Canary In The Oil Field

October 14, 2020

We’re sometimes asked whether our Environmental strategies include traditional energy or utility companies that are attempting to transition toward renewable energy. It’s a reasonable question, since a business that could successfully achieve that transition would be well-aligned with our investment thesis.

For now, the answer generally remains “No” for a few reasons. First, most of the movement so far is better characterized by intent than action. While many companies have announced plans to reduce their dependence on fossil fuels, the vast majority are still devoting only a small fraction of their capital to renewables.

Second, most of these companies are large, with entrenched business models. Reinventing any business is challenging enough. Doing it at that scale in the face of growing consumer pressure while still producing enough profits from the traditional business line is daunting to say the least.

A final issue is purely practical. At what point is a company doing enough to be on the “good” side of the equation? Our existing approach, which penalizes current fossil fuel reserves and carbon emissions, is transparent and removes a great deal of subjectivity.

Nevertheless, it’s important that as investors, we maintain an open mind…which is why we’re keeping an eye on BP. Yes, that BP. The BP that brought us the infamous Deepwater Horizon oil spill. Under the leadership of a new CEO, BP has aggressively planted a flag in the renewable camp. As outlined here, the company has committed to a huge increase in renewable investments over the next 10 years and has promised to achieve net zero emissions by 2050.

Almost as notable to us, however, is that BP has done something few companies ever do. It has said out loud that its entire business is becoming obsolete. It has also admitted a willingness to sacrifice near-term benefits in the interest of long-term viability.

For the reasons we outlined above, success is far from assured, and the market seems to understand this. While BP’s stock experienced a bounce on this announcement, its year to date return through the end of September is a depressing -51%, even worse than the Energy sector overall¹.

Though we’re a long way from including BP in our portfolios, the company’s acknowledgement of reality is, at a minimum, encouraging. Two things we aim to avoid in our investment process are emotion and dogma. While BP and other companies like it still hold a negative connotation for many, our responsibility is to stay alert to change and to maintain objectivity. Here’s hoping that a much different version of BP is eventually part of our portfolios.

Quotable: “We aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.” – Xi Jinping, President of China, the world’s largest carbon emitter, in a September 22 speech to the U.N. General Assembly.²

Trivia: On November 4, the U.S. is scheduled to withdraw from the Paris Agreement on climate change. Of the more than 190 parties to the U.N Framework Convention on Climate Change, the U.S. will be the ninth to have either withdrawn from or never ratified the Agreement. How many of the other eight can you name? They are the countries with blank cells in the second column of this table.

Totally Off-Topic Random Fact of the Month: Maybe some of you caught this surreal story back in June, but I missed it. I ran across it while googling “last living world war I veteran” (yes, that really is the kind of thing I do in my spare time).

1. Source: Portfolio Visualizer
2. Science Magazine, October 2, 2020