TIMING the energy transition IS EVERYTHING
TOO FAST and stranded assets may crash the economy. TOO SLOW and emissions may crash the climate.
Ten years ago, the Bill and Melinda Gates Foundation drastically reduced its investments in coal, oil, and gas companies. In one year, 2014, they divested their entire $187m stake in BP after they had previously dumped $824m stock in Exxon Mobile – all of it.
I am not privy to their internal deliberations, but I believe the divesting was a financial decision, not a political one. Gates has expressed skepticism about divestment as a climate solution strategy. (Financial Times, 2017).
Prescient about the energy transition and investing for the long term, perhaps the Gates Foundation managers were concerned about the risk of stranded assets. Financial institutions that insure or lend to or rate O&G companies (e.g., Citigroup, Lloyds of London, the Bank of England, Standard and Poor’s, insurance regulators in California) were warning about the risk of stranded assets.
Remember that stranded assets are reserves of oil and gas owned by O&G companies, that do not get extracted. Lower fossil fuel demand and prices may make extraction unprofitable, and/or climate legislation may require keeping it in the ground. Either way, the reserves that cannot be turned into profitable O&G products become worthless, and the valuation of the company owning the reserves declines.
A study in the journal, Nature, estimated the value of global stranded assets as “at least $1 trillion” in 2022. The risk is not so much that fossil fuel companies will lose value, but that an abrupt transition could have “destabilizing effects on the financial system.”
In other words,
“This is less about the shift away from fossil fuels than about how smoothly it is done” (London School of Economics, July 2022).
The current controversy about whether environmental factors (ESG) should be considered in evaluating potential investments can be understood as a disagreement about where we are in timing the energy transition. The outcomes of these disputes have serious implications for the hope of a smooth transition.
Dueling perspectives are seen in disputes about NYC pension funds and insurance legislation in Texas. Are we at a point where the risk that stranded assets will devalue O&G companies is real? imminent? far off? never going to happen? Actors on opposing sides of these conflicts answer the questions differently.
Real and Possibly Imminent Vs Far Off or Never Going to Happen
The managers of NYC pension funds are taking the financial risk of stranded assets seriously, as real and imminent.
"The trustees of all three funds voted in 2021 to exclude fossil fuel reserve owners from their portfolios, in accordance with their fiduciary duty…, with the goal of protecting beneficiaries from the financial risks of investing in fossil fuel reserves…” (Pensions&Investments, 2023)
Not all fund participants agree that stranded assets are currently a risk. The risk is either Far Off or Never Going to Happen to plaintiffs in a lawsuit. Four fund participants (a subway driver, a former city schoolteacher, an occupational therapist and a school secretary) are suing the trustees for abdication of their fiduciary duty. These fund participants say that the director is “continuing the strategy of using that office to advance an environmental agenda at the expense of retirement security.” (ESG Weekly)
A similar dispute is playing out with insurance companies in Texas. To Texas state legislators the risk of stranded assets is either far off or never going to happen. They have crafted a bill to prevent insurers from taking environmental factors into account.
Floodlight news reports that insurers are pushing back. To these experts in evaluating risk, the threat of stranded assets is real and imminent.
Insurers argue: “It [the legislation] would interfere with the ability to accurately calculate risks and create insurance coverage policies.” (Floodlight, 2023)
The International Energy Agency (IEA) announced a decline in demand for oil in the past year (Jan18, 2024). They project: “consumption growth would slow this year to 1.2 million barrels a day from 2.3 million in 2023.” Would New York pensioners and Texas legislators then be worried about stranded assets?
Timing technological transitions has always been a tricky business, and a smooth transition is a tall order. Management consultant, Richard Foster, studied technological transitions and noted:
“It is easier to detect a technological discontinuity from afar than it is when you are right in the middle of one. “
And Mark Twain said: