“It takes as much energy to wish as it does to plan.”
Eleanor Roosevelt
As we're all aware, energy is going through a massive transition at present. The combined impact of dire warnings about the damage caused by climate change and the war in Ukraine is accelerating this transition, and in investment terms it translates into two clear reasons to avoid fossil fuels: ethical exclusion from funds which have any kind of social conscience, and the concern of being left with stranded assets in investment portfolios.
Investment classifications have not, however, kept up with this accelerating transition. Exposure to the energy sector should be a significant part of any investment fund — the world uses energy in massive amounts as we know from our household spending. But the energy sector is full of fossil fuel companies: the few investable renewable energy stocks are generally included in the ‘financials’ classification.
So this week, while reminding you that this commentary does not give investment advice (please ensure that you refer to an investment professional in this respect), we take a look at the dysfunctional state of the investable market in energy, and we ask what can be done to improve accessibility for personal investors.
It's not difficult to find the leading candidates for energy investment in the UK equity market. Shell has a market capitalisation of £168 billion and BP £94 billion: between them they comprise 13% of the FTSE-100 Index.
Of course, both of them would draw attention to their activities in alternative energy; but these are really minnows compared to their massive activity in extracting and distributing oil and gas. There was a time, many years ago when Lord Browne was in charge at BP, when he sought to re-brand the company as ‘Beyond Petroleum’: but we’re all ‘eyes open wide’ to green-washing now, and we can see that they have a massive journey to make before they are investable in funds which exclude companies earning more than 10% of their income from fossil fuel activities.
In contrast, I would invite you to review Motley Fool Money’s selection of alternative energy investments in the UK market. The leader is SSE (previously known as Scottish and Southern Electricity) with a market capitalisation of £20 billion: just 12% of Shell. Most people may think of SSE as an electricity distributor, but they have recently sold that business to OVO Energy and are now focused on renewable energy generation.
There's only one other investment in The Motley Fool list whose market capitalisation is measured in £billions; Greencoat UK Wind with a market cap of £3.6 billion and which majors on wind-powered generation, but it is more of a collective investment vehicle rather than a direct generator in its own right.
Beyond SSE and Greencoat UK Wind it is indeed a motley list, starting with ITM Power (hydrogen), Ceres Power (fuel cells), and AFC energy (also fuel cells).
So where is the range of significant renewable investments accessible to those who have to use the quoted markets, such as personal investors? They're nowhere to be seen.
This is largely because, as usual, private equity companies and large institutions get in there first to take the major early returns — another case of ‘fat cats getting the cream’.
And both the extent of investment in renewable energy and the returns to be earned from it are huge.
We reported on the massive Xlinks project in the Western Sahara on 25th April 2022. This expects to supply 8% of the United Kingdom's electricity supply at a significantly lower cost than fossil fuel and nuclear generators from 2029. Both wind and solar costs are coming in well below fossil fuel costs: returns are there in abundance, and many people who buy their electricity from green suppliers cannot understand why these lower costs are not passed through into the charges that they pay each month.
So it is high time for the London Stock Exchange to take a close look at how to encourage more availability of renewable investment opportunities in the quoted markets. It surely cannot be right for private equity firms to be the prime beneficiaries in such an important sector.
The energy sector classifications should also be reviewed to ensure that they contain all means of production, including renewables, so that people have a clear view of the alternatives if they want to steer clear of fossil fuels. At a recent investment committee meeting, the benchmark proportion set aside for energy was stated at 3.5%: but because all investments in the sector were based on fossil fuel — which was, of course, excluded — the fund had 0% invested in that sector.
Our commentaries on investment have tended to focus on tech giants because of the huge opportunity for introducing ‘Stock for Data’, but it's important to maintain a diverse investment exposure in any portfolio: you shouldn't keep all your eggs in one basket.
It's not just the London Stock Exchange and investment firms who need to look at these issues: the Government should review tax breaks provided for private equity firms (particularly on interest) and consider whether they are too generous. Investment associations such as ShareSoc should also press for more opportunities for personal investors; and further work needs to be done in the primary market where London has slipped well down the list of markets for new issues.
A more egalitarian form of capitalism, based on the key principle of disintermediation, requires that these issues are given proper priority: considerable progress was made with the Prospectus Review a couple of years ago, but we need to maintain the momentum.
Gavin Oldham OBE
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