Although some argue for owning every sector, clearly hanging on to coal has been a very bad idea for returns.  

Getting ahead of the demise in coal would have meant higher portfolio valuations.   This is now a challenge to index construction, and assumptions about universal ownership, although longer term there could be more hope perhaps.

Looking at a time not to long ago, in fact less than a year ago, Peabody Energy, the largest coal producer in the US, was a member of the S&P 500.


 

This meant if you owned one of the very largest US Mutual Funds, you had a position in this company, such as the Vanguard 500 or SPDR S&P 500 ETF.  

During September 2014, while the company was being removed from the Index, it fell from $15 to $10 or a loss of about 33% in value.  It was only a little over 4 years ago that the company reached its peak at over $70 a share and has since collapsed to what is now $1.31

Adding insult to injury comes today's news of Alpha Natural Resources, one of the other largest coal producers in the US is being delisted from the New York Stock Exchange, and is currently trading at roughly 25 cents, down from over $3 a year ago, or a loss of over 90% in value in the past year alone.  Other producers such as Patriot Coal have filed for bankruptcy. Of the other largest producers, Arch Coal is trading at 27 cents a share, Cloud Peak Energy is at over $3 down from over $20 and Rio Tinto is looking to leave the business. 

Natural Gas has been the biggest reason for this demise, and cheaper, cleaner natural gas has been a logical move, not only to lower related pollution, but also to anticipate future legislation on power plants.

 Other nations such as China are also seeking to limit their future use of coal,which puts further pressure on the industry.  Cost curve changes, climate change and energy demand shifts all line up to make coal a zombie, especially in the US.

The Carbon Tracker Initiative also wrote recent only how coal is trapped in the EU Utility Death Spiral,  and how the US coal collapse may be a harbinger for other fossil fuel sources.

Amy Jaffe, a respected expert on the subject of US energy, saw the US gas revolution coming, and as we wrote recently here, the US economy is more resilient the more we are self reliant on energy, which the gas revolution has enabled,  as does increased solar installations and distributed generation.  Jaffe also recently forecasted a future peak in oil demand globally.  

If this occurs, this will have a number of likely impacts.  As the cost curves continue to change and the remaining oil in the ground becomes more expensive, as with coal, use will be limited to necessary purposes, such as flying existing airplanes and driving existing cars and trucks.

Much like coal companies, oil company profits will likely start to come under increased pressure as a future upside for the sector becomes clearer.  

Jaffe stated in the Wall Street Journal piece also cited above that: "The world’s economy is experiencing transformational changes that, I believe, will dramatically alter patterns of energy use over the next 20 years. Exponential gains in industrial productivity, software-assisted logistics, rapid urbanization, increased political turmoil in key regions of the developing world, and large bets on renewable energy are among the many factors that will combine to slow the previous breakneck growth for oil.

The result, in my opinion, is as startling as it is world-changing: Global oil demand will peak within the next two decades."

Expect oil prices to remain low as higher prices would accelerate this transition and Saudi Arabia has figured this out hence their move into solar energy for domestic consumption and their ongoing likely desire to be the lowest cost provider.  This will place enormous additional pressure on large oil companies, who are rapidly becoming increasingly reliant on gas revenue, as is the case with ExxonMobil and Shell.  It is hard to understand Shell's move to the Arctic on these economics alone, however one thing about gas is that it may turn out to be more sensible to harvest it up north rather than where people live given the affects on water and the discovery of earthquakes that come from the insertion of waste water (although these don't only happen where the injections take place).

Smarter analysts have seen this coming as can be seen in research such as has been published by Kepler Cheuvreaux and HSBC.

The days of owning every sector and expecting that to be the best way forward are over.  

The flip side of this has been the out performance seen by the Tech sector over the same last 5 years.

Sustainable Investing, unlike negative screening is about finding the winners of tomorrow who solve problems.  This is clearly true now not only of companies but of entire sectors as well, and also for countries who can best position themselves accordingly.