Fossil fuel IPOs lag ACWI by 52%, says Carbon Tracker

The value of share issuances from fossil fuel producers has gone down by $123bn and underperformed the MSCI All Country World Index (ACWI) by 52%, according to new research from Carbon Tracker.

Shares have consistently fallen short of the ACWI since the fourth quarter of 2014, driven by oversupply, weak financial performance and reduced demand, the think tank said. Increased investor scrutiny and broader support for the Paris Agreement may also have contributed to faltering performance, it added. 

The findings are based on analysis of initial public offerings (IPOs) and all subsequent share sales made by fossil fuel producers between 2012 and 2020, which accounted for nearly $270bn in equity sales to global investors.

In the same period, share issuances by renewables and cleantech producers outperformed ACWI by almost 54%, gaining $77bn in value. However, Carbon Tracker noted that these transactions generated “a surprisingly small amount” of proceeds, valued at $56bn, despite a large number of new companies coming to market. 

The report attributed the strong performance of the alternative energy sector to a rally in share prices which began in late 2018 and continued into the latter half of 2020 on the back of ‘build back better’ policies introduced in the wake of Covid-19, anticipation ahead of the US rejoining the Paris Agreement and positive momentum for tech companies.

When asked if the sector would continue to deliver strong returns, Mark Campanale, the founder and Executive Chairman of Carbon Tracker, said to RI: “The economics is firmly in favour of renewables as energy sources such as sunlight and wind can be captured close to the point of use, resulting in a lower cost base and lower energy prices which will end up crushing the margins of competing oil and gas producers. In addition, oil and gas producers face cost pressures due to soaring cost of capital across the sector and wide-scale borrowing to fund investor dividends.”

Campanale called for increased scrutiny on investment banks and stock exchanges that bring fossil fuel producers to market. 

“While many banks have made Net Zero commitments, they're still offering investment banking services to raise money for the fossil fuel companies. For me, Net Zero means giving up investment banking services to oil, gas and coal companies on the market – the proposals shouldn’t even make it past the new business committee which approves new client relationships.

“For all the work being done by our financial market regulators and central banks on managing climate risk, the one glaring hole is the role of exchanges and the admissions panels to exchanges. We counted a total of 2,360 stock exchange transactions related to fossil fuel producers and dependent utilities, pipelines and service companies. If we can't even burn the oil and gas we've already financed, why are we allowing markets to raise even more capital?”

According to the report, RBC Capital Markets, Credit Suisse and Citi were the most active book runners for oil and gas producers, while Credit Suisse, Citi and Deutsche Bank advised the most number of coal producers. 

Ownership data from Bloomberg showed that BlackRock, Vanguard and Capital Group were the largest three shareholders of energy companies.

While global markets may have soured on fossil fuel stocks, the report noted that coal mining IPOs had significantly outperformed the rest of the energy sector due strong post-IPO performances by a handful of Asian coal companies.