Whether you believe in climate change or not, there’s no denying the figures – taking your money out of oil, coal and gas makes good financial sense





Don’t believe in climate change? Okay, let’s pretend it’s a hoax. From a purely financial perspective it doesn’t matter.

If it is a hoax, you’ll make a lot of money. If it’s the real and worsening catastrophe climate scientists believe it to be, you’ll still make a lot of money. Now let me present some facts to you on the financial case for getting out of fossil fuels (I am fine if you just view it as some bar talk).

There’s a strong and growing business case for climate protection. The 2014 report “Climate Action and Profitability” by the Carbon Disclosure Project showed how companies that integrate sustainability into their business strategies are outperforming companies who fail to show such leadership. Companies that are managing their carbon emissions and are planning for climate change enjoy 18% higher returns on their investment than companies that aren’t, and 67% higher than companies which refuse to disclose their emissions.

Something tells me, though, you are sentimental about your personal ownership in fossil fuels, right? If improving your company’s returns on investment does not interest you, how about the prospect of stranded assets? That’s investments that quickly turn out to be worth much less than expected.

In early 2012 Seeking Alpha, an energy industries financial advisory service with more than three million registered clients cautioned against panicking and selling coal stocks, concluding that even though Peabody Coal’s stock value had fallen 45%, it was nicely undervalued, and after all, such companies had always grown: “Currently, Peabody Energy’s share price is at just over $36 (£25), but I think it has the potential to hit the $45 barrier before the end of 2012 because its Australian interests are likely to be snapped up by China and Indian Steel companies”, the advisors wrote. Seems like a strong argument for staying invested in coal, doesn’t it?

Unfortunately for Peabody’s investors, their trust in China’s insatiable hunger for coal was ill-advised: A 2015 report by the Institute for Energy Economics and Financial Analysis, (IEEFA) noted that although “China’s coal demand grew 10% annually over the decade to 2011, the rate of growth halved to 4-6% in 2012 and 2013. In 2014, China’s coal demand has actually declined by 2.1% year-on-year.”

I know these are a lot of numbers for a simple bar talk. And, usually, the China argument doesn’t even come up before the third drink when everyone feels they can win any fight just by quoting a big number. But the changing reality in China might make you want to wait with that second sip.

“While real economic growth exceeded 7%, electricity demand grew by less than 4%”, the IEEFA study said. Rapid supply diversification saw China’s coal consumption decline 2% and coal imports fall by 11% in 2014.

China’s coal demand will permanently peak by 2016 and decline thereafter, the report predicts.

“Coal companies’ underperformance against the global equity market is unprecedented,” said IEEFA’s Tim Buckley. “A more than 50% decline in coal prices has seen most listed coal companies globally lose 80-90% of their equity market value in the last four years. While the sun will undoubtedly rise for renewable energy in 2015, for coal, there remains a lot further to fall.”

Today Peabody Energy, the world’s largest private-sector coal company, is trading below $5 per share. Investors betting that coal will rebound are very likely to find their assets stranded.

Conversely, renewable industries are prospering. A recent study by Agora Energiewende, a German think-tank, found that solar electricity is already a low-cost renewable energy technology. Large-scale photovoltaic installations in Germany fell from over 40 cents per kilowatt-hour (c/kWh) in 2005 to 9 c/kWh in 2014. Even lower prices have been reported in sunnier regions of the world. Most interesting for investors, solar will soon be the cheapest form of electricity in many regions of the world. Even conservative scenarios which assumed no dramatic technological breakthroughs saw no end to cost reduction, with costs of 4-6 c/kWh expected by 2025, and 2-4 c/kWh by 2050.

Deutsche Bank analyst, Vishal Shah, agrees, predicting that rooftop solar will be the cheapest electricity option for everyone in the US by 2016. This builds on the Energy Darwinism report from Citi Group which forecast unsubsidised renewables to become cheaper than gas within 10 years. New developments, such as solar cloth, a lightweight solar fabric stretched across parking lots and rooftops, could make solar ubiquitous and cheap.

Sometimes, change happens very fast. Within just one year, California went from utility-scale solar installations supplying 1.9% of its electricity to 5% in 2014. The German study mentioned above warned, “Most scenarios underestimate the role of solar power in future energy systems.”

Sure, bottom feeders will swoop in and grab any fossil stocks you sell – at least you hope they will. Otherwise any delay in selling your fossil holdings may leave you in a market with no buyers. And, of course, people will continue to burn gasoline in their cars for many years to come.

California, a state which is already facing severe consequences of climate change, has committed to cut oil use in cars by half by 2030 and Stanford professor Mark Jacobson’s Solutions Project shows how energy efficiency and renewables can meet all of the energy needs of the entire world better and cheaper than any coal or nuclear power by as early as 2035.

Does your denial of climate change really justify holding on to those fossil stocks in your portfolio? Consider that the Fossil Free Indexes US (FFIUS ), a stock market index excluding top fossil fuel companies outperformed the S&P 500 by 1.5% last year. The FFIUS is almost identical to the S&P 500, but excludes shares in the world’s largest coal, oil, and gas companies, including Peabody Energy, ExxonMobil, and ConocoPhillips. The Fossil Free Indexes report concluded: “With oil prices performing wildly and leading analysts warning that fossil fuel companies are a risky long-term investment, the market-based argument for fossil free investing is sound.” At least this little fact should be a happy conversation piece at any bar in the world, wouldn’t you agree?

But in the end, it shouldn’t really matter whether you are a climate change denier or are spending your life proving just how scary the increasing extremes of weather are, how the California drought indeed is being caused by the changing climate, and just how little time we have left to act.

This isn’t just about polar bears or disappearing islands, but about humanity. Let’s go make money, create jobs, enhance our security and resilience, let’s enable communities around the world to prosper and our children to grasp a finer future. We can still argue over drinks at the pub whether there would have been a mess if we hadn’t acted, when we’re done.