Oil has long been known as a dirty fuel. For investors, it is now a dirty word.
The London Stock Exchange caught many by surprise this week when a little-known rule tweak relabelled a group of oil and gas producers as “non-renewable energy”.
The change, made by index provider FTSE Russell, is designed to separate heavily polluting energy companies from greener alternatives, but analysts complained that it risked stigmatising a sector already struggling with its image.
“The oil and gas industry is being painted in a corner with coal,” said Al Stanton, an energy analyst at RBC Capital Markets.
BP and Royal Dutch Shell and other UK-listed exploration and production companies such as Cairn Energy and Tullow Oil are now grouped in the non-renewable index, which was previously called “Oil & Gas producers”. Green energy producers, formerly indexed as “alternative energy” were also reclassified as “renewable energy”.
The oil and gas industry is being painted in a corner with coal
“Putting oil and gas away from the mainstream is unwelcome . . . It enables you to exclude oil and gas more easily from your portfolio but there is still a need for a transition,” added Mr Stanton.
Mike Tholen, upstream policy director at trade association Oil & Gas UK said: “We would hope that any change which seeks to help the advance to a lower-carbon future does not have unintended consequences.”
Indexes such as these are used by investors looking for broad exposure to individual industries through sector-specific exchange traded funds, or to help compare a company’s performance against its peers.
Susan Quintin, managing director of product management at FTSE Russell, defended the change, saying it would provide “greater visibility to other forms of energy such as renewables”.
The change comes as Norway’s sovereign wealth fund, one of the world’s biggest investors, moved to exclude oil and gas companies that are focused purely on exploration and production.
The $1tn fund is using the FTSE Russell classification system as the standard to determine which fossil fuel companies to divest, with the changes potentially affecting the inclusion or exclusion of an oil company or security from the fund’s blacklist.
The classification of a company is determined by its primary source of revenue and other publicly available information, suggesting that oil companies would have to substantially diversify revenue streams to no longer be considered “non-renewable”.
While the LSE has moved this week, the Russell US Index and the FTSE Indexes will continue to use the legacy benchmarks until June and September 2020 respectively, giving traders time to change over to the new system.
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