Investors who choose to steer clear of oil, gas, and coal are protecting their portfolios in the short term and the long run.
Who has divested lately? The fast-growing list includes the University of California, insurance giant Allianz, the German city of Munster, and the London School of Economics. Portfolios that add up to a total of $3.4 trillion are now either entirely fossil-free or exclude specific kinds of dirty energy like coal and tar sands.
Rather than punishing the people and institutions who commit this act of climate kindness, financial markets are rewarding them. Shunning fossil fuels has boosted returns for the past decade, as measured by a specialized index the financial tracking firm MSCI manages.
And while markets and energy trends are hard to predict, you don’t need a crystal ball to see that 2016 looks like a terrible year to bet on fossil fuels. For one thing, OPEC just passed up an opportunity to cut its oil production. Oil prices, already driven low enough to gut profits worldwide due to oversupply, are diving again.
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How low will they go? Even before OPEC made news by doing nothing, Goldman Sachs analysts were forecasting $20 a barrel — about half of recent levels and more than 80 percent below mid-2014 highs. As consensus builds around a “lower for longer” oil outlook, U.S. natural gas prices are slumping due to a glut in that fuel too.
Then there’s the coal industry’s financial freefall. The leading coal exchange-traded fund (ETF), known as KOL, had lost nearly 55 percent of its value by early December, after suffering double-digit declines for the prior four years. KOL joined several natural gas ETFs on a list of the worst performers in that asset class during the first nine months of 2015.
With bankruptcy and debt distress in store next year for the oil and gas industries, according to Fortune, the purely financial case for going fossil-free is getting stronger.
Do you want to invest in S&P 500 companies, aside from any oil, gas, and coal outfits? Financial firm State Street Global Advisors partnered with the Natural Resources Defense Council to create a low-carbon vehicle that lets you do that now.
Better yet, invest some money in the industries bound to replace fossil fuels, such as renewable energy and other climate-friendly technologies. One option is FAN, a wind ETF. It had gained more than 10 percent through the first week of December, making it among 2015’s top performers. (Disclosure: I’ve both lost and made money over the years investing in the wind and solar power industries.)
As the Paris climate talks have made clear, the question is increasingly when, not if, the world will stop burning oil, gas, and coal. So the long-term case for abstaining from any investment in those businesses is even more powerful than current market malaise.
How powerful is it?
Those wild-eyed radicals at Citigroup have estimated what averting a climate catastrophe by leaving more than three quarters of oil, gas, and coal reserves underground or beneath the sea would cost.
The price tag for this collectively rational behavior, whether it will be due to government action or booming demand for environmentally friendlier options, is $100 trillion. That huge number, which exceeds the combined value of the economy of every country on earth, has ominous implications for ExxonMobil and all of its competitors.
In any case, a global shift toward greener energy is already underway. Acting now to protect your money from the financial risks associated with this upheaval — while putting it where your mouth is if you care about climate change — sends a message to energy companies and Wall Street. And it just might speed up this monumental industrial transformation.
