fuels is that if we are to avoid climate change, they must be left in the ground. Fossil fuels that can’t be burned are worthless, and yet trillions of dollars are locked up in the market for oil and gas.

So far, this discussion has been on the margins, but in a new research briefing, HSBC show that divestment needs serious consideration. The stranding of fossil fuel assets is a real possibility, and “the risks of this occurring are growing”.

They suggest that there are three different ways that fossil fuels could become stranded:

  1. Climate change regulation – if the world ever agrees a binding climate change agreement, measures to limit the use of fossil fuels would inevitably follow. The biggest risk here is to investments in coal. Coal power is carbon intensive and is likely to be the first thing to get regulated.
  2. Economics – recent events are demonstrating this one quite clearly at the moment. Tar sands and oil shale need a high oil price, or they won’t be exploited. When the oil price falls, investments in more expensive fossil fuels start to look like a bad bet.
  3. Energy innovation – as renewable energy advances and becomes cheaper, it will eventually impact demand for fossil fuels. That’s always been likely eventually, but progress in battery storage and solar power are moving faster than some expected.

In short, fossil fuel investments could be stranded by policy, economics, or technology – or most likely, all three at once. So is it time to bail on fossil fuels?

Obviously I’d say yes, on principle. But free of such things, what do HSBC recommend? They don’t have a ‘one size fits all’ solution, but insist that the problem can’t be ignored and “investors should have a strategy in place”. That strategy can take one of two mutually exclusive approaches: you can either divest, or you can ‘hold and engage’.

The divestment approach doesn’t have to be a wholesale sell-off, in their book. Some might choose to do that, and there are reputational gains to be had there, though you may miss the regular dividends from the oil companies. You could choose to ’tilt’ your portfolio instead. That would means looking at which sources of fossil fuels are likely to remain profitable in the longer term, and holding onto those. The more exotic stuff, such as deepwater oil, sands and shale, or Arctic oil, could be sold on or rebalanced.

Hold and engage is the second possible approach, where investors keep fossil fuel investments but press for greater diversification and carbon reporting, using their shareholder power to push for change. You get to keep making money this way, though HSBC warn that there is a “reputational risk that non-divesters may one day be seen to be late movers, on ‘the wrong side of history’”. Indeed.

6 comments

  1. There are millions of good reasons to keep the stuff buried. But at least three good points of economic reasoning are finally, seriously in play, advancing clean energy and unwinding a highly speculative commodity. Unfortunately endowment and pension managers still see enormous profit potential in oil and gas. Consumers can hasten this market shift, more than ever now, with conservation. How to boycott fossil fuel? Take a deserved day off the grid. What respectable cause doesn’t demonstrate resolve?

  2. Hard to invest in Saudi oil as it is state owned and operated. That most reserves are owned by state oil companies shows that the ‘stranded assets’ issue is bigger for oil producing countries than for most Western economies.

    1. True, it’s an example of oil source that remains profitable rather than an investment to hold, but my sentence was unclear on that front and I shall amend it. The second most profitable oil source is Venezuela, so good luck there too.

      Interestingly, I remember reading somewhere that Saudi Arabia opened their stock market to foreign investors for the first time last year. That doesn’t include Saudi Aramco, or we’d have heard a lot more about it, but you can presumably get a slice of the Saudi oil sector indirectly.

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