Progressive investment analysts and financial leaders have been warning for years that fossil fuel reserves face an increasing risk of becoming stranded assets; that is, these resources lose their value, or turn into liabilities, before the end of their expected economic life.
That concern has not gone unnoticed among investors. According to a report from London, U.K.-based Ernst & Young released last year, almost two-thirds of global institutional investors surveyed said they were concerned about the risk of stranded assets, with more than a third reporting that they had cut their holdings in a company in the previous year due to this risk.
With oil prices dropping to levels not seen since 2002, the economic fundamentals around the issue of stranded assets are clearly having a material impact on investment portfolios. The S&P/TSX capped energy index has fallen by 36% in the past year.
With persistent global over-supply and relatively low oil prices forecasted for the next couple of years by various agencies, including the World Bank, the U.S. Energy Information Administration and the International Energy Agency, the investment prospects for oil and gas companies — and other fossil fuel businesses — will remain depressed relative to their market highs. This poses notable investment challenges.
Although the issue of stranded assets has largely been based on the potential impact of climate change regulations, it’s clear that the economics of fossil fuels can also lead to significant risks for your clients. The combination of those risks along with continued innovation in energy efficiency and the development of new technologies mean a significant portion of fossil fuels may remain unburned in the foreseeable future, according to a report from London, U.K.-based HSBC Bank PLC released last year.
But for responsible investors, the dramatic shift in the economic fortunes of carbon-intensive industries strengthens the opportunity to capitalize on the shift toward a low-carbon global economy.
The signs of this economic transition are increasingly apparent. In addition to the International Climate Agreement reached in Paris this past December, investment in renewable energy continues to grow in around the world. In fact, total global investment in green energy surged to US$270 billion in 2014, according to the United Nations’ Environment Programme’s Global Trends in Renewable Energy Investment 2015 report. As well, the total amount of investment in renewable energy hit a record US$329 billion in 2015, according to Bloomberg New Energy Finance.
In Canada, several responsible investment (RI) mutual fund companies have responded to investor concerns about stranded assets over the past few months with low-carbon and fossil fuel-free options. They’re also taking advantage of the opportunities presented by the transition to a low-carbon economy.
As an example, AGF Global Sustainable Growth Equity Fund, sponsored by Toronto-based AGF Management Ltd., recently became the first Canadian mutual fund to publish its environmental footprint. The fund is fossil fuel free and invests in companies that provide solutions to global sustainability issues.
As well, IA Clarington Inhance Global Equity SRI fund, sponsored by Toronto-based IA Clarington Investments Inc., fully divested from oil, gas and coal production companies in 2015 while maintaining, or increasing, investments in companies with a competitive advantage in a low-carbon future.
And in January, Toronto-based NEI Investments launched NEI Environmental Leaders Fund, which invests in companies that provide solutions to environmental problems focusing on energy efficiency, renewable energy, waste management, water, sustainable food and agriculture.
Although some analysts warn that low oil prices could lead to an eventual slowdown in the transition to a low-carbon future, countries and investors may have already reached a tipping point in terms of positive momentum toward a more sustainable economy.