IEEFA update: The investment rationale for fossil fuels falls apart

For decades, the fossil fuel sector literally fuelled the global economy and powered the world’s investment markets.

This is no longer the case. The long-standing and now outdated investment thesis around fossil fuels—that such holdings would make large and reliable annual contributions to institutional funds—has crumbled.

The sector now lags the broader market, and the one-time assumption that an oil and gas company’s value equalled the number of barrels of oil, or reserves, it owned has collapsed alongside the core steady-returns rationale for investing in the sector.

A new paradigm is emerging: Cash, revenue, and profits matter, and risks cannot be ignored.  Fossil fuel companies are responding in different ways to this shift, some more responsibly than others. But some companies (and their investors) ignore what’s happening, and they do so at their peril.

The absence of a coherent and honest industry-wide value thesis today places fossil fuel investors at a true disadvantage. The days of powerhouse contributions by such companies to investment fund bottom lines are over. The risks of continuing to invest in coal, oil and gas are formidable and unlikely to abate.

*For the full analysis from Institute for Energy Economics Analysis, click here.