The investment opportunity in ‘Fossil Fuel Free’

Neil Brown

While no investor can completely avoid exposure to fossil fuels, as all companies use electricity, we invest in businesses that profit from changes under way in our energy system.

We look for companies reducing costs through energy efficiencies, selling products that drive efficiencies for others or generating and transmitting renewable energy. Naturally, we avoid companies that stand to lose from these positive trends – the fossil fuel sectors.

Burning fossil fuels currently provides the majority of energy used for generating electricity, transport and industrial processes. It is also the largest source of greenhouse gas emissions, which countries and companies are working hard to reduce against clear and challenging targets.

The three fossil fuels are coal, oil and natural gas and they have different emissions profiles and carbon intensities.

Coal looks the least attractive for many reasons, not least the fact it emits the most carbon dioxide per unit of energy. We believe regulation will continue to discourage the building of coal-fired electricity generation and the outlook for investments in this area is severely challenged.

Oil is mainly used for transport (petrol, diesel and jet fuel) as well as the petrochemicals that make plastics. As reserves have become harder to find, there has been a shift into new types of oil, known as unconventionals, including tar sands, ultra-deep water and shale. These have higher footprints in terms of energy and water inputs and we believe the economics of unconventional projects have been overstated.

Natural gas exhibits different characteristics to coal and oil, primarily how little carbon dioxide it emits when burnt and can assist in transition but only when used as a direct substitute for coal.

The ‘Fossil Free’ movement calls for asset owners to end support for the industry by freezing new investment in fossil fuels and selling positions in equities or corporate bonds within five years. Our Liontrust Sustainable Future Funds have long taken a more positive approach:

  1. Invest in companies profiting from accelerating the decarbonisation of our economies
  2. Invest in companies with low exposure to carbon risk
  3. Avoid investment in coal, oil, tar sands and natural gas

Our thematic investment ideas continue to evolve rapidly but currently include insulation providers, vehicle battery components and power semiconductors.

In summary, there are global commitments to transition away from fossil fuels and meeting those commitments presents challenges. We believe there are profits to be made in meeting those challenges and risks for companies on the wrong side. By providing capital to companies that are leaders in these fields, we believe we can continue to profit from a credible pathway to a lower carbon economy.


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Tuesday, November 21, 2017, 12:38 PM