Investors pivot from Fossil to Green
Summary - 2021 will be the first year in which investments in European offshore wind will equal investments in oil and gas. Investors in the energy sector are increasingly opting for companies with a green profile. The pressure on fossil companies to limit their CO₂ emissions is now called an 'investment risk'. Moreover, the non-fossil energy companies such as Ørsted have structurally outperformed traditional companies such as Exxon-Mobil.
This article from the Financiele Dagblad was translated from Dutch and added upon. For the original, click here.
No longer part of the club
In December 2020, ExxonMobil announced that it would write off $20 billion on a number of natural gas fields as their value has declined dramatically. This historic billion dollar write-off of what was once the most powerful publicly traded oil company in the world - now kicked out of the Dow Jones Industrial Average - once again marks the dramatic change in the global energy sector.
The US oil and gas mogul joins the group of global fossil energy companies that have written off their oil and gas fields for colossal amounts. In 2020, BP wrote off $17.5 billion. Shell wrote off $16.8 billion. The Anglo-Dutch oil group also cut its dividend for the first time since World War II. ExxonMobil wants to spare itself that humiliation, but the question remains how long that wish can be kept. The company has suffered heavy losses in 2020 and the pressure on cash flow from which the dividend is paid has increased significantly.
There is a massive difference in the value of ‘Old and New’ energy companies. This chart shows the growth - or decline - of market value of energy companies of the past five years.
Investors are getting anxious
Oil companies are increasingly losing out to energy companies that focus on sun and wind, which makes investors understandably nervous. And they were are already having more and more issues with Big Oil anyway.
"There is a huge paradigm shift," says Thijs Berkelder, an analyst at ABN Amro who monitors the oil and gas sector. For a long time, large investors had to justify themselves that they did not invest in tobacco or in companies that violate human rights. “With every investment that takes place now, it is clearly explained why this is still justified”, says Berkelder.
Money that is now invested therefore ends up with funds that invest in companies with a green profile. In the words of Berkelder: "Everything turns towards sustainability. Until the second half of 2019, institutional investors used a black list. Now that has become a green list." This has led to the fact that for the first time in history, the total amount of investments in offshore wind farms in Europe next year will be as large as the investments in oil and gas in Europe, as stated by Norwegian energy consultant Rystad Energy.
Impact of the climate agreement
Whether depreciation on oil and gas assets is truly a demonstration of a more fundamental change in the world is hard to say. As in most cases, experts tend to disagree. The fact remains however that under the influence of the Paris climate agreement, climate-conscious shareholders and governments, the pressure on companies to limit their CO₂ emissions is increasing.
One example is Milieudefensie's climate case against Shell, in which the NGO holds Shell responsible for global warming. Though this is a compelling showcase of the current zeitgeist, the counter arguments by critics is that the world will still need oil and gas for a long time. And due to the fact that virtually no money is spent on exploration and production of oil, it is feared there will be a shortage of it once the corona pandemic is over. The result would be higher oil prices - which makes investing in Shell paradoxically more profitable. Of course, no one knows whether that will actually happen.
BlackRock: climate risk is investment risk
The position of BlackRock, the world's largest asset manager, is characteristic. CEO Larry Fink sent investors an open letter in January 2020, in which he stated that sustainability should be an integral part of building an investment portfolio and assessing the risks. His vision: “Climate risk is investment risk. In the near future, and that is faster than most people expect, there will be a markedly different distribution of capital.” That is: more greenly distributed capital.
His words were not the beginning, but rather the confirmation of an existing trend. Companies that invest billions in energy from wind and sun have for some time performed significantly better on the stock exchange than the so-called fossil companies. For example, at the beginning of last November, the Spanish energy group Iberdrola announced its intention to invest €75 billion in renewable energy and networks over the next five years and the Italian energy group Enel will put most of its billions of investments in renewable energy in the coming years.
The increase in share prices of both companies this year (Iberdrola + 32%, Enel + 26%) contrasts sharply with those of, for example, ExxonMobil (-44%) and Shell (-43%). The latter two companies invest a fraction of their total investment budget - of more than $40 billion collectively - in renewable energy. Non-fossil companies are now structurally outperforming fossil companies. The American Nextera, which develops wind and solar parks, has already surpassed BP, Total and Shell with a market value of $147 billion.
These numbers raise eyebrows with even the non-investors among us and begs the question: how long can this last before something happens?
Despite their best intentions, oil and gas industry is still investing - and relying - heavily in fossil fuels.