EC Is Bill Gates Right On Energy Investing?

Not long ago, Bill Gates offered some investment advice. That, in itself, constitutes news, but the content and the reactions make up a more interesting story.

Gates told the Financial Times, in essence, that investors who want to do something about climate change should stop making up lists of companies they do not want in their portfolios based on involvement in fossil fuel production or use. They should, instead, invest in disruptive technologies that will provide actual solutions to climate change.

Environmental-social-governance (ESG) investors have pushed back on this position partly on moral grounds. But there are economic reasons as well. Their withdrawal of capital, and demand that banks not finance fossil fuel projects limits the pool of capital available to fossil fuel companies, which raises their cost of capital. And their insistence that fossil fuel companies more explicitly lay out risks to shareholders sets on notice fiduciary investors, who do not want to have to explain, afterwards why they made an investment in disregard of warnings. But the actions of ESG investors are essentially negative, and possibly of limited effectiveness, given the huge cash flows that oil companies generate. The oil companies can continue to do what they always did. And the capital market boycotts do not create solutions.

Okay, easy advice for Bill Gates to give, because he and his fellow billionaires have the money and contacts to acquire interests in those disruptive technology companies before they go public. The rest of us don’t. We will, as consumers, pay for the new technologies that will make the original investors richer.

Some energy experts have said, don’t worry, the big energy firms will make those investments, and they have the money to do it. In truth, some giant energy firms have looked into doing so. Royal Dutch Shell (RDS-A) , for instance, set up a team of executives to figure out how. They immediately ran into the problem. Shell is the biggest dividend payer in the world. It wants to maintain that dividend of $16 billion per year. The bulk of cash flow comes from the oil and gas business. It has invested in natural gas (lower carbon content than oil or coal) in windmills, in hydrogen energy, but all this green investing, no matter the prospects, cannot generate enough cash to pay that dividend. Shell will not make the Schumpeterian move, to dump the old business before it is too late, and go whole hog into the new. Shell cannot afford to be disruptive. Somebody else will have to do it. In that respect, Bill Gates is right.

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