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What’s the smart money saying about our energy future?

22 April 2016 in

“This isn’t an environmental issue. This has moved into the mainstream following the Paris agreement.”

– Anne Simpson, CalPERS’ investment director of global governance.[1]

The climate agreement struck in Paris and approved by nearly every country in the world to limit earth’s average global temperature rise to below two degrees Celsius above preindustrial levels has thrust climate change on the investing agenda. By “this,” Ms. Simpson was referring to the call by CalPERS and other shareholders of Exxon Mobil for America’s most valuable energy company to disclose the risks of climate change to its business. Similar calls came from fund managers after top U.S. coal miner Peabody Energy said it was filing for bankruptcy.[2]

What are we to take from this? If climate change risks can potentially puncture fossil fuel asset values, is it also becoming a mainstream and investable theme? If you follow the smart money and the renewable targets set by the world’s largest businesses, then the signs seem to be pointing to “yes.”

Climate risks pressure energy stocks
Some fund managers are feeling the heat from their exposure to fossil fuel assets, concerned that the asset’s value will shrink in our march to a low-carbon economy. From real estate to bonds to stocks, professional investors are reviewing their carbon-polluting holdings, with some devising plans to shed them completely over time.[3] Other funds, notably U.S., Australian and U.K. pensions, are meanwhile allocating portions of their portfolio to green assets over time too. [4]

Still some are keeping away from companies that disproportionately add to greenhouse gas emissions. Examples include Stanford University Endowment which no longer invests in businesses that primarily mine coal to generate electricity. Allianz said in December it was pulling out of companies that get 30 percent or more of their sales or power supply from fossil fuel. [5] Others are taking steps to scrub deforestation from their portfolio. Companies financed by Netherland’s Rabobank are asked to have nothing to do with palm oil operations in areas marked for conservation.[6]

Pressure will likely grow for businesses to disclose their greenhouse gas emissions with risks and opportunities from climate change. Money managers have hired nonprofits like CDP to request this information and the latter does so on behalf of 767 institutional investors with US$92 trillion in assets.[7] Ceres is another nonprofit working the disclosure front on behalf of investors.

Has any of this had any impact on oil, coal and gas stock performance? Fossil fuel energy stocks have largely underperformed the broad market based based on a review of one- and five-year performance of traditional energy ETFs.

Performance of fossil fuel ETFs
* Click on image to enlarge.
ETF

ETFs sorted in descending order by assets under management, ETF.com

Not surprisingly, the market cap of large energy companies has duly shrunk over the last few years.

20 Top Global 100 companies with
largest absolute decrease in market  cap, 2009 – 2015

* Click on image to enlarge.
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Source: PwC

Beginning of the end for coal?
Exactly 50 U.S. coal companies have filed for bankruptcy since 2012[8], the latest being Peabody. In recent years, coal prices have been pressured by cheap, less-polluting natural gas, stricter air pollution standards and slowing Chinese demand.

Still, the dirtiest of fossil fuels isn’t disappearing; Peabody’s bankruptcy protection should reposition it for the long haul as coal-fired power stations have long operational lifetimes. To be sure, we’ll still get our energy from dead plants and animals for years to come. Let’s not forget that fossil fuel producers get subsidies in the hundreds of billions, several times the incentives handed to makers of renewable energy. Still, the trend points to coal’s dwindling share in U.S. electricity generation.[9][10]

Annual share of total U.S. electricity generation, 1950 – 2016
* Click on image to enlarge.
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Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016, U.S. Energy Information Administration

Financial markets going green
Ahead of December’s climate change agreement, businesses from various sectors including financial services, issued announcements and frameworks touting their positions and commitments to reducing their carbon footprint. Notably, Morgan Stanley CEO James Gorman called on investors to inject the sustainability theme into their portfolios. Around the same time, Goldman Sachs said it looked to invest $150 billion in clean energy financing and investments by 2025. Meanwhile, JPMorgan’s environmental and social policy framework prohibits it from financing new coal-fired power plants in 32 OECD developed countries.

