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Fossil fuel companies facing death spiral

For investors here’s the bottom line; if you don’t take carbon intensity into account in long-term investment decisions, you will lose.

john HeadshotsTRY sq John Berry 3 minute read

Despite coal and oil being essential for our modern world to function, events of the last week mark a turning point.

Courts and shareholders dealt ‘old world’ energy investments a series of breath-taking blows.

Royal Dutch Shell had set a pathway for greenhouse gas reductions to net-zero by 2050.

But a Dutch court ruled its targets don’t go far enough, deciding Shell‘s world-wide operations must cut emissions by 45 per cent within ten years, and by 72 per cent within twenty years.

These cuts are set relative to Shell’s 2019 emissions, which were similar to Russia’s, the world’s fourth largest polluter.

The ruling is remarkable given Paris Agreement obligations for the Netherlands, New Zealand and other signatories are at a country, not company, level.

Shell itself never signed up to the Paris targets, and yet is being held to them on human rights grounds.

While Shell will likely appeal the decision, there are major implications globally.

Fossil fuel companies just had their ‘tobacco industry’ moment when denial and slowness to act won’t cut it, and indeed will lead to financial consequences.

This goes beyond oil, it’s a warning for all large polluters.

While Shell was slammed in Europe, on the same day across the Atlantic ExxonMobil also took a hit for its lack of climate change leadership.

A small shareholder successfully unseated two board members who were slow to act on global warming. Despite only a tiny 0.02% shareholding in ExxonMobil, support from other conscious shareholders was unprecedented.

The carnage wasn’t restricted to Shell and ExxonMobil.

Shareholders of Chevron, a US$198 billion oil company, also voted over 60 per cent in favour of the company working harder to reduce emissions.

US oil majors only have themselves to blame.

Oil companies are less profitable and less significant than they used to be.

In 2011 US oil companies made up around 13 per cent of the S&P500, now they’re a paltry 3 per cent.

They’ve also been chronic investment underperformers.

Over the last 3 years (on a per annum basis) ExxonMobil’s share price is down 4 per cent, BP is down 10 per cent and Shell has fallen 14 per cent.

The watershed week wasn’t limited to oil companies, closer to home was a bad week for coal.

Australia’s federal court ruled in relation to Whitehaven Coal’s expansion that the Environment Minister has a duty of care to protect young people from climate change. Although the court didn’t stop expansion of the mine, recognising this duty of care is remarkable.

This is no longer about aspiration for environmentalists, bold moves by shareholders and courts are forcing business model changes.

More resources will focus on decarbonising and low carbon technologies recognising the significant risks around not accepting net-zero as reality.

The best future investment returns will come from companies accepting there is no turning back.

For energy, industrial and transportation companies, business as usual is over.

The losers of the future will be those companies stranded with ‘old’ and worthless carbon intensive assets and technologies.

For investors here’s the bottom line; if you don’t take carbon intensity into account in long-term investment decisions, you will lose.

- John Berry is the Chief Executive at ethical fund manager and KiwiSaver provider Pathfinder Asset Management, which is part of Alvarium Wealth. Pathfinder does not invest in any of the oil companies referred to in this article. (This article was originally published by Stuff  May 31, 2021) 

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