Investors running for cover as allure of fossil fuels fades

The below piece was published in the Business Post in late February. By my usual standards, this probably ranks as quite optimistic, in pitching the argument that fossil fuel, the world’s most dangerous industry, is in the process of losing its social licence. While it may be wounded, it is still massively wealthy and politically powerful, and will doubtless fight to the bitter end to maintain its hegemony in energy.

THE DECISION to rely on fossil fuels to power civilisation and expand our dominion over the planet means humanity has unwittingly struck a Faustian pact with nature. Surprisingly, we have in fact understood the broad terms of this bargain for well over a half a century. In 1965, US president Lyndon Johnson published a report that presciently examined the existential risks involved in uncontrolled fossil fuel burning.

“By the year 2000 the increase in atmospheric CO2 will be close to 25 per cent,” it found. This “may be sufficient to produce measurable and perhaps marked changes in climate, and will almost certainly cause significant changes in the temperature and other properties of the stratosphere.”

Johnson’s science advisory committee recommended “economic incentives to discourage pollution”, with special taxes to be levied on major polluters. This is how clear the science was over 55 years ago.

Hopes that the trillion-dollar global energy industry would clean up its act, in line with the scientific evidence have proven groundless. For instance, in 2000, BP rebranded itself as ‘Beyond Petroleum’, in what turned out to be just a cynical PR stunt.

Climate emergency notwithstanding, the lure of easy profits has proved irresistible for the world’s fossil fuel giants, many of whom, like Saudi Aramco, are state-owned. However, after many false green dawns, revolutionary change is now finally in train, and the key driver is, improbably, the global investment community.

Larry Fink, CEO of BlackRock, the world’s largest asset manager, controlling a staggering €8.7 trillion in investments recently described the “tectonic shift” now underway in the sector. “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy”, Fink told investors.

BlackRock says it will dump companies that fail to commit to achieving net zero emissions by 2050. Further, Fink flagged any non-compliant companies for “potential exit in our discretionary active portfolios, because we believe they would present a risk to our clients’ returns”.

BlackRock is not acting alone. A consortium of 30 of the world’s largest asset managers, controlling a combined fund of over $9 trillion, have also warned companies seeking investment that they must clean up their act on emissions or face de-funding.

“Climate change poses one of, if not the most, significant risks to the long-term profitability and sustainability of companies, including our own,” according to Anne Richards, CEO of Fidelity International.

In December, New York’s city pension fund, valued at $226 billion, announced it was dropping all fossil fuel holdings. “Investing for the low-carbon future is essential to protect the fund’s long-term value”, according to state comptroller, Thomas DiNapoli.

Partly as a result of the pandemic, 2020 was an annus horribilis for the oil giants. ExxonMobil, BP, Chevron and Conoco Phillips suffered combined losses totalling around $33 billion. The once mighty ExxonMobil suffered the further indignity of being removed last August from the Dow Jones Industrial Average basket of companies. Credit rating agency Standard & Poors last month put a list of oil giants on a “credit watch” list, meaning they face potential downgrade.

Political pressure is growing too. The new Biden administration broke decisively not just with Trump’s overt support for fossil fuels but also Obama’s “all of the above” approach to energy. “Unlike previous administrations, I don’t think the federal government should give handouts to big oil to the tune of $40 billion in fossil fuel subsidies”, Biden stated on signing an executive order on January 27^th to accelerate climate action.

At EU level, foreign ministers met last month and agreed that “EU energy diplomacy will discourage all further investments into fossil fuel based energy infrastructure projects in third countries, unless fully consistent with an ambitious, clearly defined pathway towards climate neutrality.” However, critics argue that the vagueness of EU ministers’ wording leaves ample wiggle room.

Despite our very poor record on emissions reduction, Ireland is recognised as a world leader in fossil fuel divestment. In 2018, the Oireachtas passed legislation requiring the state to sell off its €8 billion in oil, coal, gas and peat investments. This year, the government has gone further, announcing a permanent ban on all new oil and gas exploration licensing, although existing licenses will be honoured, while all new petrol and diesel cars are to be banned by 2030.

Evidence that the internal combustion engine is running out of road can best be gleaned from radio ads for new cars. Despite EVs still only accounting for single digit sales, brands are scrambling to paint themselves as fully committed to clean motoring.

Globally, road transport is the single biggest market for oil, accounting for one third of all usage. Rapid electrification of both transport and home heating poses a major threat to future demand for liquid fuels, and this risk is being priced in by edgy investors.

Fossil fuels will continue for some time to be the world’s dominant energy source, helped in no small part by the estimated $5.2 trillion in annual government subsidies globally. But the world’s most dangerous industry is finally losing its social licence. Decades of oil wars, ecological disasters and funding of climate denial have left its credibility running on empty.

Now the slow shuffle of investors, insurers and politicians tip-toeing away from the crippled energy leviathans is threatening to become a stampede.

• John Gibbons is an environmental commentator and co-author of the Routledge Handbook of Environmental Journalism