Introduction

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Fossil Fuel Industry Explained

The term ‘fossil fuels’ refers to forms of energy that are created from organic material that is millions of years old. Fossil fuels include: coal, petroleum, natural gas, oil shales, bitumens, tar sands, and heavy oils, all of which can undergo combustion to produce heat for energy.

Companies that profit off of fossil fuels can be involved in the industry at various stages of production. These include:

• Upstream industry: engages in exploration  and production of oil and gas Midstream  industry: transports oil and gas (e.g. pipelines) 

• Downstream industry: refines oil products  and sells and distributes oil and gas (e.g. gas  stations) 

• Utilities industry: converts fossil fuels into  energy that is then sold for commercial and  residential use 

• Utilities often use a mix of fossil fuels and  renewable sources to generate electricity. For  our analysis, we consider a utility company  to be fossil fuel dependent if it derives  more than 30% of its total energy supply or  revenues from coal, oil, or gas. 

In terms of coal, we have chosen to only screen  thermal coal, referring to coal used to produce  energy for utilities. We are not screening for  metallurgical coal, which refers to coal used to  produce steel. This decision is based off the fact  that metallurgical coal is a requirement for the  production of steel and there is currently no  feasible alternative. 

The Economic Rationale for Investment

Companies that derive a majority of their  revenues from fossil fuels have the potential to  incur significant losses due to stranded assets.  According to HSBC, there are three factors that  could lead to fossil fuels becoming stranded  assets: 1) the implementation of climate change  regulation, 2) economic factors and fossil fuel  price fluctuations, and 3) the development  of innovations in the energy sector such as  advancements in renewables.2 

A reduction in the individual consumption of  fossil fuels could also lead to stranded assets.  As public sentiment towards fossil fuels shifts,  people may focus on reducing their own fossil  fuel consumption by purchasing an electric  vehicle, installing solar panels, or making other  carbon-free lifestyle changes. 

Furthermore, the price of solar and wind is now  on par with many other fuel types for electricity  generation, and electric cars are becoming  mainstream. According to Forbes, the cost per  KwH for solar and wind ranges between $0.06  and $0.10, which is competitive with the cost of  electricity generation from fossil fuels, which is  in the range of $0.05 to $0.17 per KwH.3 

The Social Rationale for Investment 

There is a large overlap between the economic  and social rationales for fossil fuel divestment  as the social response to the negative effects  of fossil fuel consumption can drive fossil fuel  assets to become stranded assets. The worldwide  divestment campaign is one example of a social  movement that poses a threat to the fossil fuel  industry. 

There is a significant worldwide push for fossil fuel  divestment at institutions such as universities  and national funds, with $8 trillion in globally

managed assets committed to the divestment  from fossil fuels.4 In July 2018, Ireland became  the first country to divest its assets from fossil  fuels, a significant achievement in the fossil fuel  divestment movement.5 This movement poses a  significant economic risk for the share prices of  fossil fuel companies, as it represents decreased  demand for the stock. 

Regulators, especially those countries who have  signed the 2015 Paris Agreement on Climate  Change, may feel pressure from citizens or global  allies to impose new legislation restricting the  sale of fossil fuels by either banning certain  fossil fuels completely, imposing a carbon tax, or  heavily subsidizing ‘green’ energies. These forms  of regulation could further depress the value of  the fossil fuel industry. 

The Environmental Rationale for Investment

There is also an overlap between the social and  environmental rationales for divestment. The  environmental impacts of climate change pose a  threat to our local and global communities.  

The overwhelming majority of scientists believe  that humans are causing climate change,  predominantly through the burning of fossil fuels.  According to the International Panel on Climate  Change (IPCC), about 78% of the total greenhouse  gas emission increase since 1970 is due to CO2  emissions from fossil fuel combustion.6 These  greenhouse gases are harmful because they  contribute to the greenhouse gas effect, which  traps heat in the atmosphere and results in  warming on a global scale, i.e. global warming.7 

The 2015 Paris climate agreement agreed to  “holding the increase in the global average  temperature to well below 2 degrees Celsius  above pre-industrial levels and pursuing efforts  to limit the temperature increase to 1.5 degrees.”8 

Without efforts to reduce emissions, the IPCC  estimates that global mean surface temperatures  will increase by 3.7 to 4.8 degrees Celsius by 2100  compared to pre-industrial levels.8  

Warming of 1.5 to 2 degrees Celsius will bring with  it inevitable environmental effects, including  heatwaves, a decrease in the availability of  freshwater, reductions in agricultural yields,  a rise in sea level, and coral bleaching, among  other impacts.9 The difference between 1.5 and  2 degrees comes down to intensity: 2 degrees of  warming will result in more dramatic, negative  changes in all of the above. 

Signatories of the Paris Agreement include  Canada, China, and India, all of whom have  pledged to keep emissions below that amount.  The US is also a signatory, however President  Trump has announced his intention to leave the  agreement by 2020, when it is permitted under  the terms of the agreement. At the current rate of  greenhouse gas reductions, the world will fail to  meet the goals of the Paris Agreement and we are  set to overshoot 2 degrees Celsius of warming.  

The most effective way to reduce emissions is to  stop burning fossil fuels. Recent studies indicate  that “globally, a third of oil reserves, half of gas  reserves, and over 80 per cent of current coal  reserves should remain unused from 2010 to 2050  in order to meet the target of 2 degrees Celsius.”10  This means that these reserves must remain in  the ground and not be extracted or consumed,  a statement that implies we must reduce our  global dependency on fossil fuels. If the global  community exceeds these recommendations, 2  degrees Celsius of warming is likely inevitable. 

Divesting from fossil fuels signals to companies  and the industry that they should be exploring  new and cleaner technologies.

Works Cited 

1. Encyclopedia Brittanica: www.britannica.com/science/fossil-fuel 

2. HSBC Global Research: www.businessgreen.com/digital_assets/8779/hsbc_Stranded_assets_what_next.pdf 

3. Forbes: www.forbes.com/sites/dominicdudley/2018/01/13/renewable energy-cost-effective-fossil-fuels2020/#55c17b114ff2

4. Corporate Knights: www.corporateknights. com/channels/responsible-investing/qa money-talk-bill-mckibben-15568031/ 

5. New York Times: www.nytimes.com/2018/07/12/climate/ireland-fossil fuels-divestment.html 

6. IPCC: www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_summary for-policymakers.pdf 

7. NASA: climate.nasa.gov/causes/

8. United Nations Climate Change: unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement 

9. Vox: www.vox.com/energy-and-environment/2018/1/19/16908402/global warming-2-degrees-climate-change 

10. United Nations Climate Change: unfccc.int/news/most-fossil-fuels-must-stay-in-the-ground-new-study