Divestment and stranded fossil fuel assets: The return characteristics of divested index portfolios

Jenny Lieu, Ashim Paun, Noam Bergman and Tim Foxon

The fossil fuel divestment movement, motivated by environmental and ethical concerns, was initially driven by grassroots initiatives in the United States during the early 2010s, and has since been gaining international momentum, with the support of large institutions. A growing group of conscious investors are questioning whether they have a moral responsibility that conflicts with holding and profiting through ownership of shares in fossil fuel assets in their investment portfolios. Apart from ethical motivations, there is an increasingly compelling economic case for fossil fuel divestment, driven by risks of hydrocarbon assets being economically stranded by carbon regulation, disruptive technologies, falling commodity prices and geopolitical risks. These contextual factors mean that economic arguments for divestment are beginning to be taken seriously by investors and could persuade mainstream investors to rethink their investment choices. Such a shift could reduce investments in fossil fuel and bring about reinvestment in non-fossil fuel energy at a more significant scale, helping to push a transition to a low-carbon economy. This paper first evaluates the economic rationale for divestment to potentially support a low-carbon energy transitions. We then consider how the volatility of the markets and low oil prices could affect future risk and uncertainty of fossil fuel investments, as well as recent evidence that “peak oil demand” might be more relevant than “peak oil”. We then draw on market data to create “divested” portfolios that screen out fossil fuel sectors from 2004 to 2014. The performance of the divested portfolios is assessed though backtesting. The results show that, depending on time frame and reinvestment choices, the divested portfolios could have outperformed non-divested portfolios and would likely have had less volatility-driven risk. We suggest that future conditions could mean divestment is likely to be more economically beneficial. Download full paper PDF »

Future pathways to 1.5°C/2°C-compatible oil and gas majors: Survey of energy outlooks and key uncertainties

Lucas Kruitwagen, Ingrid Holmes, Chris Littlecot, Shane Tomlinson, Owen Grafham and Ben Caldecott

Major oil and gas companies face an existential threat a transition to a low-carbon economy consistent with the Paris Agreement and a 2°C limit on global warming. New technologies, uncertain energy demand, rising energy efficiency, competitive resource landscapes, and policy and regulatory changes all have potential to disrupt oil and gas company business models and strand assets. Shareholder value may be better secured by helping companies with a managed transition to business models compatible with a 2°C pathway. With this transition will come requisite changes in oil and gas company capital expenditure, dividend policy, and business model diversification. This paper identifies key uncertainties in the transition of oil and gas company business models to become compatible with a 1.5°C/2°C warming limit. This is done by comparing the energy outlooks, scenarios, and projections of governments, NGOs, think tanks and private companies. Uncertainties identified include macroeconomic assumptions, total primary energy demand, oil and gas demand by sector, oil and OPEC production, the electrification of light-duty vehicles, oil prices, future power generating options, and carbon dioxide emissions. Changes in International Energy Agency (IEA) projections through successive energy outlooks are presented. Discussion considers how energy outlooks may be improved to better inform analysis of and engagement on the energy transition for the benefit of all stakeholders. Download full paper PDF »

Aligning an oil and gas company’s reserves and future emissions with a 2°C science-based target: A preliminary study of an oil and gas major

Richard Heede and Paul Griffin

This presentation provides an overview of the potential emissions of CO2 and methane from the proven reserves declared by the world’s largest producers of oil, natural gas, and coal, focusing on the 70 companies that produced 46% of the world's fossil fuels from 1750 to 2010. Previous work quantified the potential emissions arising from the production of proven fossil fuel reserves held by those 70 companies. Scientists have argued that no more than 275 Gt C of the world’s reserves of fossil fuels of 733 Gt C can be produced in this century if the world is to keep warming below 2ºC. The 42 investor-owned oil, gas and coal companies analysed hold reserves with potential emissions of 44 Gt C, whereas the 28 state-owned entities (SOEs) possess reserves of 210 Gt C, equivalent to 16% and 76% of the remaining 275 Gt C carbon budget, respectively. Having set the global context for a 2ºC pathway – typically applied to non-energy companies’ consumption of fossil fuels –options for how a major oil and gas producer can align its Scope 1 and Scope 3 (emissions from sold products) with the 2ºC pathway are explored. Emissions traced to one oil and gas major’s oil and gas production from 1972 through 2015 total 1.28 Gt C, and its reserves hold emissions equivalent to 0.58 Gt C. Opportunities for investment in additional oil and gas reserves allowable within the 2ºC pathway are explored in conjunction with the flexibility offered by carbon capture and storage, continued reduction in Scope 1 emissions from flaring, vented CO2, own fuel use, and fugitive methane, and accelerated investments in non-carbon energy.