Funds management has always been an interesting business – a combination of innovation and borrowing the best ideas from other industries.
Sometimes this goes spectacularly wrong (hello Global Financial Crisis). This may explain why funds management is also a very conservative business, where many players fight tooth and nail to keep on doing things as they have in the past rather than adapting to new realities.
Combatting the effects and causes of climate change is the latest battleground.
Unequivocally the world is changing due to society’s impact on the environment through the massive release of greenhouse gases as industrialisation swept the globe, seeded by the industrial revolution in the late 18th century.
The science is unequivocal, and any rational reading of the data can only come to one conclusion – we must change our behaviours in order to keep global warming within limits that will not shatter our way of life.
As investors, we have a large part to play, and we also have more influence than almost any other industry. Companies and other participants in the economy respond to many things, but the most direct influence we can have is to who, where and how we invest in our savings.
It’s not just the natural world that is changing, the investment world is changing too and this change (while resisted by many investors) is both smart and ultimately unavoidable.
Already, many fossil fuel reliant companies are un-investable for long term investors. Certainly, there can be short term gains from these companies but the long-term prognosis for a company that relies on fossil fuel extraction for sales is bleak.
In financial markets there is an unpleasant description for companies like this that might have a short term rise in value – “Dead Cat Bounce” – even a dead cat will bounce at least once if dropped from a high enough height.
The trends against companies involved in fossil fuel are compelling. Regulation around the world is imposing more costs on these companies. The price of offsetting carbon emissions and requirements to reduce actual carbon emissions is rising and will continue to do so.
This will impose the true cost of carbon emissions on the entities actually responsible for emitting them, rather than allowing companies to pass that cost on to society as a whole.
Governments have traditionally been quick to talk but slow to act. In many countries, policy is now catching up. New Zealand has made extracting new fossil fuels extremely difficult. Europe is in general forcing a transition on their economies from fossil fuel based to renewables. Under President Joe Biden, the United States will also force companies to recognise the true cost of their emissions.
The United Kingdom has just announced it will no longer subsidise fossil fuel related projects offshore.
Consumers are also flexing their economic power and demanding cleaner forms of energy. Already the cost of production from solar and wind is below the cheapest forms of fossil fuel electricity generations.
As the pivot to more renewables continues, the risk grows of stranded assets in traditional fossil fuel companies – what to do with billions of dollars of infrastructure if fewer people are buying your product? A great example is the large number of car companies (Ford, Jaguar, GM, Mazda, Mitsubishi, Nissan for example) now declaring that they will only produce electrically powered or zero emission vehicles by certain dates.
Forward thinking investment managers have recognised this and are pivoting away from fossil fuel heavy companies. But it is not just the obvious candidates like oil companies, fuel distribution companies, utilities that burn fossil fuels for electricity generation.
Banks are a major problem too. Since the Paris Agreement was signed in late 2015, just 12 banks have collectively financed over US$2 trillion of new investment in fossil fuel projects. Just four banks (JP Morgan Chase, Citi, Wells Fargo and Bank of America) are responsible for nearly 50 per cent of this total.
This action is just a start. All investors should look at what companies they are invested in and pressure their manager to change.
Happily, the best investment opportunities right now are in companies at the forefront of the renewable energy industry, long-term returns from fossil fuel companies have been dire and are likely to get worse.
- Paul Brownsey is chief investment officer at Pathfinder Asset Management. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product. At Pathfinder KiwiSaver we have actively divested from the worst of these banks (JP Morgan Chase, Citi, Wells Fargo and Bank of America). Our KiwiSaver is now carbon neutral (based on our owned share of carbon emitted by the companies whose equity we invest in).