Editor’s Note: Tom Steyer is the founder and co-executive chair of Galvanize Climate Solutions, an investment firm focused on the energy transition. His upcoming book, “Cheaper, Faster, Better: How We’ll Win the Climate War,” is available now for pre-order. The opinions expressed in this commentary are solely his own. View more opinion on CNN.
Earlier this year, during the warmest February in recorded history, the investment giants JPMorgan Chase, State Street, BlackRock and Pimco walked away from some of their boldest climate pledges.
The leaders of these firms, with a combined more than $15 trillion under management, did not deny that climate change exists, that humans are its cause or that its potential consequences are catastrophic. Instead, some pointed to their legal responsibility to shareholders, which they said precluded them from following through on climate pledges. Others argued that their own climate standards were sufficient, or reserved the right to make business-related decisions without having to take the climate pledge into account.
Some might think that, questions of morality aside, fossil fuel investments are just too good to pass up. In the wake of Russian President Vladimir Putin’s invasion of Ukraine, the oil and gas industry has seen its profits soar. Even in the United States, where President Joe Biden’s Inflation Reduction Act is making historic investments in clean energy, oil exports are at an all-time high.
But if there’s one lesson I’ve learned in decades as an investor, it’s that things change. On closer examination, the simplest argument against funding new oil, gas and coal projects is not that they’re immoral. It’s that they’re unsound.
For investors — and their shareholders — funding new fossil fuel projects is a risky bet.
First off, an oil and gas project begun today won’t come online for years, sometimes even decades. According to the Global Energy Monitor, the global average timeline from discovery to production is 11 years, with one study finding that in the world’s largest oil fields, it takes an average of 17 years to go from the first barrel to maximum production.
This means that when institutional investors bankroll fossil fuels, they’re not just betting that demand for oil and gas will be sky high in the short term. They’re betting that demand will remain sky high 10, 20 or even 30 years from now.
The future is famously difficult to predict, and there’s a chance that that prediction will turn out to be correct. But it’s hardly a sure thing. Renewables such as solar and wind are growing at an exponential rate.
Global conflicts are pushing countries without fossil fuel resources to seek energy independence. A wave of new technology is bringing down the cost of clean energy while making its adoption easier than ever. There’s enormous potential for fossil fuel demand to fall more quickly, and more sharply, than today’s investors expect.
Oil and gas has a supply problem, too. The fossil fuel companies’ business model is the same as it was in 1985, when I was a young analyst at Morgan Stanley examining oil industry price decks: sell each barrel of oil or ton of natural gas for more than it costs to produce.
What has changed is that the low-hanging fruit is gone. In many places where oil is easy to extract, the oil has either already been extracted, or someone is already extracting it. New technologies such as fracking have expanded the amount of oil than can theoretically be obtained, but at a substantially higher cost than traditional drilling.
Even in Texas, where potential drilling sites are ranked on a three-tier scale, companies have no choice but to drill new wells in the less desirable tier two and tier three locations; there’s very little tier one left.
Drilling in remote locations, such as the Arctic or far offshore, is more expensive still. The oldest piece of investment advice in the book is “buy low, sell high.” But in many cases, today’s fossil fuel investors aren’t following it. They’re buying high and hoping to sell even higher.
What should be even more concerning to investors is that fossil fuel companies’ challenges go beyond supply and demand. Oil and gas companies face vast litigation risk as well.
Over the past several years, states and municipalities across the country have sued oil companies, arguing, persuasively, that the companies knowingly deceived the public about climate change and its effects.
In many ways, the fossil fuel industry finds itself where big tobacco was in the 1990s. They haven’t yet been forced to pay damages, but if the floodgates open, the projected cost to oil and gas companies could amount to more than $200 billion per year.
Finally, there is perhaps the greatest risk fossil fuel investors face: the industry’s massive profits are largely dependent on special treatment by governments. Last year alone, oil, coal and gas received an estimated $7 trillion in subsidies worldwide.
In the United States, fossil fuel companies enjoy a wide range of industry-specific tax breaks, including one allowing many oil producers to deduct 15% of their total income from their taxes.
Clean energy, meanwhile, is already winning in the marketplace. In less than 50 years, the average cost of solar panels has fallen by more than 99.7%, from nearly $126 per watt of energy generated to 26 cents; in many parts of the country and the world, renewables are already cheaper than some fossil fuels. But even this obscures the full extent of fossil fuels’ market weakness. If the playing field ever becomes level, oil and gas will struggle to compete.
Twelve years ago, I stepped away from Farallon Capital, the investment fund I founded, to focus on climate full time. When investing in promising, innovative companies, I now see returns as a means to an end, and the end is impact.
That’s one reason the last 12 years have been among the most rewarding, fulfilling and fun of my life. But today, you don’t have to be an advocate or activist to see the opportunities in the clean energy transformation, or the danger in betting big on fossil fuels.
All you have to do is follow the advice of the conservative economist Herbert Stein, who offered what I still consider to be among the greatest pieces of investment wisdom: “If something cannot go on forever it will stop.”
Today, an institutional investor that backs new fossil fuel projects is betting that our addiction to fossil fuels will go on forever. Even if all I cared about was financial responsibility to my shareholders, I wouldn’t make that bet.
