Financially prudent

The fossil-fuel era is ending and is being replaced by a sustainable energy economy. Investors risk losing substantial value by holding onto fossil fuels.

Introduction: Financially Prudent

Introduction: Financially Prudent

1. The carbon bubble is bursting

Investors in fossil fuels are sitting on a carbon bubble, which has already burst for the coal sector, leading to billions of dollars in losses. Small shifts in demand have big financial impacts. The coal industry saw widespread bankruptcies when demand was just 2% off its all-time peak. The same factors that have enabled the transition from coal – the falling cost of other energy sources, policy, and social stigma – are now at play in the oil and gas sector. The prudent investor is getting out now and finding opportunities offered by a clean economy.

1. The carbon bubble is bursting

2. Renewables are cheaper

Technological progress is a cause of real optimism for investors and other climate actors. The price reduction of solar is particularly extraordinary. Costs are down 62% since 2009 with further significant reductions expected.

Renewable energy has provided more new power generating capacity than fossil fuels since 2013, and is now cheaper than fossil fuels in most of the world. Last year, renewables overtook coal as the world’s largest source of total installed power capacity

New advances in smart energy systems and storage are addressing intermittency in supply from renewable energy. Electric vehicles are expected to reach cost parity with internal combustion engine cars by 2022, which will disrupt the oil industry than any other event of recent years.

2. Renewables are cheaper Average cost globally. In many markets wind and solar are cheaper than all fossil fuels.

3. Regulatory and legal risks escalating

Policy and regulation are accelerating the transition, with governments committed to meet the Paris Agreement to keep temperature rises to well below 2˚C, and to address the serious health impacts of burning fossil fuels.

Regulation and litigation risk against fossil fuels is now a serious financial risk for investors. In its 2016 year-end financial report, Chevron became the first company to acknowledge the risk: “Increasing attention to climate change risks has resulted in an increased possibility of governmental investigations and, potentially, private litigation against the company”.

In contrast, policies in support of climate solutions are unstoppable.

Countries including UK, France, Norway, Netherlands, India, China have pledged to end petrol cars by 2030-2040. Key growth markets are rushing to adopt renewables. India has set a target to install renewable energy capacity of 175GW by 2022. By May 2017 it had installed renewable capacity of 57GW, double the amount of four years before. In 2016, it shelved 82GW of planned coal capacity. China too has seen phenomenal growth. In 2015, China invested $102.9bn in renewable energy and installed half of the world’s new wind power. It added 35GW of solar in 2016 alone; equal to Germany’s total capacity. In 2016, it spent a record $32bn on renewable projects abroad.


3.	Regulatory and legal risks escalating

4. Demand for fossil fuels is falling

The combination of technology and policy is leading to a rapid fall in demand for fossil fuels. Falling demand undermines the sector’s capacity to generate revenue, repay debts, and maintain dividends to shareholders. 

A growing number of analysts including Carbon Tracker and Imperial College London expect oil and coal demand to peak by 2020. Gas will likely peak before 2030.

4.	Demand for fossil fuels is falling

The fossil fuel industry is set to lose $33 trillion in revenues by 2040, including $27.9 trillion in oil and gas alone.

Mark Lewis, Managing Director and Head of European Utilities Research, Barclays

5. Financial opportunities from the transition

The opportunities from the sustainable energy transition, with more favourable policies and more mature technologies, are significant. As more investors publicly commit to DivestInvest, the policy and financial environment become even more favourable in a virtuous cycle of supply and demand.

The finance sector is responding to investor demand, creating new fossil fuel free products to make the process of divesting and investing easier and cheaper. In 2015, global investment in renewables was double that of fossil fuels.


5.	Financial opportunities from the transition Investment opportunities are all around us. Image credit: Seb Beloe, WHEB Asset Management

Through DivestInvest, you can avoid the risks facing the fossil fuel sector, limit the wider climate risks, and make attractive returns from the clean economy.

Sarah Butler-Sloss, Founder, Ashden


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