• FT Lex writer Alan Livsey discusses his estimate of $900bn in “stranded assets” from the shift towards cleaner energy – defined as investment that are no longer able to earn an economic return such as oil, natural gas or coal assets in the ground (i.e a white elephant) perhaps due to a carbon tax or emissions trading scheme.
• Energy companies remain committed to further production even as they diversify to renewables, but the way they treat energy reserves has changed as the long-term risks to oil and gas means reserves not as important as in the past.
• Tough to disaggregate the impact of ESG concerns on share prices but valuation discrepancies between so-called clean and dirty assets are the biggest in 10 years.
• Coal is the dirtiest fossil fuel and one of the easiest to get out of portfolio. Natural gas prices have been weak and this is the competing fuel for coal. Coal stock prices down over 70% since peak in spring 2011. Oil stocks not as much.
• Livsey estimates that if the aims of the Paris climate agreement are met more than 80% of fossil fuel assets would be stranded.
• Which companies have the most to lose? A lot of this is coal but also Saudi Aramco given carbon rich assets (oil), Rosneft and ExxonMobil also vulnerable.
• Energy companies are taking the climate emergency seriously but they don’t know what to do. No competitive advantage in renewables and need to find a way to preserve high dividend yields.
• How can other companies adapt? Renewable capital spend is currently tiny and can be increased. Cost of capital is going up as share prices go down and this cannot be ignored.
Why does this matter? Increased focus on ESG investing under an unchanged pool of assets risks pushing up prices of a small number of assets, like Orsted, that are currently deemed green. But a lack of consistent ESG ratings mean there is no industry-wide standard to define a green asset. And it’s the change that matters. Just because a company is not currently considered environmentally friendly does not mean it won’t be in the future. ESG investors could miss opportunities if they look only at current rather than projected future green performance.
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