July 20, 2018 (IEEFA) — A paper published today by the Institute for Energy Economics and Financial Analysis details the growing rationale for divesting from the fossil fuel industry. The paper—“The Financial Case for Fossil Fuel Divestment”—is aimed primarily at trustees of investment funds that continue to hold stakes in a sector that is freighted …
“A cumulative set of risks undermines the viability of the fossil fuel sector. Climate change is hardly the only challenge facing the fossil fuel industry. The broader factors bedeviling balance sheets stem from political conflicts between producer nations, competition, innovation, and attendant cultural change. These risks can be grouped into a few broad categories, such as “pure” financial risk; technology and innovation risk; government regulation/oversight/policy risk, and litigation risk…”
“Historically, fossil fuel companies were drivers of the world economy and major contributors to the bottom line of institutional funds. This is no longer the case,” Sanzillo said. “Whether oil prices are rising or falling the investment thesis cannot replicate the sector’s strong past performance.”
Once a pillar in institutional investment strategies, the oil and gas sector is described as speculative rather than a sure return on investment. The financial industry now regards technology, health, consumer discretionary, real estate and manufacturing as providing better returns. They have pretty much decided that the oil and gas industry wide and individual company failure to acknowledge and prepare for transition to a low carbon future will make a much greater risky investment. The industry has underperformed during the past three to five years. The report goes on to show that indexes like the MCSI World Index do better without fossil fuels.
Material and reputational risks are demanding that executives of oil and gas companies, indeed the entire industry, directly address the growing skepticism in some financial industry circles. The long view is that traditional oil and gas companies will have a diminishing role as the world moves to a low carbon future. Oil and gas companies, however, are not standing still.
Forbes Magazine recently featured a story “Benchmarking Upstream Resilience to a Low-Carbon Future.” They counsel a need for oil and gas companies to build portfolios that can withstand financial industry scrutiny using a new carbon efficiency indicator, NPV/tonne which assesses the financial implications of corporate carbon emissions. Sustainability metrics which integrate non-financial and financial information are becoming more of the norm in decision making. The Oil and Gas Industry is beginning to address the challenges of climate change head on. One thing is certain, the magnitude of change in this industry will be no less complex than the disruptions seen in retailing, hospitality and media.
Where financial performance is key to your business’ longevity, maybe it’s time to address climate resilience and sustainability or face disruption. We can help.
Read the full article at: ieefa.org