The transition away from fossil fuels is definitely happening, and investors would be wise to adjust their investment strategies to coincide with this transition.
In fact, with new global policies now underway — specifically policies designed to limit CO2 emissions — exposure to fossil fuels could end up burning you in the long run. Because make no mistake: These policies are going to impose a heavy burden on the fossil fuel industry as we move forward.
As Mark Carney, the Governor of the Bank of England, recently said:
Policies to address climate will render the vast majority of fossil fuel reserves stranded. We're talking about oil, gas and coal that will be un-burnable.
The truth is, regulators are starting to send clear signals to the market that a shift from fossil fuels to cleaner energy is underway. And the result of this shift will end up stranding massive stockpiles of fossil fuels — stockpiles so large that it would take $2.2 trillion in CAPEX to produce those stockpiles.
But due to the high carbon costs associated with fossil fuels, it simply won't make sense to spend that $2.2 trillion. It will simply become too cost prohibitive to do anything but abandon those assets. And that'll crush investors who still believe there's a future in fossil fuels.
Of course, the smart money's already starting to distance itself from this risk.
$2.5 Trillion Up for Grabs
According to the latest data released to Bloomberg, portfolio managers have pledged to transition $2.5 trillion in investments away from fossil fuels. To put this in perspective, portfolio managers in 2014 pledged to transition $50 billion away from fossil fuels. That's a 50-fold increase!
Why the change of heart?
Some have suggested that many of these portfolio managers simply want to make an effort to reduce CO2 emissions. And while I'm certainly happy to hear about any portfolio manager doing something so altruistic, the truth is that it's simply becoming too risky to invest in fossil fuels.
As researchers at Arabella Advisors have pointed out, climate risk to investment portfolios is helping drive the exponential growth of divestment from fossil fuels.
Reports by Citigroup analysts, HSBC, Mercer, the Internal Energy Agency, and the Bank of England have offered evidence of significant, quantifiable risk to portfolios exposed to fossil fuel assets in a carbon-constrained world. The leaders of several of the largest institutions to divest in the past year have cited climate risk to investment portfolios as a key factor in their decisions.
The Citigroup report actually warned that current target carbon emissions reductions could strand over $100 trillion of fossil fuel assets by 2050, noting that globally, a third of oil reserves, half of gas, and over 80% of coal could be stranded.
Meanwhile, as these large institutions divest from fossil fuels, they are re-investing in clean energy.
As Arabella points out, institutions committing to divest have also collectively pledged to invest billions of dollars in climate solutions. Those institutions and individuals that have pledged to both divest and invest in climate solutions collectively hold $785 billion in assets.
It's Not Rocket Science
It's all pretty simple, really...
As noted by Bloomberg, the race for renewable energy has passed a turning point.
The world is now adding more capacity for renewable power each year than coal, natural gas, and oil combined. And there's no going back.
The shift occurred in 2013, when the world added 143 gigawatts of renewable electricity capacity, compared with 141 gigawatts in new plants that burn fossil fuels, according to an analysis presented at the Bloomberg New Energy Finance annual summit in New York. The shift will continue to accelerate, and by 2030 more than four times as much renewable capacity will be added.
The price of wind and solar power continues to plummet and is now on par with or cheaper than grid electricity in many areas of the world. Solar, the newest major source of energy in the mix, makes up less than 1% of the electricity market today but could be the world's biggest single source by 2050, according to the International Energy Agency.
I'm not saying fossil fuels are going to go gently into that good night, but from the perspective of an investor, which would you rather invest in? Fossil fuels, where all forecasts are showing a decrease in capacity additions? Or clean energy, where all forecasts are showing a massive growth in capacity additions?
Some of the top clean energy companies making the biggest moves today include:
- First Solar (NASDAQ: FSLR)
- SunPower (NASDAQ: SPWR)
- SolarEdge (NASDAQ: SEDG)
- Vestas Wind Systems (OTCBB: VWDRY)
- Tesla Motors (NASDAQ: TSLA)
Again, it's not rocket science.
And of course, the icing on the cake is that the more clean energy that's integrated into the global energy economy, the less damage we end up doing to our air, soil, and water. It's a win-win for any individual who believes we should respect the planet instead of destroying it.