As climate change rises up the agenda, one obvious area of consideration is the energy sector, as fossil fuel-related emissions play a significant role in climate change.
While the specifics vary between each industry, we believe it is likely that a combination of policy and new technology will have a notable impact on the demand for oil and gas over the next few years, with the explicit aim of curbing catastrophic climate change. These policies might include carbon taxes, scrappage and banning vehicles with internal combustion engines, as well as efficiency subsidies.
Aside from purely financial projections, the consequences of climate change and potential remediation may also create other risks and difficulties for energy companies. These include physical risks from extreme weather events (made more likely by climate change), litigation risks as fossil-fuel giants come under pressure from activist groups, and reputational risk for being – in the eyes of many – the perpetrators of global warming.
The numerous ways in which fossil fuels are embedded in the world’s industries and products is complex, but we think it is probable that oil and gas will come under fire from policy within our investment time horizons, a reality that investors may want to consider.
Emma Mogford, portfolio manager, Newton Investment Management.