Almost a quarter of the respondents to a survey of 39 fund managers think that oil and gas companies should begin to wind up in an orderly way and return cash to shareholders. Of the same 39, who between them control over $10 trillion in assets, 37 believed oil and gas stocks would not be an attractive investment over the next decade. The reason why oil and gas companies now look so unsustainable as an investment is the expected gathering pace of a global transition towards renewable energy sources.
The survey was conducted by the UK Sustainable Investment and Finance Association and the Climate Change Collaborative. Aviva, Invesco, Schroders, Legal & General, M&G and Hermes Asset Management were among respondents.
It echoes other recent warnings such as a recent statement from Bank of England that as much as $4 trillion could be wiped from fossil fuel asset values over coming years as a direct result of directives connected to climate change. That rises to $20 trillion across all economic sectors. Bank of England governor Mark Carney stated that companies that did not adapt to the changing market brought about by these new realities would fail.
However, the results of the survey were more nuanced than an outright expectation that the oil and gas industry will imminently fail. While almost a quarter of the fund managers surveyed no longer see oil and gas companies as an attractive investment on any timescale, 68% thought those that aligned themselves with the Paris accord would be. That involves allocating significantly more capital to transitioning towards becoming efficient renewable energy providers.
Less than a fifth of respondents saw an investment case for oil and gas companies that planned to retain a focus on fossil fuels over the next half decade. Simon Howard, chief executive of the UK Sustainable Investment and Finance Association referred to investments in fossil fuels by oil and gas companies as “increasingly risky”.
Fund managers are increasingly pricing environmental and policy risk into investment assessment models. The assumption is that the increasing cost efficiency of renewable sources, combined with new legislation and regulation punishing and restricting power sources with a large carbon footprint, will lead to a riskily challenging future business model for pure fossil fuel plays.
Big investors such as fund managers have been taking an increasingly active role in forcing the hand of companies that are slow to adapt their business models to a more environmentally sustainable footing. If the trend continues in its current direction, the present generation of money men often held accountable for the ‘profit first’ approach to capitalism that has driven climate change, could prove one of the most important forces in unwinding the carbon-intensive economy.