Not pandering to a vocal minority makes sense

The pressure groups busily campaigning for institutional investors to divest from fossil fuel producers are currently congratulating each other on their wisdom. They have persuaded a growing roster of institutions, from endowments to pension funds, to divest from the evil hydrocarbon producers (or at least make a gesture to this effect, very few are selling out full stop).

Now they are keen to publicise how much money the recalcitrant, reactionary investors who have not followed suit are losing from their continued exposure to fossil fuel companies. As FTfm reported last month, UK pension funds have had almost $1 billion (Dh3.67 billion) wiped off their balance-sheets in the past 18 months due to the plunge in the value of coal companies.

More broadly, the website of Bill de Blasio, the mayor of New York, proffered figures showing the far-sighted seers who sold out of fossil fuel companies in 2010 would have earned 13 per cent a year from their equity investments since then, trumping the 11.8 per cent generated by the dinosaurs who eschewed this sensible course of action.

All this is dressed up in the divestment argument built around the concept of “stranded assets”, which asserts that if the human race is going to avert runaway climate change, a large chunk of the fossil fuel reserves on the books of hydrocarbon producers will have to stay in the ground.

That argument may have validity, but the idea that the poor share price performance of oil, gas and coal companies of late is proof of divestors’ wisdom is pure nonsense. In case anyone has been asleep for the last few years, the oil price, and by extension that for gas and coal, has fallen rather a lot. In these circumstances, it would be somewhat surprising if fossil fuel stocks had not underperformed the market.

When energy prices rise again, as they surely will, these stocks are likely to outperform. Will the pro-divestment lobby then rush to produce data showing how much money their adherents have lost out on as a result? I think we all know the answer to that.

This is not to suggest that the stranded asset narrative is nonsense, or that divestment is wrong per se. It would be fascinating to know whether Opec’s refusal to cut supply to combat low oil prices is in any way driven by its members’ desire to sell their hydrocarbons while they still can. But the response needs to be thought through.

If an individual investor wishes to dump fossil fuel stocks for moral reasons and hang the financial repercussions, then fine. Professional investors bear a responsibility to those whose life savings are in their hands.

Selling an asset on purely financial grounds makes sense. Doing so for moral reasons or to avoid the wrath of a vocal minority — except where expressly requested by a clear majority of investors (and for pension funds, the scheme sponsor) — is not acceptable.

Even assuming the stranded assets hypothesis is correct (and I think it is), the financial argument is not clear-cut. First, to some degree it should already be priced in. Second, being a pariah sector is not, in financial terms, anywhere near as bad as some may presume.

Given the limitations on future fossil fuel use, the industry might be expected to enter a lengthy period of measured, and managed, decline. In other words, it might be expected to become more like the tobacco industry, which has rewarded shareholders with a total return of 1,515 per cent since 2000.

As for other pariah sectors, take your pick from brewers (678 per cent), distillers (593 per cent) or weapons manufacturers (399 per cent).

Over the same period, renewable energy stocks have returned just 118 per cent, a dramatic underperformance the do-gooders omit to mention.

It would be unfair to suggest this proves that investing in renewable energy stocks is a financially stupid idea. Just as ludicrous, in fact, as using recent performance data to suggest investors should dump hydrocarbon companies.

— Financial Times