With Cop26 underway, the environment is firmly at the front of the world’s news agenda.
However, investors are not convinced by the fact that many world leaders emphasize the importance of creating a low-carbon planet.
While some have ploughed money into green technologies — and vowed to shun big polluters — others see out-of-fashion sin stocks, including oil companies, as an opportunity.
Green stocks: Global investment capital of more than $35 trillion is currently held in funds that are ESG (environmental social and governance).
Some of the world’s biggest investment companies — including Fidelity, BlackRock and Vanguard — have pledged to pull money from companies not committed to becoming carbon neutral.
It comes as Chancellor Rishi Sunak will today announce plans to force listed companies to publish their plans on how they’ll become carbon neutral.
Yet at the same time, several hedge funds and private investors — including British billionaire Crispin Odey — have been buying up oil companies left behind by big firms.
And thanks to a surging oil price — now up to $85 (£62) a barrel, after seven consecutive weekly gains — their bets appear to be paying off.
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Global investment capital worth more than $35 trillion is now believed to be in ESG-friendly funds.
Meanwhile, shares in green technologies — including renewable energy and electric vehicles — have been rocketing.
Tesla, the electric car maker, continues to push at record heights, reaching $1 trillion last week. Plug Power, the U.S.-based hydrogen battery developer, is up 1,150% since January 2020.
The picture started to change a few months back. An abrupt rise in oil prices and disruptions to global energy markets led to a rapid resurgence of carbon stocks.
Diamondback, an American oil driller, is up 133% this year. Peabody, a Missouri-based coal miner, has seen its shares rise by an incredible 384 percent. It’s worth noting that this comes after a longer-term decline in their price: with Peabody still worth 30 per cent of its 2018 price.
On the FTSE, a similar (albeit less dramatic) rise has occurred, with oil giants Shell and BP now up 28 per cent and 37 per cent since January. Both companies are expected to pay higher than 4 percent in dividends.
Despite Cop26 grabbing the headlines, the oil industry will not be riding off into the sunset any time soon,’ says Garry White from investment platform Charles Stanley.
‘They may be less fashionable with ESG concerns, but ultimately it’s the oil price that determines their valuation.’
Despite the fact that oil stocks in the United States have risen, many people were at risk of bankruptcy last year. They still owe a lot.
On the FTSE, you don’t have to look far for companies that have struggled: with the beleaguered Wood Group down 37 per cent this year (and 73 per cent in five years).
Its struggles reflect the market’s general consensus that, while it may take years to materialise, a transition from oil is under way. Shell and BP want to be part in that transition by publishing plans for low-carbon companies.
Fund manager William Lough, who manages River & Mercantile UK Dynamic Equity Fund, is a believer in Shell’s green transition plan — and that it is undervalued by environmentally-conscious investors.
‘We think they have a thorough and credible strategy to become more sustainable,’ he says.
The uncertainty of the energy market means many investors — saints or sinners — may prefer to buy-in through managed funds. Impax Environmental Markets is a direct investor in renewable energy.
Its five year performance has turned £10,000 into £24,600. Baillie Gifford’s Positive Change Fund avoids carbon-intensive companies, rather than focusing on renewables.
Over three years, it has turned £10,000 into £25,900.
Big investors are less likely to commit to net zero, which means that fossil-focused funds will be decreasing.
Schroder’s ISF Global Energy is one such fund. But struggling energy markets have dragged its long-term performance, with a £10,000 investment five years ago worth just £7,611. It is risky, but it could pay off, just like oil stocks.