Photo by Percy Feinstein, Corbis
As a founding signatory for the Divest-Invest movement, I have been quite vocal about the choice to divest from fossil fuel companies as a significant lever for affecting change. At Nia Impact Capital, we are fossil fuel free, we do not invest in stocks of any company engaged in the prospecting, extraction, refining, transporting or distributing of fossil fuels due to both the financial and environmental risks. We specifically build solutions focused portfolios, all of which include clean and renewable energy technologies based on the belief that economic opportunities lie in the solutions needed for both people and planet.
While the extraction and burning of fossil fuels has (literally) fueled the building of the technologically advanced global economy we live in today, the current portfolio risks of holding fossil fuels securities over the medium and (especially) long term have become increasingly apparent. Russia’s invasion of Ukraine in February of 2022 has underscored this risk for all of us. Europe has had to scramble to ensure its energy needs are met. Plus, major banks such as HSBC are updating their climate strategies to eliminate financing for new oil and gas fields.
The time has come for all of us to consider the risks of continued investment in fossil fuels:
Volatility. The first compelling risk to consider is that oil is a commodity, one that requires increasingly complicated methods to extract, refine, transport, and ultimately burn. Prices of commodities have historically been volatile, as we have seen with oil prices over the past several years. As drilling and extraction become more remote and expensive, prices stand to continue rising in the future. In contrast, the costs for renewable energy products are based on technologies designed to harvest energy from the sun, wind, and waves. The costs for harvesting renewable energies, particularly solar, are comparable to electronics and other semiconductor-based technologies, and have been decreasing for decades and are projected to continue to decrease. With batteries being developed to store solar energy, the need to transport this energy source is reduced, and in some cases eliminated. As technologies improve, renewables are becoming more competitive, and more popular, while fossil fuels have, and may continue to become less relevant over time, putting shareholders of these companies at financial risk.
Declining Market Share. The fossil fuel industry has already lost considerable market share to the renewable energy sector. Despite subsidies for the production and sale of coal, nuclear, oil, and gas, wind and solar have become less expensive and more popular. As this trend continues, fossil fuels will continue to lose market share to these updated, more technologically advanced renewable options. Each year, as we see in the news, there is increasing public awareness that any protective expenditure may not be a prudent use of public dollars, and will likely diminish overtime, decreasing any competitive pricing advantage for extracting companies.
Potential for Stranded Assets. In the short term, for stockholders, dividend payouts from fossil fuel companies are at risk, as these firms, in an effort to stay competitive, spend significant money on new high cost projects such as offshore drilling, instead of returning money to shareholders. For the longer term, an important risk for investment portfolios is that fossil fuel companies count their yet undrilled reserves on their balance sheets as assets. With popular and political pressure mounting to restrict carbon emissions and keep that oil in the ground, the under and aboveground reserves of coal, oil, and gas currently held by many fossil fuel companies on their balance sheets may become devalued or "stranded assets," serving to further devalue these companies.
And divestment isn’t only a useful strategy to protect against risks - divestment can produce financial gains. The global finance firm MSCI has found its world index fund excluding fossil fuels has outperformed its conventional fund over the past decade.
While climate change stands to affect all holdings in a given index portfolio, this is a good time for the financial advisors, wealth managers, pension plan participants, as well as each of us as individuals to know what we own, and to make prudent decisions according to our values and goals.
Important Disclosure:
The views presented here are those of Nia Impact Advisors, LLC (“NIA”) and these views may be subject to change. This information is for illustrative purposes only. All information is obtained from sources believed to be reliable, yet NIA does not certify the accuracy or completeness of this information. This blog article does not constitute an offer to sell or the solicitation of any offer to buy any security. All investments carry risk. Each investor is strongly advised to consult with their investment professionals prior to making any investments to ensure that all associated risks are understood.
The incorporation of environmental, social and governance (“ESG”) considerations into the investment process may cause the investment adviser to make different investments than other funds that have similar investment portfolios and/or investment styles. Under certain economic conditions this could cause the investment adviser’s performance for any of its portfolios, including the NIAGX Fund, to be better or worse than similar funds that do not incorporate such considerations into their investment strategies or processes. In applying ESG criteria to its investment decisions, the investment adviser may forgo higher yielding investments that it would invest in absent the application of ESG investing criteria.