Green campaigners want big investors to ditch fossil fuel stocks - will it hit your shares and funds?
Environment campaigners are ramping up pressure on big investors to dump holdings in fossil fuel companies, including the huge international miners and oil firms populating London's stock market.
The movement, which has enjoyed publicity but mixed success so far, is focused on large and influential investors with an ethical or educational bent to their other activities - the Gates Foundation, the Wellcome Trust, churches, universities and so on.
The debate is mostly taking place over the heads of ordinary savers, whose pensions and other investments are routinely exposed to fossil fuel firms through mainstream funds, although the stakes are big enough that everyone's returns could be affected eventually.
Looking ahead: Fossil fuel companies are also among the biggest financial backers of alternative energy sources, and could take a crucial role in supplying clean fuel in future
We take a closer look at the investment case for and against fossil fuels below. We also look at the practical options open to individual investors - whether they prefer to divest, put money into alternative energy sources, or stay exposed to the fossil fuel sector.
What is the 'fossil free' campaign about?
Campaigners argue most of the reserves owned by big fossil fuel players - BP, Shell and the like - are effectively 'stranded assets' because if they are extracted and burned this would trigger dangerous climate change.
They believe that ultimately governments and regulators will have to stop companies from exploiting a good deal of their assets, because letting them do so would irreversibly damage the planet.
They are effectively making both an environmental case for selling fossil fuel stocks, and an investment one on the grounds the industry's business model is a money loser over the longer term.
But the situation is not that straightforward. Those worried about the environment have to bear in mind that fossil fuel companies are also among the biggest financial backers of alternative energy sources, and could have a crucial role in supplying clean fuel in future.
Then there is a question of what the campaigners can ultimately achieve, given they have little enough clout with fossil fuel firms but none at all with countries like Saudi Arabia or Iran.
Finally, just from a hard-headed investment standpoint, it's reasonable to assume there is still plenty of money to be made from fossil fuels.
What should investors consider?
'It is entirely understandable that some investors will want to exclude certain types of investment from their own portfolio, perhaps for reasons of ethics or views on sustainability, in which case they should carefully select a specialist fund which screens out these companies,' says Jason Hollands, managing director of Tilney Bestinvest.
But he stresses that the reality is that oil and gas are basic resources that most of us rely on to go about our daily lives.
Jason Hollands: 'It would be wholly wrong for fund managers and pension schemes to be lobbied into blanket boycotts by activists'
'Were these industries to be switched off overnight then we would all have a serious problem on our hands and have to get used to living as our ancestors did, as green energy alone would simply be insufficient to meet world demand.
'A shift to a low carbon economy takes time and investment and traditional energy companies need be part of that process rather than excluded from it, by themselves investing in ways to reduce emissions and diversify into new forms of energy.
'As these industries need capital to continue to operate and develop, it would be wholly wrong for fund managers and pension schemes to be lobbied into blanket boycotts by activists who are completely unrealistic in their demands and possibly disinterested in the economics.'
Hollands adds that despite the slide in energy prices over the past year, which has hit the share prices of oil and gas companies, the sector still represents 12 per cent of the UK stock market.
He says these companies in turn generate the profits and dividends that help power most of our pension funds and other investments, as well as being key suppliers of all sorts of other manufacturing industries.
Tim Cockerill, investment director of Rowan Dartington, says: 'We are becoming much more efficient in our use of oil therefore we need less of it. We are also investing heavily in other technology like wind and solar and increasingly in the UK and in Europe becoming more reliant on alternative energy sources.
'That means demand for fossil fuels is going to diminish. The trend long term is for less reliance on fossil fuels. It's absolutely the direction of travel we are going in. These fossil fuels assets they are expecting to extract are going to be unprofitable to get out the ground.'
Cockerill reckons it is hard to predict how hardline regulators are going get about this issue in future, but points out that we have seen increased regulation across all industries over the past 25 years and this is unlikely to diminish.
He nevertheless believes we are going to carry on using fossil fuels for decades into the future - especially as there are a lot of very positive things that can be done with oil and gas aside from burning them.
Cockerill also notes the oil price has fallen sharply since last summer, and despite a partial recovery already to around $65 there is the possibility of good returns from the industry if it rises again.
'We are in a situation where the oil price has fallen a long way,' says Cockerill. 'In the short term it could be $70-$75. From the investing point of view there is a potential opportunity there. We have seen shares in oil and gas sold down aggressively and there is recovery potential there.'
Not enough: Clean energy sources like solar can't meet our fuel needs at present so we must still rely on traditional high carbon suppliers
Jim Wood-Smith, head of research at Hawksmoor Investment Management, says: 'We are always looking for alternatives to old fashioned energy plays. But it's also terribly complicated because if you look at who the major investors in alternative energies are it tends to be the oil companies.
'The people who spend most on trying to develop alternative energy sources are your Royal Dutch Shells, Exxon Mobils and BPs.'
Wood-Smith adds that having a higher oil price makes alternative energy look less expensive and more financially viable by comparison - so a $100 price is better than $60 for both oil firms and the green energy industry.
What are the practical options for investors?
