Fossil Fuels, Carbon Bombs and the Risk of Stranded Assets

“And into the forest I go, to lose my mind and find my soul” - John Muir

One of the most effective ways we can address the global climate crisis is to be intentional with where we invest our money.

For decades, our economic system has been extractive, exploiting people and the environment for financial gain. Increasingly, however, more and more investors are looking to align their wealth with their values, avoiding sectors and companies that damage the environment and contribute to global warming.

Many clients and prospective clients that I talk to are looking to make long-term decisions about their wealth so that they can live their desired lifestyle often many years from now, in retirement, for example, or to leave a legacy to their children or grandchildren.

As such, as awareness of the climate crisis increases, more and more clients are actively making a decision to avoid investing in fossil fuels.

The Problem with Fossil Fuels

According to Paul Hawken in his book, ‘Regeneration - Ending the Climate Crisis in One Generation’, fossil fuel combustion is the primary cause of global warming, “and must cease rapidly otherwise there is no cure”.

There have been several high profile reports which highlight the need to urgently reduce greenhouse gas emissions in order to tackle global warming.

In May 2021, the International Energy Agency (IEA) concluded that there should be no new oil or gas fields or coalmines if the world is to reach net zero by 2050.

In April this year, a report published by the Intergovernmental Panel on Climate Change (IPCC) warned that there was only a narrow chance of limiting global heating to 1.5C above pre-industrial levels. The report went on to say that overshooting 1.5C was almost inevitable but that it might be temporary if drastic action was taken this decade to reduce greenhouse gas emissions to reach net zero emissions by 2050.

A month later, in May, the UN World Meteorological Organisation issued its ‘State of the Global Climate 2021’ report in which it states that four key climate-change indicators: greenhouse gas concentrations, sea level rise, ocean temperature levels and ocean acidification all set new records in 2021.

The evidence is therefore clear; we need to reduce the amount of fossil fuels we are burning. As the UN Secretary General, Antonio Guterres stated following the publication of the IPCC report, “Our addiction to fossil fuels is killing us”.

‘Carbon Bombs’

However, a report by the Guardian newspaper has uncovered plans by the largest oil and gas companies to actually increase investment in oil and gas projects. The report, ‘Revealed: the ‘Carbon Bombs’ set to trigger catastrophic climate breakdown’ sets out how the projects will cause huge amounts of global emissions in excess of the levels that global emissions need to remain at in order to prevent 1.5C of global warning.

The Guardian report highlights a stark reality; we need to burn less fossil fuels to tackle the climate crisis but the biggest oil and gas companies want to extract more of it.

Stranded Assets

Anyone investing in oil and gas companies need to take into account the risk of investing in stranded assets. In other words does the share price of companies that extract, distribute or rely heavily on fossil fuels take into account the risk that demand for fossil fuels could significantly reduce. This could be as a result of lower demand as we transition to renewable energy, government regulations could restrict the use of fossil fuels, subsidies could be removed or new technologies could make fossil fuels redundant. If these events occur, oil and gas companies funding new projects would have to write down significant losses.

We are not going to end the need for fossil fuels overnight but we do need to transition to renewable energy and the evidence shows that this needs to happen sooner rather than later.

Our Responsible Investment Approach

Our approach at Mangu Wealth Management is to take into account risk, return and impact when managing our client’s wealth and we work with a few carefully selected fund managers to manage portfolios that reflect our clients values. More and more clients are looking to invest in a way that achieves both a positive financial return for them and a positive social and environmental impact for the next generation.

If you would like a review of your current portfolio and to discuss how your wealth can be aligned to your values and long-term financial planning goals, please do get in touch.