The top 200 companies who generate the bulk of their revenue from clean energy have offered juicier returns to investors over the past 18 months than their counterparts in fossil fuels.
A new report from As You Sow and Corporate Knights finds that not only is the clean energy sector growing quickly, but investors are better off putting their money into renewable energy and other clean energy stocks than oil and gas. The largest 200 companies that generate at least 10 percent of their revenues from clean energy have generated a total return of 32.1 percent in the past year-and-a-half, compared to just 15.7 percent for fossil fuel companies in the S&P 1200 Global Energy Index.
The top 200 companies are spread out across 29 countries, and they generate an estimated $363 billion in combined annual clean energy revenues. The top five in terms of revenues include: Siemens, Toyota, Schneider Electric, Abb Ltd-Reg and Panasonic.
The shift toward clean energy is driven by a variety of factors, but as investors reap better returns from cleaner forms of energy, the transition could accelerate.
Surely, however, the better performance for clean energy stocks are the result of the depressed nature of the oil market, with oil companies suffering from several years of low oil prices? The report’s authors point out that oil prices have actually be on an upswing over the last 18 months, the period of time that they studied. “Oil prices (WTI) have went up by almost 40% over the time period we are measuring,” Toby Heaps, CEO of Corporate Knights and report co-author, told Oilprice.com. “If someone had told me a year and half ago that oil prices were going up almost 40%, I would have been really surprised if somebody would have told me the Clean200 would outperform fossil fuel stocks over this period.”
Part of the dim outlook for oil and gas stocks, the report argues, is that investors are looking over the horizon and are starting to see the long-term decline of the fossil fuel era. “Look at the long list of car companies and countries that have stated that electric transport ONLY is in the near future; look at the price of renewable infrastructure and batteries dropping,” Andrew Behar, CEO of As You Sow, and co-author of the report, told Oilprice.com. “This is the classic example of commodities vs. technology.”
Behar goes on to describe the predicament that oil companies find themselves in, squeezed between falling costs from renewable energy on the one hand, and demand destruction on the other. “Oil & gas are stuck in a lose-lose situation, if oil prices go up then demand shifts to renewables, if oil prices go down they cannot make a profit, their reserves cannot be sanctioned, so they become stranded assets,” Behar said. “The great transition is inevitable.”
More and more analysts and investors are taking note. Last year, Norway’s trillion-dollar sovereign wealth fund announced a proposal to withdraw its investments in fossil fuels. Instead of a pure climate change argument, the sovereign wealth fund justified its divestment plans by pointing to the uncertainty and volatility of oil prices and the value of fossil fuel assets.
Other warning signs abound. The World Bank said it would stop lending to oil and gas projects after 2019. Major investment indices have halved their exposure to fossil fuel stocks over the past five years, the report argues. Pension funds around the world are calibrating their criteria for investing, including clean energy and environmental metrics. Insurance and reinsurance companies are also taking a harder look at fossil fuels. In a sign that hard-nosed investors are getting anxious about their long-term returns in oil and gas, ExxonMobil and other large oil companies finally lost their battle against shareholders last year to disclose their investment risks to climate change. Exxon, for its part, recently dismissed concerns about peak demand and forthcoming climate regulation, arguing that it plans on producing just about all of the oil and gas reserves that it has on its books.
However, as the As You Sow/Corporate Knights report argues, the danger is that peak demand comes unexpectedly, and that oil and gas assets are dramatically repriced downwards when the writing on the wall becomes clear. If we get to a point at which clean energy and alternative forms of transport eat into the market share of fossil fuels at an accelerating rate, and oil demand enters into a period of decline, the valuation of oil and gas assets will end up being only a fraction of what the market currently estimates.
Except, the danger is that the asset repricing could come well before demand actually hits an overall peak. “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,” the report concludes.
The report’s authors argue that this realization is already factoring into the poor performance of the fossil fuel sector relative to clean energy companies. And even if some dismiss the long-term threat to oil and gas, the recent investor return numbers simply don’t lie.
“Oil prices have spiked by almost 40% over the past year and half, and clean energy stocks have almost doubled the fossil fuel stocks performance over this time,” Toby Heaps of Corporate Knights said. “While there may be brief periods where clean energy stocks under-perform fossil fuels stocks going forward, high fossil fuel prices just pave the way for more demand of clean energy products and services.”