Avoid investing in fossil fuels
This is not easy for individual investors to do. Ethical funds don't tend to exclude companies simply because they are in the fossil fuel business, instead assessing them on the basis of their environmental and human rights records.
WHAT IS THE ONGOING CHARGE OF A FUND?
The ongoing charge is the investing industry's standard measure of fund running costs.
The bigger it is, the costlier the fund is to run.
The ongoing charge figure can be found in the Key Investor Information Document (KIID) for any fund, usually at the top of page two.
You should be able to find these documents somewhere on fund managers' websites.
If you have trouble tracking one down, try putting the fund name and 'KIID' together in an internet search engine or call the company and ask for help.
Hollands says that no ethical fund that he knows of screens out fossil fuel firms entirely. But he, Cockerill and Wood-Smith all recommend Kames Ethical Equity which has very low exposure at around 2.5 per cent.
Kames Ethical Equity Ongoing charge: 0.81 per cent. Yield: 1.70 per cent. Minimum investment: £500.
Invest in fossil fuel alternatives
Another approach is to put money into firms developing clean energy alternatives to fossil fuels.
Impax Environmental Markets specialises in alternative energy, waste and water management investments but doesn't take an ethical stance, says Cockerill.
'They will buy into solar and wind, plus energy efficiency companies. It's a fund we use. It's been around some time. They are not new. It's a very well established business and this is what they have always done.'
Wood-Smith, who also recommends Impax, says it operates as both a fund and an investment trust but he tends to use the latter.
Hollands says: 'There are specialist funds out there, such as Guinness Alternative Energy, that do specifically invest in green energy equities but it is important to recognise that like any niche fund, the ride can be volatile and just investing in such funds is not going to provide a balanced investment strategy.
'In particular, renewable energy tends be very expensive to produce - hence much of the industry relies on subsidies - and therefore when traditional fossil fuel prices are weak, as they are now, these companies seriously underperform.'
Hollands says another area of interest is renewable infrastructure projects, which means making a direct investment in physical assets such as wind and solar farms, where revenues are underpinned by long-term subsidies.
Tim Cockerill: 'The trend long term is for less reliance on fossil fuels'
Impax Environmental Markets fund Ongoing charge: 1.31 per cent. Yield: 1.29 per cent. Minimum investment: None.
See below for more about investment trusts and explanation of NAV.
Stick with investing in fossil fuels
Mainstream UK funds are heavily exposed to these stocks already, as they make up such a big chunk of the London market, so the average investor can really just stay put.
But for those with a particularly keen interest in the oil and gas sector, Cockerill recommends the big and well-established Guinness Global Energy fund.
'What you are getting is broad exposure to the energy sector. Half of it is in the US, and including Canada, 60 per cent is in North America. A lot of it is in these big international oil companies.'
He believes such broad exposure is better than picking individual stocks, which is highly risky especially in exploration where perhaps only two out of 10 finds are successful.
Wood-Smith says there is a safe way to invest in fossil fuel companies and a risky way to do it.
'The safe way is to invest into one of the integrated oil majors, Royal Dutch shell or BP. The risky way is to buy into oil explorers, or a selection of them. It's useful to buy a selection, or by Murphy's law you are invested in the one that goes bust.'
But Wood-Smith cautions against investing based on a forecast of where the oil price is going, because in his view no one has a clue.
'If we go back in time to the middle of last year and ask how many people in the oil and investing industries knew the oil price would be below $50 it's nil. Therefore our faith in anyone forecasting where oil will be in 12 months' time is nil.'
Guinness Global Energy Ongoing charge: 1.12 per cent. Yield: Nil. Minimum investment: £5,000 (It's usually possible to buy into funds with smaller sums than this by going through a DIY investment broker).
HOW DO INVESTMENT TRUSTS WORK - AND WHAT IS 'NAV'?
Investment trusts are listed companies with shares that trade on the stock market.
They invest in the shares of other companies and are known as closed ended, meaning the number of shares or units the trust's portfolio is divided into is limited - unlike unit trusts or open-ended investment companies (OEICs) where investors' money is pooled to invest in shares, bonds or other funds.
In an investment trust, investors can buy or sell shares to join or leave the fund, but new money outside this pool cannot be raised without formally issuing new shares.
Investment trusts can be riskier than unit trusts/OEICs because their shares can trade at a premium or discount to the value of the assets they hold, known as the net asset value.
NAV is calculated by dividing the total value of assets (what it owns) minus liabilities (what it owes) by the amount of shares existing.
A trust's price can fall below the total value of its holdings if it is unpopular and people do not want to invest but do want to sell. This pushes down demand and drives up the supply of its units for sale.
This gives new investors the opportunity to buy in at a discount, but means existing investors' holdings are worth less than they should be.
An investment trust trading at a discount to NAV may be regarded as cheap because the shares cost less than its overall value - although there might be good reasons why, such as investors being justifiably pessimistic about its prospects.
When a trust trades at a premium to NAV it is more expensive than its net worth.
Investment trusts tend to be a lower-cost option than funds, with no initial charge and lower annual fees. However, buying them incurs share-dealing charges. A good DIY investment platform will cut these.
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