Experts have touted the statistic that the US could be energy independent within the next several years as not only a reason to back the shale gas revolution, but also as a reason to buy into the recovery in the US economy.
However, Mike Appleby (pictured), analyst on Alliance Trust Investments’ sustainable and responsible investments (SRI) team, says ‘fracking’ isn’t all it’s cracked up to be.
“We believe shale-gas – and its associated ‘fracking’ – can provide a positive contribution to sustainable development; but only if done to the highest standards,” he said.
“We believe that, if done to the highest operational standards, and with the majority consent of the local people affected by the exploration activities, shale gas and its associated fracking is a net positive activity due the substitution of more polluting fossil fuels and to increase energy security.”
“That said, we are wary of companies with exposure to shale-gas as we believe the economics are currently overstated, and it is hard to accurately identify those achieving the necessary high operational standards.”
“We prefer non-fossil fuels and energy efficiency investments, but make an exception for natural gas as a substitute for more carbon intensive fossil fuels, such as coal – especially in the US.”
According to Appleby, the main reason why the SRI team at Alliance Trust tends to avoid companies with exposure to fossil fuels and instead focuses on energy efficiency and renewable energy generators is to avoid companies contributing to man-made climate change.
“For this reason we do not invest in companies with high exposure to carbon intensive fossil fuels such as coal and oil – in particular tar sands,” he said.
Fracking is often considered a purely US phenomenon; however, UK companies have recently delved into the exploration and extraction of shale gas reserves, albeit on a far smaller scale.
Appleby says the team at Alliance Trust has no material exposure to the miniature shale gas revolution in the UK and they plan to keep it that way.
“We are not at all excited about prospects for shale gas in the UK in contrast to many mainstream investors. We do not have any material exposure to UK shale gas exploration in the Sustainable Future funds,” he said.
“The main reason for our caution relates to local opposition and an over-simplistic analogy of shale gas in the UK being a repeat of what has happened in the United States.”
“For instance, while the UK government is trying to make local communities get more meaningful compensation rates for the inconvenience and potential risks of fracking – this is very different from the US where, generally, the mineral rights are owned by the occupier (not the government) and where the owner of the land is paid substantial royalty rates from exploration companies, greatly facilitating local consent.”
However, as exploration falls under different rules in the UK, Appleby expects companies in this space to face ongoing opposition and that it will be some time before, if ever, the expense of exploration will fall to a level that supports sustainable exploration and fracking practices in the UK.
Alliance Trust Investments offers six Sustainable Future funds which invest in asset classes from bonds to equities to mixed asset portfolios. It also has a pure UK equity fund, Alliance Trust UK Ethical, which invests in sustainable and responsible companies in the UK.
Over the last three years, six of these seven portfolios have outperformed their mainstream peers, picking up roughly 30 per cent in most instances.
Over the last five years, the five crown rated Alliance Trust Sustainable Future Absolute Growth portfolio has gained 89.77 per cent while the IMA Flexible Investment sector made just 63.02 per cent, according to FE Analytics.
Performance of fund vs sector over 5 yrs
Source: FE Analytics
The fund has been slightly more volatile than its peers over this period, with an annualised volatility score of 17.23 per cent. The sector has an annualised volatility score of 13.44 per cent.
The £80.2m fund requires a minimum investment of £500 and has ongoing charges of 1.65 per cent.
This article was written in collaboration with and is sponsored by Alliance Trust Investments.