Oil is polluting investment portfolios as well as the planet

They used to call it “black gold”, but oil’s lustre has faded dramatically over the past decade, and the same is true of other fossil fuels. 

The performance of energy stocks over the last decade or so, per the MSCI global energy index, has been miserable. That’s one of the points made by Carbon Tracker, the energy think tank, in a report published this morning titled “A Tale of Two Share Issues”. 

It shows that the value of share offerings in fossil-fuel production and related companies dropped by $123bn (£90bn) over the last decade, underperforming in the MSCI All Country World Index by 52 per cent between 2012 and 2020. 

So oil isn’t just polluting the planet. It’s increasingly polluting investment portfolios too, and that was the case long before Covid-19 emerged as a global-market jack-in-the-box, tipping western economies off a cliff in the process.

Since the end of 2011, when Carbon Tracker was launched, investors have still bought almost $640bn in equity issued by fossil fuel producers and electric utility companies, amounting to 10 per cent of the total worldwide.

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But share issues have declined in number and their influence is waning. These sectors accounted for 12 per cent of total equity issuance proceeds in 2012, falling to 8 per cent between 2014-16 and less than 1 per cent in 2020. The number of annual completed transactions, meanwhile, declined by 75 per cent. 

New share issues have also increasingly been dominated by existing players raising fresh cash, rather than new ventures coming to the market. 

What of the alternative: energy from renewable sources, often referred to simply as alternative energy? There’s clearly a long way to go. Between 2012 and 2020, the total proceeds of share issues from companies in the sector stood at just $56bn, less than 1 per cent of the total.

But there’s a vanishingly rare ray of light from 2020, that global annus horribilis that almost everyone was otherwise pleased to see the back of: the total proceeds from share issues by alternative energy companies exceeded those of fossil fuels for the first time ($11bn vs $10bn).

While the report makes the case for renewable investments, the performance of which notably spiked in 2020, the sector’s record before that point was spotty. But this is a new(ish) industry, so you would expect some level of volatility.

Prior to the recent surge, Mark Lacey, head of global resource equities at fund manager Schroders, highlighted “several high-profile instances of companies in the benchmark (MSCI index) going bust”, which made the graph tracking the performance of these investments look unimpressive. This, again, is something that happens to new(ish) industries. Remember when the dot com bubble burst, 20 years or so ago? With Amazon, Google, Facebook et al performing in the way they have, most people have forgetten about it. But it happened. 

Lacey’s note urged a selective approach to renewables as opposed to tracking the index, as you might expect given that Schroders is a stock-picker, but he might have a point. 

He also suggested that it represented a live opportunity for investors. I think you can still make that case, even after the sector’s strong 2020 performance. 

The long-term outlook favours renewable energy, which looks primed to produce some hefty returns over the next couple of decades as countries seek to decarbonise their economies.

Fossil fuels, meanwhile, appear set to head in the opposite direction, although it remains the case that despite the banks’ pretty-looking net zero pledges, they continue to freely offer financing and share-issue advice to these companies, in search of a quick buck. Same old bankers, eh.

That brings us round to an important point made by the report: “In Article 2.1(c) of the (Paris) agreement, the signatory countries agreed to make finance flows ‘consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’.”

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Shouldn’t it follow, then, that exchanges should be regulated to ensure that the economic activities arising from share offerings comply with the temperature targets set out in the Paris agreement? Ditto banks.

“Based on the evidence presented in this report, it is not possible to say that stock exchanges and their regulators are at all ready for Article 2.1(c),” the report says on that point.  

“Further scrutiny of fossil fuel IPOs [initial public offerings] and the role of stock exchanges is therefore a vital aspect of policy reform and regulatory assessment,” it concludes. 

Indeed so. “Greenwashing” is an established fact in the corporate sector. Far too many companies engage in it and they deserve to be called out. 

But the same could be said of the regulators that oversee public markets, and perhaps even the public markets themselves. Perhaps it’s time to hold their feet to the fire before it consumes the planet?