The changing environment of fossil fuel investing

Fossil fuel investing, and ultimately divesting, has been national news this year, and, as world leaders convene at the end of this month to discuss climate change, they are likely to gain even more column space.

Some of you will be old enough to remember Bush Senior, Yeltsin et al helicoptering in to Rio in 1992 to save the environment. Will Obama, Cameron, Putin, Hollande and Xi be any more successful? Given some of the scary statistics I've seen this week, we can only hope. The guys at EdenTree have summed it up nicely:

"Certain temperature maximum increases have been identified as effectively fatal to the human race, and sadly we are on track to exceed them – we need to stay within 2 degrees of pre-industrial temperatures, or emit no more than 1,000 GT of carbon, but at the current rate the 'carbon budget' will have been reached by 2045.
The world has to find a path between economic growth (particularly for emerging markets) and seriously reducing burning fossil fuels that cause warming – thermal coal being the worst culprit in terms of emitting the most carbon per Mwh of energy produced (414kg). This compares with bio-mass (wood pellets, chips or straw) at 7kg-91kg."

To reiterate the points above, Jupiter's Charlie Thomas says that 50% of greenhouse gases have been emitted in the past 27 years. And as Marc-Pilivier Buffle, from Pictet Asset Management, pointed out at a Sustainble Investing conference we attended this week: “We've seen a great acceleration in the use of natural resources over the past 200 years. As standards of living increase, so does the environmental footprint. We want China and India to develop, but if they do it in the same way we have, we will be in trouble. So we need new technologies to decouple this relationship.”

Of all the leaders, Merkel may be able to make the best case for renewables. 43% of electricity generation capacity in Germany comes from renewables; 22% from solar power, 21% from wind, and 8% from hydro and biomass*.

China has also shown willing and increased its environmental spend to $300bn per year for the next five years. But will it be enough?

The consequences of not keeping within this budget are already being felt in the form of catastrophic weather events and rising sea levels. We hear about cyclones, but did you know that a village in Fiji has already had to be upped and moved to another location, with the help of the government, as the sea has breached its original site?

Some steps have already been taken by certain investors, namely those with the 'fossil fuel divestment' campaign, which was launched in 2012. Since then, 180 institutions have pledged to withdraw $50 billion of assets from fossil fuel investments.

What can individual investors do? There are a number of funds around that actively screen out companies that don't adequately address climate change or produce ozone-depleting chemicals. These funds will also seek to engage with companies to see what they are doing to assess the risks posed by the possibility of 'stranded assets' (if they are not allowed to extract fossil fuels in future) and how they are planning for a lower carbon world. Elite Rated funds of this ilk are Edentree Amity UK, Rathbone Ethical Bond and SLI UK Ethical.

By Darius McDermott, managing director, Chelsea

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
*As at 2014. Source: Frauhofer.
Published on 23/11/2015