Words by Polly Ghaz iINVESTMENT & MARKETS
In the latest indication that fossil fuels are on the way to becoming persona non grata for investors, the London Stock Exchange (LSE) has reclassified oil and gas companies as “non-renewables.”
The move was made earlier this month at the request of index provider FTSE Russell, which is wholly owned by the London Stock Exchange Group. Companies formerly classified as oil and gas producers and now shifted to the non-renewable energy category include two of the world’s top 10 fossil fuel companies—BP and Royal Dutch Shell. Coal companies previously listed as “basic materials/mining” companies were also reclassified as non-renewables.
Renewables have more visibility at the London Stock Exchange
The index provider’s goal is to draw a clearer line for investors between heavily polluting and GHG-intensive fuels and cleaner ones. Its new ground rules for industry classification also rebrand producers of wind, solar, ethanol, methanol, hydrogen, biofuels and other cleaner sources under “renewable energy.” Most of these were previously listed as “alternative fuels.”
Taken together, these changes will provide “greater visibility to other forms of energy such as renewables,” Susan Quintin, managing director of product management at FTSE Russell, told The Guardian. Since a company’s classification is based on its main source of revenue, oil and gas companies would have to make major investments in cleaner energy sources to avoid the “non-renewable” category.
Investor pressure piles on fossil fuel companies
The London Stock Exchange’s move reflects growing investor pressure on fossil fuel companies to diversify in order to avoid climate-related business risks amid the growing urgency to combat climate change. The FTSE Russell is among many index providers that now offer climate-focused indices, including a climate risk government bond index, launched last week. S&P Global provides carbon-efficient and fossil-free indices for investors that measure the performance of companies in the S&P Global 1200 with a reduced carbon footprint or that do not own fossil fuel reserves.
The trend among large institutional and private investors to pull back from or abandon fossil fuels is also snowballing. Through December 2018, over 1,000 institutions with managed investments worth almost $8 trillion have committed to divest from fossil fuel producers, led by insurers, pension funds and sovereign wealth funds.
In June, Norway’s parliament instructed its country’s $1 trillion sovereign wealth fund to divest an estimated $13 billion from eight coal companies and around 150 oil producers. The fund, one of the world’s largest, will also move up to $20 billion into renewable-energy projects and companies.
Insurance companies are also sending energy companies a message
On July 1, insurance giant Chubb joined an industry-wide shift away from coal-related underwriting and investment, joining the likes of Hannover Re, Allianz Group, Munich Re and Swiss Re. The firm announced it would stop underwriting the construction or operation of new coal-fired plants, and end debt or equity investments in companies that generate over 30 percent of revenue from coal production. The Swiss-owned company will phase out insurance coverage for firms exceeding the threshold by 2022. As the Insurance Journal reported, 57 more insurers committed to divesting some or all of their thermal coal investments in 2018 compared to 2016.
While fossil fuels remain the dominant global energy source for the time being, accounting for roughly four-fifths of energy consumption, the longer-term outlook for oil, coal and gas companies that do not diversify looks increasingly cloudy. BP’s group head of energy strategy, Dominic Emery, appeared to acknowledge as much in a recent interview with Bloomberg when he conceded that some of the company’s “more complicated to extract” oil resources “won’t come out of the ground.”
As the London Stock Exchange’s reclassification suggests, the time is overdue for fossil fuel companies to escape the risk of stranded assets and move beyond a “non-renewable” approach to meeting the world’s energy needs.
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