The Shift Away from Fossil Fuel Investments

In light of a growing fossil fuel divestment movement, banks and investors are limiting their financial exposure to coalmining companies.

In April, HSBC warned investors in a client research note against investments in “stranded” fossil fuel assets, noting the recent drop in energy prices. In early May, Bank of America announced that it will formally cut back on its lending in the coal mining sector as part of its policy to promote responsible use of coal and other energy sources.

The nationwide campaign for fossil fuel divestment has raised pressure on universities, cities, charities, and pension funds to exit their holdings in the fossil fuel industry. Both ethical and financial reasons have been cited for joining the cause. Amid growing concerns for climate change, investors have been discouraged from putting money in an industry largely responsible for the bulk of human-caused pollutant emissions. Also, with climate change regulations on the rise, coal investments are expected to lose value as policymakers strive to keep warming under a 2C threshold by limiting the use of fossil fuel.

As the fossil fuel divestment movement gains steam, natural gas companies’ financial difficulties will only increase. According to a report by HSBC, the decline in demand for shares and bonds of such companies will ultimately increase cost of capital and limit ability to finance projects that are critical for long-term growth in the industry. As there are options available for managing the risk of stranded assets, not all investors will choose to exit the industry. Yet, the current trend in divestment is clearly pointing downhill for the multi-trillion dollar fossil fuel industry.

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