Cleanse thy money: the case against dirty fuel

Written by Rebecca O'Connor on 29th July 2015

by John Ditchfield, a good-with-money.com expert and director at Barchester Green, the ethical Independent Financial Adviser, reproduced from his blog with kind permission

Many clients have been approaching my investment firm, Barchester Green, with a similar question in recent weeks.

To paraphrase the late, great Freddie Mercury: they want to break fossil free.

Yet while some good options do exist for those wishing to take the carbon-based energy sources out of their investment portfolios, the practicalities make it more challenging than many expect.

An argument that is heating up

The recent rise in interest in this area comes as no surprise.

In March, The Guardian newspaper stoked interest with its high-profile ‘Keep it in the ground’ fossil fuel divestment campaign and last month, oil giant BP hit the headlines due to a shareholder resolution which called on it to be more transparent in its response to climate change, attracting the support of 98 per cent of shareholders.

The BP resolution, submitted by the ‘Aiming for A’ Coalition of investors including the Church of England, ShareAction, UK Local Authority Pensions and Client Earth, asked BP to include data around low carbon energy research, emissions management and to publish a business plan to deal with the ‘stranded assets scenario’ – something I spoke about with Jeremy Leggett in a recent blog.

‘Aiming for A’ Coalition member Catherine Howarth commented to me: “This is the first resolution on an environmental theme ever to pass at a UK listed company. For BP’s shareholders this means we can look forward to far stronger reporting from the company on how it will respond to climate change and international policy measures to control it.”

It’s about money, not morals

Similar resolutions will be brought at the AGMs of Shell and Norwegian oil firm Statoil in the coming weeks. I believe this interest has come to the boil now not just because of the moral case for action against climate change, but because the financial case is increasingly compelling.

For example, organisations such as Carbon Tracker have calculated only 20 per cent of already known fossil fuel reserves can be burned if the world is to be kept below a 2 degree temperature rise (meaning that listed fossil fuel companies, such as oil companies, are potentially massively over valued [1]). Similarly the current low oil prices are making oil extraction from the deep sea or from tar sands economically unviable.

The problem of state actors

Heartening as the progress at BP is, the truth is that if we want to prevent carbon dioxide emission levels from reaching unsustainable levels, then it is not just the oil giants that need to reform. We need the international community to take much greater action. That is because most oil reserves remain state controlled.

Around three-quarters of all crude oil production is controlled by state owned companies and the world’s 13 largest energy companies (as measured by reserves they control) are government owned and operated. Some of the biggest players are Saudi Arabia (Aramco), Russia (Gazprom), China and Iran[2].

Therefore the real drive on climate change needs to come from government and international bodies such as the UN – with much resting on the COP21 meeting in Paris in December.

Going fossil fuel free

For those readers who want to reduce their investments’ exposure to fossil fuels it is important to distinguish genuinely fossil fuel free funds from the broader range of options. For example some socially responsible investors will talk of being a sustainable energy fund but will include natural gas, or even oil and gas and mining companies in their portfolios. Interested investors will also want to assess the financial risks associated with reducing exposure to fossil fuel stocks.

I’d recommend several reports for more detail on this including:

Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment, issued by Impax Asset Management in 2014.

Building a Carbon Free Portfolio, issued by Aperio in 2014.

Responding to the Call for Fossil-fuel Free Portfolios, issued by MSCI in December 2013.

One of the key findings of the latter report, by MSCI, was that investors who dumped fossil fuel companies have outperformed those who remained in coal, oil and gas by an average return of 1.2% more a year over the last five years.

I’m also happy to provide some detailed analysis summarising the findings of these reports to any clients reading this blog.

Despite the complexities, there are several options available to those who want to divest or reduce exposure in this area. For example Barchester Green manages several fossil fuel free portfolios, most prominently for the charities Greenpeace and WWF.

We also point clients to the WHEB Sustainability Fund, which has no investment in companies whose core business is the extraction or combustion of fossil fuels and to the Conbrio B.E.S.T Income Fund.

Conbrio B.E.S.T Income has no exposure to any companies that extract fossil fuels, including oil and gas producers or mining companies and instead favours companies innovating in areas such as renewable energy infrastructure.

For example, last quarter the fund invested in the floatation of Lakehouse plc, a company specialising in energy-related support services such as insulation, smart metering and gas safety[3].

Members of the Ethical Investment Association are also committed to increasing access to green and fossil fuel free investment and their website could be a useful source of advice on a divestment strategy.

To discuss any of these strategies in more detail or for more information please see our website or contact us.

[1] Carbon Tracker – Unburnable Carbon report
[2] The Wall Street Journal ‘The long shadow of the invisible hand’ www.wsj.com/articles/SB10001424052748704852004575258541875590852 and Transparency International Corruption Perception Index http://www.transparency.org/cpi2014/infographic#compare-
[3]http://www.premierfunds.co.uk/FactSheets/ConBrio%20B.E.S.T%20Income/ConBrio%20B.E.S.T%20Income.pdf