Institutional investors the world over are increasingly divesting from fossil fuels.
The trend is most pronounced in coal but there are growing levels of divestment in oil and gas.
AXA Insurance, with $4bn under management, recently announced that it will remove half a billion dollars of coal investments from all its portfolios. In July, the $900bn sovereign wealth fund of Norway began selling off $10bn of coal investments. An increasing number of pension funds and endowments are doing the same, with other professional investors such as family offices and wealth managers also following the trend
Institutions are doing this for two main reasons. First, a combination of factors is making fossil fuel investments less attractive in absolute terms. Performance has been poor in the past year and fossil fuels’ risk-return profile is worsening amid increasing volatility. Concerns about man-made climate change are growing and the role and culpability of the fossil fuel industry in creating global warming is coming under greater scrutiny. The energy majors are no longer the relatively low-risk and dependable investments they once were.
Second, institutions are divesting in order to reallocate their portfolios to clean energy. At the same time as making its coal divestment announcement, AXA Insurance said that it will triple its clean energy investments to more than €3bn by 2020 and report the carbon footprints of all of its portfolios (even those without a specific ecological investment strategy) with the aim of reducing its carbon exposure.
While ESG or ‘ethical’ considerations have a role to play in this trend, it would be a mistake to think that investment performance is secondary to them.
Clean energy companies’ share prices are rising, while oil companies’ have remained in the doldrums. Year to date, the Wilderhill Clean Energy Index (PBW) is down 5.69%, while the price of oil as measured by the USO ETF is down 19.74%, adding to last year’s 43% plunge. Even in volatile markets, clean energy shares are often bucking negative headwinds – they are often in fact a bright spot. While the Shanghai index saw steep falls in June and July, losing about 30% of its value, the clean energy sector held onto value with the best performers falling no more than 10-12% over the month before bouncing back to highs last seen in April and early May.
And amid the turmoil, some companies have even made gains on the back of Chinese government commitments to clean energy investment, with a large proportion of the $40bn stimulus package announced in July expected to go towards infrastructure construction and environmental protection, including support for renewable energy. This reinforces the national pledge submitted by China to the UN in June to reduce China’s carbon intensity by 60% by 2030 and increase non-fossil fuels to 20% of the primary energy mix, the equivalent of the entire US electricity system.
Underpinning the share price performance are growing levels of investment across the clean and renewable energy value chain.
2014 saw a 16% year-on-year increase in investment in clean energy to reach $310bn globally. China led the way with 32% spending growth, followed by Japan, at 12%, and the US, 8%. India is also investing heavily. And it’s not just governments that are putting their money into the sector – Bill Gates announced in June that he is doubling his own personal investment in clean energy to $2bn, mere days after the Obama administration announced a new $4bn clean energy fund to provide US clean energy project finance.
As investment has risen, the costs of clean energy production have fallen so much that energies such as solar are competing on a level playing field with fossil fuels like gas. As a result, in many sectors subsidies are being withdrawn and truly competitive markets are thriving, in which investable and highly profitable businesses are operating.
By 2016 it is forecast that solar energy will be as cheap as average electricity prices in 47 U.S. states, with even rooftop residential generation prices, one of the costlier areas of solar, set to fall below those of gas within a few years. Wind energy generation costs are already comparable to those of coal, one of the cheapest (and dirtiest) forms of energy.
It is true that last year clean energy stocks fell with oil stocks, but the correlation was down to market irrationality. Renewable energy is primarily used for electricity generation; the majority of oil production is used for transportation fuels – petrol and diesel for vehicles. While there is an oversupply of oil, demand for electricity continues to grow rapidly and so will renewable electricity generation.
The opportunities to make big returns in clean energy are growing but the routes to investment remain limited. Many of the options currently available are via illiquid private equity or specialist schemes, usually focused on power generation only, or in broader, non-energy sector specific, ‘ecology’ or ‘sustainability’ funds. There are few readily accessible, truly global clean energy mutual funds that are diversified across the value chain. As the company results and share price performance of clean energy sector businesses continue to impress – which they have done to eye-catching effect over recent quarters – this is changing.
And, as is often the case, those investors who recognise the opportunity at an early stage are likely to be well rewarded.
Martina Turner is manager of the VAM Funds Accessible Clean Energy Fund