Asset managers who remain invested in fossil fuels may increasingly be feeling rather uncomfortable, as Europe is beginning to show a trend in considering such investments a risky bet. Last week an academic paper presented to U.K. MPs and figures in industry warned again that “oil assets face becoming stranded.”

Mark Shackleton, professor of finance at Lancaster University and member of the Pentland Centre for Sustainability in Business argues that oil companies that struggle to change tack face the future that has been witnessed by tobacco companies.

While big tobacco has shown resilience over the years in the face of ethical arguments against investing, today, he says “Investors are simply not funding growth and expansion – they take their annual dividends and run. As a result, the industry’s share of the stock is falling. This indicates a dying sector – while it is still generating and paying high earnings, the tobacco corner is smaller now.”

Mr. Shackleton acknowledges that oil and gas investments are “a much bigger fish to fry than tobacco” not least because they will necessarily remain a significant part of asset allocation with a significant risk to under-weighting. But “the harms of conflict, pollution and climate change certainly have the potential to increase social costs and put future returns at risk” he says.

As Thomas H. Stoner, Jr., the founder of Entelligent, wrote earlier this month on MarketWatch; “Like the legal woes of the tobacco industry before it, the legal issue of the impact of carbon emissions is in vogue and more cases are likely to follow. Already, coal giant Peabody Energy (NYSE: BTU +3.72%settled with the New York attorney general about its disclosures related to climate change.”

A growing trend for active ownership allows asset managers to flag concerns and ask for governance and sustainability action. In Sweden, Fondbolagens – the trade association for the fund industry is moving towards requiring asset managers to provide a “sustainability overview” under its code of conduct, which would mean revealing the climate impact of investments, its new CEO Fredrik Nordstrom, told the Financial Times last week. Asset managers with large fossil fuel holdings would inevitably come under pressure.

In oil and gas investments, “the harms of conflict, pollution and climate change certainly have the potential to increase social costs and put future returns at risk” argues Mr. Shackleton.  

“Crucially, energy companies can chose to embrace green generation technology or not and fund managers will have a say in those decisions. The risk of CEOs talking without acting or, like VW, failing to spot flaws in their business is severe reputational damage” he writes in a paper Financial Markets are almost off cigarettes – will they now kick the oil habit?’

His conclusion? “Like tobacco, oil will fade from the index. No one wants to be the one turning the lights out; no fund wants to be the last selling out.”

Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website