Investors funneled hundreds of billions of dollars into fossil fuel investments since the Paris Agreement was signed in 2015, and the financial performance of those investments has been poor.
The silver lining is that more recently financing for new fossil fuel projects has narrowed, with capital having already begun to shift towards “green” investments.
$640 billion in new equity
The oil and gas boom in the United States resulted in a tidal wave of new production, but that was made possible by an even more impressive wave of capital that flowed into energy companies. But many of those investments turned out poorly.
A new report from Carbon Tracker finds that since 2011, investors bought $640 billion in new equity in fossil fuel companies, and only $56 billion in renewables/cleantech. While some investors may have made money by getting out at the right time, the report finds that the $640 billion in equity lost $123 billion in value.
Indeed, the energy sector lost value over the past decade, performing worse than the broader market and also cleantech. For example, the energy sector underperformed MSCI’s All Country World Index (ACWI) by 70 percent, posting a -2.4 percent annualized return compared to the broader market’s 11.7 percent annual return and 14.3 percent annually for renewables/cleantech.
A separate analysis from the International Energy Agency and Imperial College Business School found that renewable energy stocks beat fossil fuel stocks by threefold over the past decade. “Renewables are outperforming fossil fuels and they’re outperforming the broader market,” Milica Fomicov, a researcher at Imperial College London, told Bloomberg Green in mid-March.
The poor financial performance of oil and gas companies was especially true in the U.S. shale sector, where promises of riches turned to vapor. The U.S. shale industry burned through more than $300 billion in cash since 2010, and production “peaked without making money for the industry in the aggregate,” according to a June 2020 report from Deloitte. Since 2015, there have been roughly 250 bankruptcies declared by oil and gas companies in North America, according to Haynes and Boone.
But as the Carbon Tracker report notes, the wave of financing for new coal, oil and gas projects also comes despite clear signals from global governments about their intentions to transition away from fossil fuels. The financial spigot remained open even after the 2015 Paris Agreement, which would almost necessarily require a phase out over time of oil and gas production.
Still, large financial institutions have ignored this clear market signal. A recent report from Rainforest Action Network and a coalition of environmental groups finds that the world’s top 60 banks poured $3.8 trillion into fossil fuels between 2016 and 2020. Again, this trend occurred in the five years after the Paris Agreement was signed. In fact, even as bank financing for fossil fuels declined sharply in 2020 as a result of the pandemic, those capital flows were still higher than they were in 2016.
Capital shifting course
Of course, the negative stock performance from fossil fuel companies set against the rising value of clean energy companies does offer evidence that financial markets are in fact beginning to price in the unfolding energy transition. In other words, to some extent financial markets have already begun to shun carbon-intensive industries and are shifting their investments toward renewables.
For example, while new fossil fuel equity issuance proceeds accounted for 12 percent of total proceeds in 2012, that share declined to 8 percent between 2014-2016, and down to less than 1 percent in 2020, according to Carbon Tracker. That suggests that financial markets are less likely to recapitalize an industry that has performed poorly, at least for the moment. “[T]he underlying trend could indicate that capital markets are increasingly difficult to access for fossil fuel producers,” Carbon Tracker wrote in its report.
Equity issuance for cleantech remains low, and has been below 1 percent of total issuance over the past decade, but those numbers surpassed fossil fuel issuance for the first time in 2020.
The start of 2021 has shown somewhat of a rebound of financing for oil and gas, rising in concert with the surge in crude oil prices. The first U.S. shale IPO since 2017 launched in March of this year. Vine Energy, a Texas-based pure-play Haynesville shale gas company, raised $301 million in its public offering, but the result was disappointing compared to what it had targeted.
The recent uptick in financing may be a blip compared to the larger forces at play. The “megatrend of the world transitioning away from fossil fuel usage and towards meeting the goals of the Paris Agreement seems here to stay, and even accelerating,” Carbon Tracker concluded.
For years, Carbon Tracker has been warning that excessive capital flows in fossil fuels, at a time when not only are governments signaling their climate ambition but also when the energy transition is clearly unfolding, would lead to stranded assets. Their new report shows that physical assets need not be stranded for them to turn out as bad investments. This is not a theoretical exercise – the past decade’s negative returns for so many fossil fuel companies demonstrate the risks, which are only going to be magnified going forward.