There have been many examples throughout investment history when massive changes have propelled a business or sector. This usually happens at the expense of another business due to advances in technology that were often ignored. In this article (The Canary in the Coal Stocks), the plight of the telegraph’s replacement by the telephone is highlighted as an example of this pattern. Coal is a recent victim in this long list, suffering -10% returns over the past decade while the S&P 500 has had double-digit positive returns. (See graph on page 2 of the article)
According to research conducted by Lazard Asset management, coal’s demise is due to the substantial cost reduction of energy produced by Natural Gas, Wind and Solar (see graph on page 3).
The next and far more significant risk in the energy arena is the likelihood of Stranded Assets that are currently included on the books and in the valuations of the Oil and Gas industry which represents 4 Trillion dollars! The stranded assets of the fossil fuel industry refer to the oil, gas and coal that is still in the ground but reported on books of some of the worlds largest companies. This article explores the impact on these companies if these assets have to be written down – no longer factored into the value of these companies. The growth in demand for alternative sources of energy combined with greatly reduced costs in this sector make for a strong economic and investment argument in their favor. With the real possibility of a peak in demand for fossil fuels coming in the next few years, owning shares of companies connected to the fossil fuel industry could represent serious risk exposure that most investors are still unaware of, or have ignored. These are avoidable risks if Environmental, Social and Governance (ESG) screening criteria are applied. This is now possible on a broader level than ever before through Socially Responsible Investing (SRI).
Jack Schniepp is a CERTIFIED FINANCIAL PLANNER™ (CFP®, ChFC®) and the owner of Cascade Financial Strategies in Bend, Oregon. CFS is a registered investment advisor licensed in Oregon, California and Idaho. They specialize in socially responsible investing which integrates environmental, social, and corporate governance (ESG) criteria into portfolio construction.