Meanwhile, more products are coming online to capitalize on the low-carbon shift. An S&P 500 Fossil Fuel Free ETF came to market late last year. The green bond market, still a small shadow of the $78 trillion global bond market, nonetheless hit a record $42 billion in 2015.[11]

Large banks are trying to whet their clients’ appetite for green. Goldman issued a green-stock investing guide and HSBC has a whole suite of tools, partnerships and products to manage climate adaptation risks advising its clients on climate change’s looming risks.[12]  According to Arabella Advisors, 436 institutions and 2,040 investors representing an estimated asset value of $2.6 trillion have committed to divesting some or all of their fossil fuel holdings. In 2014, 181 institutions committed to this. According to news reports and websites of these institutions, those who said they would be de-carbonizing some or all of their portfolio include CalPERS, Norway sovereign wealth fund, The Rockefeller Family Fund and Stanford University Endowment.

Businesses jumping on the green bandwagon
According to Ceres, 59 percent of Fortune 100 companies have set targets to increase their renewable commitments, reduce their greenhouse gas emissions or both.[13] But let’s be clear that businesses are going green not just for their public image, but climate risks need to be managed.

Walmart and Alphabet were out in front early with their well-documented green initiatives; the latter aims to be powered by renewables 100 percent and fund nearly $2.5 billion in renewable energy projects by 2025. Alphabet in December announced it was making the largest purchase of renewable energy by a non-utility company noting that this “made good business sense by ensuring good prices.”[14]  More recently, Apple issued $1.5 billion in bonds to fund clean energy projects across its global operations, said to be the largest green bond issued by a U.S. company.

Climate risks to supply chains, ranging from sourcing raw materials to price uncertainties have also fed the greening of corporate policies. Nike and Coca-Cola have spoken publicly on how global warming has disrupted their supply chains. From droughts that dry up the water supplies needed to produce Coke’s sodas to the extreme weather impacts on cotton harvests used to making Nike clothing, these companies are adopting conservation measures or using fabrics less dependent on weather and installing greener manufacturing processes.[15]

Be sure to check out our Fossil Free motif that contains companies in the Environmental Protection Agency’s Green Power Partnership List. It has outperformed the S&P on one-year and one-month benchmarks, up 2.4 percent in the last month and 4.1 percent in the last year. S&P gained 2.1 and 1.9 percent in the past month and year, respectively. Notably, the Black Gold motif has been under pressure from soft oil prices, down 19 percent on the year and underperforming the broad market about two months after its creation in January 2012.

Finally, climate change’s urgency is also getting nods from ultra-wealthy investors. Bill Gates last year launched the Breakthrough Energy Coalition backed by more than 20 other fellow billionaires to invest in clean energy. Gates also launched another program with 20 countries to double down on clean energy technology research and development budgets. This is the kind of momentum that the green sector needs to move into the black as the years roll on and the money rolls in.

Performance of energy ETFs
Table 1: ETFs sorted in descending order by assets under management, ETF.com

 

 

 

 

 

20 Top Global 100 companies with
largest absolute decrease in market  cap, 2009 – 2015

Table 2: A 2015 PwC analysis identifying market cap trends among Global 1000 companies

 

 

 

Annual share of total U.S. electricity generation, 1950 – 2016

 

 

 

Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016, U.S. Energy Information Administration

 

 

 

[1] Wall Street Journal

[2] Widely reported, including by the Los Angeles Times

[3] United Nations Environment Program and various

[4] United Nations Environment Program and various

[5] Bloomberg, Allianz Exiting Coal Stocks

[6] ibid

[7] Carbon Disclosure Project

[8] SNL Financial, 2016.

[9] U.S. Energy Information Administration

[10] U.S. Energy Information Administration

[11] Climate Bonds

[12] Financial Institutions Taking Action On Climate Change

[13] Ceres, Power Forward: Why the World’s Largest Companies are Investing in Renewables

[14] Google blog, December 2015

[15] Threat to Bottom Line Spurs Action on Climate

 

 

 

Information contained herein is based on data from multiple sources and Motif makes no representation as to the accuracy or completeness of data from sources outside of Motif. References to third parties contained herein should not be considered a solicitation on behalf of or an endorsement of those entities by Motif. The data contained herein from third party providers is obtained from what are considered reliable sources. However, it’s accuracy, completeness, or reliability cannot be guaranteed.

 

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  1. Jeanette
    17 Jul at 11:31 pm

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