Fossil Fuels Are Risky Investments

Investment in the fossil fuel industry is incompatible with a long-term sustainable and prudent financial investment plan.

Historically a generator of stable blue-chip stock market returns, the industry has underperformed the broad market for a decade. It suffers a speculative and volatile existence, despite the sector's profits in the wake of the COVID-19 pandemic and the war in Ukraine.

The challenges posed by climate change put the industry’s business model in danger, creating wide-ranging volatility and major opportunities for losses.

Fossil fuels are no longer safe investments

The S&P 500 tracks the 500 largest and most stable publicly traded companies in the country. The companies are divided into 11 sectors of the economy. The top sectors, those with the largest weighted percentage, have the largest companies and the most influence on the index's performance.

The steady decline in the Energy Sector’s weighted percentage reflects its “lagging stock market performance, fewer institutional investors, depressed profits and a weak outlook.” In sum, the Energy Sector - once recognized as a stable, sure-bet investment, is now highly speculative and volatile. (Fossil Fuel Investments: Looking Backwards May Prove Costly to Investors in Today’s Market, IEEFA, Feb 2019)

Meanwhile, the value of fossil fuel free investments has been increasing.

Transition risks

Our transition to renewable energy lowers expectations for future demand for fossil fuels.

Source: Levelized cost of energy chart by Mir-445511 - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=137272269

Stranded asset risks

The stock market’s valuation of fossil fuel companies assumes that they can extract all their oil and gas reserves. This is not possible if we stick to the Paris Agreement.

Pipelines and other infrastructure supporting the fossil fuel economy suffer the same risk.

Risks to physical property

Extreme weather threatens pipelines, mines, refineries and power stations.

Regulatory risks

Regulations threaten the fossil fuel industry:

• Approval of infrastructure projects is no longer certain.

• Regulations demanding disclosure of climate risks and/or emissions discourage investment in the industry.

• Electric utilities face pressure to increase the use of renewable energy.

• Regulations which restrict or ban single-use plastics threaten demand for petrochemical products.

Legal risks

An increasing number of lawsuits claim the industry deceived investors and the public about climate change, and is liable for climate damages.

Legal challenges have successfully claimed the sector’s business operations violate national environmental protection laws.

Geopolitical risks

The industry’s profitability is now reliant on factors outside its control. The price of raw fossil fuels can be driven up or down with little warning by the actions of other countries.

U.S. Navy photo by Photographer's Mate 1st Class Arlo K. Abrahamson., Public domain, via Wikimedia Commons