Fossil fuels divestment is ‘$5tn challenge for investors’, says report

Research published by Bloomberg New Energy Finance (BNEF) (19-page / 1.06 MB PDF) said oil, gas and coal companies make up one of the world’s largest liquid asset classes, with a combined stock market valuation of nearly $5 trillion, with oil and gas stocks in particular “at the heart of institutional investor portfolios”.

BNEF forecasts $5.5tr in clean energy investment from now to 2030, but said pension funds or institutional asset managers may not integrate clean energy into their portfolios “based on the risk-return and liquidity characteristics of projects”.

According to the report: “In the past two years, dozens of public and private institutions have announced plans to divest their fossil fuel holdings because of environmental concerns, ethical investment strategies, or worries that assets might become “stranded” by emission regulations. However, a much larger-scale divestment from fossil fuels by institutional investors would be far from easy.”

The report said: “Clean energy equities, as captured by the Wilderhill New Energy Global Innovation Index (NEX) have a free float of $220 billion. Issuance of green bonds may top $40bn this year but that would still be less than 3% of the new corporate debt issued in the US. ‘Yieldcos’, also increasingly popular for investors wanting to get exposure to clean energy assets, have a total market cap of less than $20bn.”

BNEF said it analysed several other stock market sectors that could accept divested capital, ranging from information technology (IT) to real estate. The report said: “Companies in these sectors have many of the same investment attributes as fossil fuels firms, but not all of them in one package.”

Fossil fuels are an enormous asset class, the report said. “The current value of the 1,469 listed oil and gas firms is $4.65tn (and) 275 coal firms are worth $233bn. ExxonMobil, the largest oil and gas firm, has a market cap of $425bn.”

The report said the world’s largest investors and many governments “are the key shareholders” in fossil fuel companies. “BlackRock, the largest investor in oil and gas equities, controls $140bn via just its largest 25 holdings. Governments of many countries, including China, Russia, and India, are strategic investors in public companies as well,” the report said.

Report author Nathaniel Bullard said: “Fossil fuels are investor favourites for a reason. Very few other investments offer the scale, liquidity, growth and yield of these century-old businesses with economy-wide demand for their products. Given their scale and performance, oil and gas companies are attractive to institutional investors. Coal firms, smaller and recently under-performing wider markets, are less of a focus for institutions.”

Bullard said: “The $5.5tn needed to build out clean energy through 2030 will offer many new opportunities for investors, but a major switch into that and out of fossil fuels would require a massive scale-up of new investment vehicles.”