Fossil fuels are non-renewable energy fuels formed from the anaerobic decomposition of organic matter over time (over millions of years). These fuels commonly consist of hydrogen and carbon. Fossil fuels have provided the energy necessary for global development for centuries. However, their use has also been detrimental to the global environment.
These gaseous by-products, mostly carbon dioxide (CO2), methane (CH4), and other trace gases, have a greenhouse effect absorbing and radiating infrared that continuously warm the planet. The effects of this warming are being felt as climatic patterns change across the globe. The bid to prevent effects like melting ice caps and complete ecological destruction has increased calls for a transition to cleaner energy sources. Investors seem to be heeding this call and are increasingly looking to pull out from their fossil fuel investments.
Divesting: What it means
Investors are keen to increase their environmental impact and keep up with the new trend in energy development. As a result, several investors are increasingly divesting from ‘dirty sources’ of energy like coal and petroleum.
Investors are increasingly dumping shares/bonds from companies that primarily produce and sell fossil fuels. Large investors, notably sovereign wealth funds, pension funds, and institutions, are leading fossil fuel divesting. Norway’s Sovereign Wealth Fund and the British Medical Association are some of the most prominent organizations divested from fossil fuels. In addition, many investment firms are also exiting their fossil fuel positions. By 2019, thousands of institutions and individuals with global assets of about $14 trillion have begun or committed to divesting fossil fuels.
Many of these investors are reinvesting their funds in sustainable alternatives, which have helped advance these solutions. These investors are banking on the potential for growth of the renewable energy sector, the public clamour for cleaner energy sources, and increasing favourable government policies. Would this be enough to end fossil fuels eventually?
The Decline of Fossil Fuel
The public disposition towards fossil fuels and the increasing calls for cleaner sources have influenced government policies globally. As a result, governments worldwide are adopting audacious renewable energy goals. For instance, Germany’s Energiewende policy puts the country on track to reduce GHG emissions by 55 per cent (compared to 1990 levels), and 50 per cent of electricity needs to be met by renewable energy. Moreover, these policies and growing demands for clean energy are influencing how investors invest.
Technological advances in recent years have led to a growth in renewable energy over the past decade. These innovations have greatly increased the efficiency of renewable energy solutions and lowered their cost considerably. For example, the price of solar panels fell by over 90 per cent over the past two decades while battery prices fell by 85 per cent over the past ten years; as a result, solar power has become the cheapest energy source. The electric vehicle sector has also improved in price competitiveness. Tesla currently plans to unveil a sub $25,000 car that will compete with fossil-fuel-powered cars.
Fossil fuels are losing their energy share to renewable energy solutions even in the current low-price environment of fossil fuels. Moreover, with cleaner energy sources becoming cheaper, investible, and politically accepted, there is now a greater material risk to the financial rationale for investing in fossil fuel. Citigroup recently predicted that the value loss of companies that invest in fossil fuels would be about $100 trillion over the next two decades.