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Solar PV power generation in Hong Kong

Over the past five years, and growing dramatically leading up to and post-Paris COP 21, a movement of institutional and individual investors representing more than $3.4tn in assets under management have divested a portion of their fossil fuel investments and committed to divesting the balance in the next five years. The corollary of divesting fossil fuels is re-investing in the clean energy future. As an invitation to a larger discussion of how we can invest in a clean energy future, we created the Carbon Clean 200 (Clean200TM) – a list of the 200 largest companies worldwide ranked by their total clean energy revenues.

The Clean200 is intended as the clean energy inverse of the Carbon Underground 200TM. Where the Carbon Underground 200TM (which evolved from the seminal Carbon Tracker Initiative report, Unburnable Carbon: Are the World’s Financial Markets Carrying a Carbon Bubble?), ranks the largest publicly listed companies by the carbon intensity of their coal, oil, and gas reserves; the Clean200 ranks the largest publicly listed companies by their total clean energy revenues, with a few additional screens to help ensure the companies are indeed building the infrastructure and services needed for what Lester Brown and many others have called “The Great Energy Transition” in a just and equitable way.

The moral case for divesting fuels has been well argued, but for many, the economic case is less clear. However, as clean energy growth rates take off and demand growth for fossil fuels flatlines, it is probable that divesting fossil fuels in favour of a clean energy future does not have to come at a sacrifice to long-term investment returns.

On the risk side, divesting is about not getting stuck holding stranded fossil fuel assets that cannot be burnt if the world is to adhere to a given carbon budget, a topic on which Mark Carney, governor of the Bank of England, has expressed concerns in a landmark speech to global insurer Lloyd’s of London. On the opportunity side, investing in the transition from a high-carbon to a low-carbon economy represents “the largest economic opportunity of the 21st century” according to John Doerr a major venture capitalist at Kleiner-Perkins in Silicon valley.

It might seem counter-intuitive for an investor to sell their fossil fuel stocks when most people are still driving internal combustion cars and burning fossil fuels every day. However, the point and the power dynamic of investing is that, as an investor, you have the power to bet on and capitalize the creation of the world that you want to see.

If you are wrong, you will lose money. If you are right, you will profit from and add momentum to the change you believe in. While many mission-driven investors believe that the arc of history bends towards justice – that companies which create positive rather than negative externalities will prevail – in the case of climate friendly investing, it may actually be true. Many investors have found this out the hard way. Indeed, in a world of limited capital every investment has opportunity cost. When people vote with their investment dollars in favour of clean energy over dirty it sends a message as powerful as any ballot box that the time has come to stop using the atmosphere as a free dumping ground.

Take coal, which accounts for over 40 per cent of global greenhouse gas emissions. The industry is declining rapidly in value, especially in the United States, Peabody Energy, the largest private-sector coal company in the world, filed for Chapter 11 bankruptcy protection this April, following Arch and Alpha. The Dow Jones Coal Index dropped 93 per cent over the past five years. Oil companies are facing similar problems. Fifty-two have filed for bankruptcy since 2015, and over a third of the world’s biggest oil and gas companies have crushing debt loads (over $150 billion) and cash flows depressed by low oil prices, according to the Deloitte Center for Energy Solutions and a recent study by As You Sow. Major investment indices are now only half as exposed to the fossil fuel sector (1.5 per cent to coal, 7 per cent to oil and gas) as they were five years ago. This is not due to any active decision to divest, but rather because fossil fuel stocks have lagged while other sectors have produced healthy returns.

While fossil fuel stock performance stagnates, clean energy is taking off. The world is currently adding twice as much clean power capacity as coal, oil, and gas combined, according to Bloomberg New Energy Finance (BNEF). Wind’s market share of power generation has doubled four times in the past 15 years, and solar has doubled seven times. It’s also getting cheaper to make power from wind and solar, thanks to technology, better financing and economies of scale. Increased demand for a technology generally reduces prices, whereas increased demand for a commodity increases prices. This basic calculus has driven the price of a renewable kilowatt of energy ever downward, making the choice of energy an economic one. Companies which make a significant amount of their revenue from environmental solutions now make up 5% of global investment indices; the Clean200 list of companies have a collective value over $1 trillion.

In the next 10 years, McKinsey expects oil demand growth to flatten due to growing fuel efficiencies and competitive technologies such as the electric car. Battery prices fell 35 per cent last year, and electric car sales rose by 60 per cent. By 2022, BNEF estimates electric vehicles will cost the same as their internal combustion counterparts, and if growth continues at the current pace, oil displacement by electric cars will reach 2 million barrels per day by 2023 – the size of the current oil glut and enough to drive global oil prices to record lows. Factoring in autonomous cars and ride-sharing services, electric cars could reach 50 per cent of new car sales by 2040, according to BNEF, 50 times higher than what OPEC is projecting.

None of this portends an imminent conclusion to our fossil fuel age, but it does suggest an end to fossil fuels as a long-term growth market and the beginning of a long run expansion of clean energy demand. This sentiment has been ratified, sanctified, and tallied by the political, moral, and financial bellwethers of our time, from the Paris climate talks (195 countries committed to phase out fossil fuels this century) to the vatican (Pope Francis has made moral invocations to drastically reduce use of fossil fuels in the encyclical Laudato Si’) to the Bank of England (the bank’s governor Mark Carney has warned not to get stuck holding a bag of stranded fossil fuel assets).

Some big investors are already adapting:

  • PFZW, the $183 billion Dutch pension fund, has pledged to halve its carbon footprint by 2020 while increasing its investments in climate solutions fourfold.
  • CalSTRS recently committed $2.5 billion to a Low-Carbon Index as part of a multifaceted approach to align its portfolio with the market realities emerging from climate change.
  • ABP introduced an internal carbon budget for its asset managers in 2015, designed to reduce the CO2 footprint of its portfolio equity holdings by 25 per cent, as well as doubling its €29bn equity holdings in equities providing environmental and social solutions over the next five years.
  • AXA divested from all coal holdings (mining companies and electric utilities deriving over 50 per cent of their turnover from coal) in 2015 and committed to triple its green investments by 2020.

Corporate Knights and As You Sow are committed to updating this list on a quarterly basis and ensuring that it remains in the Creative Commons as a public good. We invite anyone to make it better and share any new ideas to improve the methodology for the next quarter. It can be downloaded at www.clean200.org.

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