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The Financial Case for�Fossil Fuel Divestment

Dan Cohn, Energy Finance Analyst

May 13, 2024

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Introducing IEEFA

  • A global think tank based in the US with 75 staff across 15 countries and four continents.

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  • Our mission: to accelerate the transition to a diverse, sustainable, and profitable energy economy.

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  • Our analysis is designed to meet professional investment standards.

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Defining Fossil Fuel Divestment

Reducing investment exposure to fossil fuels below market weight.

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  • Selling current holdings in the sector,
  • Restricting new investments,
  • While continuing to meet investment return targets and minimizing fees.

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Requires financial due diligence and executive deliberation.

Divestment is both a process and a range of outcomes.

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Global Divestment Commitments

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Why divest from fossil fuels?

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Why divest from fossil fuels?

Fossil fuels are financial underperformers.

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Fossil fuels are poorly positioned to succeed over the long-term.

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Divestment is a defensive move to protect a fund from further losses.

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Fossil Fuels are Financial Underperformers

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Dec 1980

28.99%

April ‘24

4.1%

5%

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The Top 10 Companies in the S&P 500�Grey = fossil fuels

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1980

2020

2024 (thru Apr.)

1

IBM

Apple

Microsoft

2

AT&T

Microsoft

Apple

3

Exxon

Amazon

Nvidia

4

Standard Oil Indiana

Google (Alphabet A)

Amazon

5

Schlumberger

Google (Alphabet C)

Google (Alphabet A)

6

Shell Oil

Facebook

Meta (Facebook)

7

Mobil

Berkshire

Google (Alphabet C)

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Standard Oil California

Visa

Berkshire Hathaway B

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Atlantic Richfield

Johnson & Johnson

Eli Lilly

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GE

Walmart

Broadcom

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Fossil Fuels Have Underperformed

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S&P 500

+210%

Energy

+55%

As of Oct. 6, 2023 | Source: S&P Dow Jones Indices

+59.5%

+261.1%

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Performance depends a little bit on your timeframe

10-year

5-year

3-year

1-year

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Performance depends a little bit on your timeframe

10-year

5-year

3-year

1-year

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White = S&P 500

Blue = Fossil Fuels

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Performance depends a little bit on your timeframe

10-year

5-year

3-year

1-year

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White = S&P 500

Blue = Fossil Fuels

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Performance depends a little bit on your timeframe

10-year

5-year

3-year

1-year

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White = S&P 500

Blue = Fossil Fuels

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Performance depends a little bit on your timeframe

10-year

5-year

3-year

1-year

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White = S&P 500

Blue = Fossil Fuels

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Source: IEEFA calculations from company reports (ExxonMobil, Chevron, Shell, BP, TotalEnergies) ✦ Note: Figures are free cash flow minus net distributions to shareholders

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Oil Prices Are Lower in 2023…

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Fossil fuels have lagged the market.

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Fossil Fuels are Poorly Positioned to Succeed

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Fossil Fuels Face Growing Competition for Market Share

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Transportation: EVs to dominate passenger vehicle sales by 2040, says ExxonMobil CEO (June 2022)

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Electric Power: utilities investing in 9 MW of new solar/wind for each new MW gas (Edison Electric Inst.); grid battery capacity grows ~10x to 2026 (WoodMac)

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Petrochemicals: Single use plastics bans growing; fossil feedstocks targeted for replacement; growth unlikely to compensate for overall declining demand.

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Residential, Commercial: Heat pumps, electrification

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Industrial fuel use: “Heat batteries” in development

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69% of oil

4% of gas

1% of oil

37% of gas

90% of coal

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CCS is not Commercially Viable

  • CCS = carbon capture and storage
  • Projects have yet to meet capture targets in a sustained way, despite 50 years of research & development.

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B.C. Teachers Pension Plan: A Pathway to Divestment

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CCS is not Commercially Viable

  • CCS = carbon capture and storage
  • Projects have yet to meet capture targets in a sustained way, despite 50 years of research & development.
  • Financing relies on multiple parties and government support to share risk.
  • Will likely require permanent subsidies – not profitable.

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Fossil Fuel Companies are Not Investing Significantly in Low-Carbon

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1%

Cash spending by the oil and gas industry, 2008-2022 (Source: International Energy Agency)

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And there are other risks

  • Legal
  • Regulatory
  • Asset write-downs
  • Physical climate damage

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Why divest from fossil fuels?

  • Over the long-term, fossil fuels will remain a part of the world’s energy supply, but:
  • It will be a smaller industry, extracting less for a smaller class of consumers.
  • For investors, the future is increasingly in economic growth that is decoupled from the traditional energy sector.

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  • The sector is ill-prepared to navigate the risks and competitive pressures it now faces.

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  • Divestment is a defensive tool to protect investors from further losses from fossil fuels as the energy transition unfolds.

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Common objections to divestment

  • Divestment will lose money because fossil fuels perform well.
  • Divestment will require higher management fees, and that’s imprudent.
  • Divestment doesn’t change anything, it’s just shares changing hands (or: bad actors will buy the shares we sell).
  • Shareholder engagement is better (or: shareholder engagement can lower emissions, but divestment can’t).

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Thank You

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Dan Cohn

Energy Finance Analyst

dcohn@ieefa.org

www.ieefa.org