Investing in Fossil Fuels

Just mentioning the term fossil fuels can often be enough to prove a strong reaction.  This will generally fall into one of two broad camps.  According to one camp, fossil fuels are a necessity for now and the immediate future until we transition fully into cleaner energy.  According to another camp, fossil fuels are an environmental evil which are preventing humanity from reaching its climate targets and their use must be ended as a priority.  The irony of this situation is that both camps are absolutely right.  The transition away from fossil fuels is a case of “when” rather than “if” and it is indisputable that this “when” needs to be as soon as possible.  Investors, therefore, need to ask themselves what this means for them.

The fossil fuel industry

Talking about “investing in fossil fuels” is actually misleading.  It would be far more correct to talk about “investing in companies in the fossil fuels industry”.  This may be more cumbersome, but it highlights the fact that investors are backing companies rather than commodities and companies which can succeed over the long term, through good times and bad, tend to be ones where the management is of a consistently high calibre.  In this context, that means an executive board which is realistic enough to recognise the fact that the writing is on the way for fossil fuels and to negotiate an exit strategy, either by winding up the company or by transitioning into new business areas such as cleaner energy.  It also means an executive board which is aware that, ultimately, it answers to investors, even when their comments are challenging, arguably especially when their comments are challenging.  In short, therefore, companies involved in fossil fuels may be both a solid investment and an ethical investment, but probably only if their management is both socially- and environmentally-conscious enough to be aware of the winds of change and respond to them proactively.

The sustainable fuels industry

Investing in sustainable fuels (and/or the transition thereto) may be seen as a great way to merge investment returns with environmental concerns.  In fact, it can be exactly that, but only if the investment makes sense in its own right, in other words, only if the company either has a proven track record of success or can provide compelling reasons why it is reasonable to expect it to succeed.  These reasons need to be explained in simple terms so that non-experts can understand what is on offer and they need to be supported with a suitable level of credible evidence.  Investors should beware of any company which fills its marketing materials with jargon.  It may be sincere in its aims but it clearly has a communications problem and if it can’t communicate well when it is trying to attract investment then it is highly unlikely to be able to communicate well at a later date.  Also remember that even though every major company was once a tiny start-up, very few tiny start-ups go on to be major companies.  A lot of them just crash and burn along the way and investors need to keep this in mind when allocating their investment funds.

The issue of “hidden” fossil fuels investments

As a quick, final point, when analysing an investment portfolio for its level of exposure to the decline of the fossil fuels industry, it’s important to remember that some alternative investments may lead to indirect exposure to this industry.  In particular, many transportation companies depend on fossil fuels and if the companies behind it start to struggle then prices may go up.  Additionally, banks may have loans outstanding with struggling companies and if they go bankrupt then the loans will, presumably, not be paid (or at least not in full).  Insurance companies may also be exposed if desperation drives fossil-fuel companies to desperate measures and accidents result.