Oil, gas and coal companies make up one of the world’s largest liquid asset classes, with a combined stock market valuation of nearly $5trn. In the past two years, dozens of public and private institutions have announced plans to divest their fossil fuel holdings because of environmental concerns, ethical investment strategies, or worries that assets might become “stranded” by emission regulations.
However, a much larger-scale divestment from fossil fuels by institutional investors would be far from easy, according to new research from Bloomberg New Energy Finance.
Oil and gas stocks in particular are at the heart of institutional investor portfolios. ExxonMobil, the world’s largest oil and gas firm, has a market capitalisation of $425bn; BlackRock, the largest investor in oil and gas stocks, holds $140bn just in its top 25 holdings. Governments such as China, Russia, and India are also major strategic investors in fossil fuels.
For some motivated investors, clean energy might be the logical destination for their money after divesting from fossil fuels, but clean energy currently does not yet approach the necessary scale as an investable asset class for institutions. While Bloomberg New Energy Finance forecasts $5.5trn in clean energy investment from now to 2030, much of that will have risk-return and liquidity characteristics suitable for banks, developers or utilities, not for pension funds or institutional asset managers.
Clean energy equities, as captured by the Wilderhill New Energy Global Innovation Index, or NEX, have a free float of $220bn. Issuance of green bonds may top $40bn this year but that would still be less than 3% of the new corporate debt issued in the US. “Yieldcos”, also increasingly popular for investors wanting to get exposure to clean energy assets, have a total market cap of less than $20bn.
Bloomberg New Energy Finance analysed seven other stock market sectors that could accept divested capital, ranging from Information technology to real estate. Companies in these sectors have many of the same investment attributes as fossil fuels firms, but not all of them in one package.
For instance, information technology is a $7trn sector and its biggest firm, Apple, is nearly 40% larger than ExxonMobil – but as a group, IT companies offer relatively low yields, either because their shares are highly rated or because they pay modest dividends as a proportion of post-tax profits. Real estate investment trusts are only $1.4trn in total market cap, although they do have dividend yields of 4%-plus.
Nathaniel Bullard, author of the White Paper, 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 $5.5trn needed to build out clean energy through 2030 will offer many new opportunities for investors, but a major switch into that and out of fossil fuels would require a massive scale-up of new investment vehicles.”
Bloomberg New Energy Finance
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