Green funds must scale up to match $5trn oil sector – report

Large-scale divestment from fossil fuels remains a challenge, say Bloomberg analysts, with a lack of clean alternatives

For institutional investors, finding alternatives to big oil is "a challenge", says BNEF (Pic: BP)

“Fossil fuels are investor favourites for a reason,” says BNEF analyst
(Pic: BP)

By Megan Darby

New ways to invest in clean energy are needed on a massive scale to compete with the fossil fuel sector, say analysts.

In the past two years, cities, churches and universities have signed up to starve fossil fuel companies of their cash.

Divestment campaigners say continuing to extract coal, oil and gas is unsustainable if the world is to effectively tackle climate change.

However, for mainstream investors there are limited viable alternatives to big energy, Bloomberg New Energy Finance (BNEF) highlighted on Tuesday.

Quitting coal will be relatively easy, the report said, but finding an alternative to the US$5 trillion oil and gas equity market is “a challenge”.

Clean shift

BNEF estimates US$5.5 trillion will be invested in clean energy by 2030. But the transition from dirty to clean energy is not straightforward, according to the latest report.

Institutional investors such as pension funds, governments and insurance firms hold major oil and gas stocks, in particular, because they offer a large-scale home for their money and pay handsome dividends.

Nathaniel Bullard, author of the report, said “Fossil fuels are investor favourites for a reason. Very few other investments offer the scale, liquidity, growth and yield of these century-old businesses with economy-wide demand for their products.

“Given their scale and performance, oil and gas companies are attractive to institutional investors. Coal firms, smaller and recently underperforming wider markets, are less of a focus for institutions.”

The opportunities in renewable energy, meanwhile, are yet to reach the same scale. They are also exposed to risks associated with emerging technologies.

As such, they fit the investment profile of banks, developers and utilities but not institutional investors.

The growing green bond market offers a low-risk way of backing clean growth. Yet the US$14 billion issued last year made up just 1% of the US$1.4 trillion corporate bond market.

Another option is YieldCos. Such funds own renewables that are already up and running, avoiding the risky construction stage, and pay out the majority of cash flows to investors. Again, these are a relatively new phenomenon, valued in the low billions.

“The $5.5trn needed to build out clean energy through 2030 will offer many new opportunities for investors,” said Bullard, “but a major switch into that and out of fossil fuels would require a massive scale-up of new investment vehicles.”

Alternatives

BNEF also looked at seven established sectors that could potentially absorb some of the cash divested from fossil fuels.

These had some of the same benefits to investors as oil and gas, but none had the same combination of scale, growth and yield.

From a green perspective, they present opportunities for energy efficiency initiatives.

Information technology is the biggest, worth US$7.6 trillion, but is not so generous with dividends. The pharmaceutical sector, worth US$3.9 trillion, similarly offers high growth but low yield.

Bullard concluded: “Fossil fuel divestment is neither imminent nor inevitable. But, neither is it impossible for motivated investors.”

The divestment debate is evolving rapidly, with awareness growing of the financial risks of exploiting coal, oil and gas.

The Carbon Tracker Initiative showed some 80% of proven fossil fuel reserves must stay in the ground if the world is to avert dangerous warming.

As governments act to curb carbon emissions, the fossil fuel firms will be left with “unburnable carbon”, it warned.

Read more on: Climate Finance | Energy | | | |