Fossil fuels are scarce in stock market indices

Posted on Oct 25, 2020 at 10:04 amUpdated Oct 25, 2020, 1:42 PM

Oil is no longer welcome on the stock market. Producers of fossil fuels have long been among the world’s largest capitalizations. But today, they are struggling to stay within the main stock market indices: ExxonMobil was thus excluded from the Dow Jones index, where it had been present since 1928. Their decline is particularly visible in the S & P 500, the main one. American stock index. In 2008, the oil and gas sector represented more than 16% of the index, compared to barely 2% today, its lowest level in at least thirty years.

In France too, the energy sector is no longer in the spotlight. At the end of 2010, Total was still the largest French capitalization, and Engie followed in third position. Since then, Total has seen its capitalization shrink by nearly a third, and Engie by more than half. In the meantime, Technip and Vallourec have also left the CAC 40, reducing the weight of fossil fuel specialists and their subcontractors in the Paris index. As a result, the weight of the oil and gas sector has fallen from 13% to 6% between 2010 and today.

Investor mistrust

This decline in fossil fuels in stock market indices comes at a time when the fight against climate change has become a priority for many financial players. However, it is not linked to a thoughtful decision by the index administrators but to the disaffection of investors: most of the major world indices are built by taking into account the capitalization of companies and the liquidity of securities.

“There is a historic mistrust of investors vis-à-vis oil”, considers Christophe Foliot, equity manager at Edmond de Rothschild AM. The success of sustainable management is one of the causes. Many investors have also turned away from the sector in the face of falling oil prices and increasingly stringent regulations on CO2 emissions.

The impact of this drop in the weight of fossil fuels in the major world indices is immense. Listed index funds (ETFs) have attracted hundreds of billions of capital in recent years. However, they mechanically replicate the composition of their benchmarks. The largest ETF on the S&P 500 alone has $ 300 billion in assets.

Each time the weight of the oil sector decreases in the indices, it decreases by the same within these funds, which at the same time reduces their carbon footprint. The consequences are already significant for the sector. While many companies find themselves struggling with falling oil prices, “The cost of capital has increased”, underlines Christophe Foliot.

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