Big news out of Norway last week... the nation's oil fund managers – managing the largest sovereign wealth fund in the world – are seriously considering removing oil related investments from their massive portfolio.
Of course some friend of the earth sagely crowed "...the future of fossil fuel investment is looking shaky indeed".
Meanwhile, the Norwegian fund managers were quick to state their decision was focused on reducing Norway's exposure to hydrocarbon prices; the government is not selling the Statoil ownership and not ending their drilling program.
For anyone who was confused about the impact of this decision (presuming it will be ratified by the Norwegian Parliament), let's be clear: it won't change a thing.
Oil and gas are not going away for a long time yet, oil and gas stocks are likely to present great opportunities for investors, and you shouldn't let this drivel impact your investment decision making.
Assets for Assets
I'm inclined to believe the fund managers simple explanation. That it makes good business sense. Norway's entire economy hinges on the performance of oil and gas, so why double the exposure.
When oil prices are high, money pours into the fund from the Statoil ownership, oil taxation, and royalty revenue. When oil prices are low, this fire hose of cash stops and the Norwegian economy grinds to a halt.
If your income relies on high oil prices, don't invest in oil because you will get hurt twice if oil prices don't go your way. Same thing if you're a real estate flogger and your investment portfolio is focused on real estate investments; it begs you to get doubly whacked when the property market dries up along with your sales performance.
Positively, Norway stands out as the only democratic country who's leaders wisely understood the rule of assets: don't convert assets into income. While other governments (read Alberta, Saskatchewan, Scotland, Texas, etc.) have been busy squandering their asset wealth for decades, Norway decided in 1990 that they were going to convert assets into assets. That simple idea resulted in a $1,000,000,000,000 piggy bank today.
This Nordic wisdom means every Norwegian citizen's share today is worth around $200,000. Using the 30x Rule, this fund could generate perpetual income in excess of $33 billion per year to the Norwegian people. Provided it's wisely invested and carefully hedged, this is a huge boon to the Norwegian economy and will keep the country prosperous long after their oil shelf goes dry.
Impact on Oil & Gas Companies
Despite the green-crowd glee, it's important to realize this decision will have no real financial impact on oil and gas companies. Norway already has a long list of banned investments, mostly on ethical grounds. These include most tobacco companies and munitions manufacturers.
Well, the last time I checked, banned stocks like Boeing, Honeywell, and Altria are going straight up with the rest of the market. Your thousands, millions, billions, or trillions don't matter.
Boeing has returned 433% since they joined Norway's ban list in 2005. Honeywell jumped 451% in the same time period. Altria has returned 375% since being banned in January 2010.
These example stocks have all widely outperformed the broader S&P500 despite being unceremoniously dumped by the $1 trillion investment fund. Why?
Stock markets are still generally free markets. The impact of a decision made by Norway's $1T fund or the few grand you've scraped into a ESG fund have zero material impact on a global market investing trillions upon trillions.
Money ultimately goes where the opportunities to make money are. Today that might be "sharing platforms" and pot growers, but tomorrow the tide could turn.
Oil and gas companies still have a bright future and should not be ignored by you because of social pressure, a warm fuzzy feeling about where your money is, or a decision made by a group of oil-rich, blue-eyed northerners who hail themselves as social investment mavericks.
Social Investment Dilemmas
I invest to make money, not to chase the latest social fad or to make myself feel good. If you start down this road of ESG standards, there's no end to carving out reasons not to invest in this company or that company for one reason or another.
Despite my personal beliefs or convictions on various issues, I'm not playing that feel-good game when it comes to investing.
If oil companies present a great opportunity and they're trending up, you can bet I'm hitching on for that ride. If tobacco company stock prices are telling me to jump on, I'll be there too. I'm not a smoker as I believe it's unhealthy, but I'm indifferent to other people's personal decision to spend $15 a pack once or twice a day.
Likewise if one of these social pariah companies are cratering for any reason, I might take a short position and try make money from their demise. I'm not here to fight the market, I'm not here to tie myself to the welfare of one company or sector for life, I'm just here to make money where the opportunities present themselves and to get out when they don't.
I don't like tobacco companies much because I believe their products harm people, so I personally just choose not to smoke. I don't like war and the harm caused by munitions, so I put my vote in for the political party that shares my beliefs.
I don't identify myself by what's currently in my investment portfolio; my broader life choices define me much better.
Your social beliefs should guide your personal life choices; don't confuse these with your investment choices.