(CNN) — Earlier this year, during the warmest February on record, investment giants JPMorgan Chase, State Street, BlackRock and Pimco withdrew from some of their boldest climate change pledges.
The leaders of these companies, which collectively control more than $15 trillion, do not deny that climate change exists, that humans are its cause, or that its potential consequences are catastrophic. Ta. Rather, some pointed to legal responsibilities to shareholders, which they said were an impediment to delivering on climate change commitments. Others argued that their own climate standards were sufficient or reserved the right to make business-related decisions without taking climate commitments into account.
Moral issues aside, some may think that investing in fossil fuels is too good to pass up. Oil and gas industry profits have soared in the wake of Russian President Vladimir Putin's invasion of Ukraine. Even in the United States, where President Joe Biden's anti-inflation law is making historic investments in clean energy, oil exports are at an all-time high.
But if there's one lesson I've learned over my decades as an investor, it's that things change. Upon closer inspection, the simplest argument against funding new oil, gas, and coal projects is not that they are immoral. That means they are unhealthy.
For investors and their shareholders, financing new fossil fuel projects is a risky gamble.
First, oil and gas projects started today will not be operational for years or even decades. According to the Global Energy Monitor, the global average timeline from discovery to production is 11 years, and one study found that the world's largest oil fields take an average of 17 years from first barrel to full production.
This means that when institutional investors fund fossil fuels, they are not simply betting that demand for oil and gas will rise in the short term. They are betting that he will remain in high demand 10, 20, even 30 years from now.
It's well known that predicting the future is difficult, but sometimes your predictions come true. But that's not a sure thing. Renewable energy such as solar and wind power is growing exponentially.
Global conflicts are forcing countries without fossil fuel resources to seek energy independence. A wave of new technologies has lowered the cost of clean energy and made it easier than ever to implement it. Demand for fossil fuels is very likely to decline faster and more sharply than investors expect today.
Oil and gas also have supply issues. Fossil fuel companies' business models are the same as they were in 1985, when I was a young analyst at Morgan Stanley researching oil industry prices: purchasing a barrel of oil or a ton of natural gas at a price higher than the cost of producing it. It was for sale.
What has changed is that there are no longer low hanging fruit. In many places where oil is easy to extract, the oil has either already been extracted or someone has already extracted it. New technologies such as hydraulic fracturing have increased the amount of oil that could be produced theoretically, but at a cost significantly higher than conventional drilling.
Even in Texas, where potential drilling sites are ranked on a three-tier scale, companies are forced to drill new wells in less desirable Tier 2 and Tier 3 locations. There are only a few Tier 1 left.
Drilling in remote locations such as the Arctic or far offshore is even more expensive. The oldest investment advice in the book is “buy low, sell high.” But in many cases, today's fossil fuel investors are not following suit. They want to buy high and sell even higher.
Even more worrying for investors is that the challenges for fossil fuel companies exceed supply and demand. Oil and gas companies also face enormous litigation risks.
Over the past few years, states and local governments across the country have sued oil companies, persuasively arguing that the companies are intentionally misleading the public about climate change and its impacts.
In many ways, the fossil fuel industry is where it was with Big Tobacco in the 1990s. Although they have not yet been forced to pay damages, the expected costs for oil and gas companies could reach more than $200 billion a year if the floodgates open.
Finally, there is perhaps the biggest risk facing fossil fuel investors. That is, the fossil fuel industry's huge profits depend primarily on special treatment from governments.Last year alone, oil, coal and gas received an estimated $7 Trillion With subsidies around the world.
In the United States, fossil fuel companies enjoy a wide range of industry-specific tax breaks, including one that allows many oil producers to deduct 15% of their gross revenues from their taxes.
Meanwhile, clean energy is already winning in the market. In less than 50 years, the average cost of solar panels has fallen by more than 99.7%, from about $126 to 26 cents per watt of energy produced. In many parts of the country and the world, renewable energy is already cheaper than some fossil fuels. But this still obscures the full extent of the fossil fuel market's weaknesses. When the playing field is leveled, oil and gas will have a hard time competing.
Twelve years ago, I left Farallon Capital, the investment fund I founded, to focus full-time on climate change. When investing in promising and innovative companies, I now view returns as a means to an end, with an impact in the end.
That's one of the reasons why the past 12 years have been the most challenging, fulfilling, and fun years of my life. But today, you don't have to be an advocate or activist to understand the opportunities of clean energy transformation and the dangers of betting big on fossil fuels.
All you have to do is follow the advice of conservative economist Herbert Stein. He offered what I still consider to be one of the greatest pieces of investing wisdom. “If something can't go on forever, it will stop.”
The institutional investors currently backing new fossil fuel projects are betting that our addiction to fossil fuels will last forever. Even if all I cared about was financial responsibility to shareholders, I wouldn't make that bet.
CNN Wire
™ & © 2024 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.
