Fossil fuel divestment a $5trn challenge: BNEF

The global shift towards clean energy investment and out of fossil fuels would be a $5 trillion dollar challenge requiring a massive scale-up of new investment vehicles, a new report has found.

The report, released on Tuesday by Bloomberg New Energy Finance, notes that 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.

But with oil, gas and coal companies making up one of the world’s largest liquid asset classes – with a combined stock market valuation of nearly $5 tillion – the report warns that a raft of major investor groups would need to find viable alternative destinations for their money.

US-based investment fund BlackRock, for example – the world’s largest investor in oil and gas stocks – holds $140 billion in just its top 25 holdings. And governments such as China, Russia, and India are also major strategic investors in fossil fuels.

“Large-scale divestment from the nearly $5 trillion worth of oil, gas and coal assets will be far from easy,” the report says.

Clean energy, while seemingly a logical progression from fossil fuels, did not yet approach the necessary scale as an investable asset class for institutions, said BNEF, despite its own forecasts for $5.5 trillion in clean energy investment from now to 2030.

Much of that $5.5 trillion would have risk-return and liquidity characteristics suitable for banks, developers or utilities, the report found, but not for pension funds or institutional asset managers.

As part of its research, BNEF analysed seven other stock market sectors that had many of the same investment attributes as fossil fuels firms and could plausibly accept divested capital, ranging from information technology to real estate.

Information technology – despite being a $7 trillion sector, with its biggest firm, Apple, being nearly 40 per cent larger than fossil fuel giant ExxonMobil – offered relatively low yields, the report found, either because the companies’ shares were highly rated or because they paid modest dividends.

Real estate investment trusts, meanwhile, were only $1.4 trillion in total market capitalisation, although they had dividend yields of 4 per cent plus.

“Fossil fuels are investor favourites for a reason,” said Nathaniel Bullard, author of the White Paper. “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,” Bullard said.

Clean energy equities, as captured by the Wilderhill New Energy Global Innovation Index, or NEX, have a free float of $220 billion. Issuance of green bonds may top $40 billion this year but that would still be less than 3 per cent 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 $20 billion.