Gilblom covers European oil companies for Bloomberg News in London.
At LGIM, Nick Stansbury says he remembers the day in December 2016
when he was called into a meeting with about 25 of his fellow port-
folio managers. Understanding the implications of climate change
was going to become a priority, they were told.
Stansbury says he already had deep misgivings about the
future of the oil market. Oil companies’ value depends on investors
believing that demand for crude will always grow. For 100 years,
that belief had been justified. But if renewable energy sources gain
market share and crude demand stutters, the market would go
haywire, he says. That could trigger a huge re-rating of major oil
companies—of which LGIM holds more than $12 billion in shares.
“It was a lightbulb moment,” he says.
He spent a year analyzing different parts of the energy market
to try to draw some conclusions. But he knew his clients wanted
more. On an airplane from Oslo to London in early 2018, staring at
a blank piece of paper, he pondered how to build a comprehensive
financial model. He’d need data (lots of it), a team of analysts, and
months to work on it. He got what he needed. When the model ran
for the first time in October, it took hours to go through its paces.
The results confirmed his fears: Tiny tweaks to government
policies could cause oil demand to halve or to almost double by
- The crude market could become exceptionally volatile, and
investors would probably start fleeing within the next five years.
The model helped LGIM rank companies most at risk to climate
change. “Uncertainty around the level of demand growth creates
massive instability in the way oil markets work, and that has all
sorts of implications for investors,” says Stansbury, who’s now
head of commodities research.
LGIM’s Omi says this kind of rigorous analysis has persuaded
big companies, typically resistant to change, to begin making
serious strategic shifts. When LGIM divested some oil company
stocks last year, she says, some of the fund managers protested,
“These are really good stocks!” She replied, “I know they might be
good stocks for you, but these are the rationales. This makes sense
for our clients.”
Omi
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