By Kevin Jarussi, Director of Business Development at Ethos
Several landmark events over the last week suggest the global shift away from fossil fuels may be accelerating. What does this mean for investors?
Last week, the Dutch court system ordered Shell to reduce its carbon emissions by 45%, as compared to its 2019 levels. It is the first time that a company has been legally obliged to align its policies with the Paris Climate Accords.
Also last week, shareholder revolts at Chevron and ExxonMobil sent a message that the movement away from fossil fuels is a question of when, not if, and when may be sooner than many thought. At Exxon, shareholders voted at least two activist investors onto the board, after Exxon told its shareholders not to vote for them.
At Chevron, shareholders endorsed a plan to curtail Scope 3 carbon emissions which result from burning Chevron products, and this accounts for 90% of the company’s CO2 emissions. Chevron also lobbied against its shareholders voting in favor of the measure.
It seems that people are waking up to the reality of climate change, and if anything, 2020 has perhaps been a turning point in our relationship with the planet.
The market reflects this, and has for some time. Over the last three years, the return on the Dow Jones U.S. Coal Index has decreased by over 40%, and the Oil and Gas Index by almost 12%. Meanwhile, over the same period, the S&P 500 Fossil Fuel Free Index is up over 16% and the S&P Global Clean Energy Index 33%.
While fossil fuels still make up 84% of world energy production, led by rising demand from China, many saw the industry as declining even before Covid-19. The pandemic may simply have accelerated the decline.
What does this mean for investors?
It seems clear that the marketplace is shifting to reflect the rise of clean and renewable energy. A Barrons article from 2020 discusses the decreasing cost of renewable energy, pointing out that we are on the cusp of mass adoption as the cost curve is lowering to the point where cost will drive demand, which in turn will lead to greater adoption.
While investing for causes such as climate action and investing for returns have long been seen as differing objectives, the shift to clean energy may mean they are converging, in some cases. If you want to maximize your (or your clients’) returns, investing in clean energy and sustainable solutions increasingly may be a smart financial move.
Conversely, holding positions in fossil fuel companies may become increasingly risky. Part of the reason for the shareholder "revolts” at Chevron and Exxon was due to their underperforming the market as a whole over the past decade.
Ethos offers one way for investors and financial advisors to identify and manage fossil-fuel risks (and find clean energy alternatives). Our Impact Assessment allows investors to prioritize the causes most important to them, such as reducing greenhouse gas emissions or supporting terrestrial biodiversity. Investors and advisors can then use this information to screen out fossil fuel stocks and funds (i.e., any fund holding a fossil fuel company) or to screen in stocks and funds that perform well on the causes they care about.