What have financial studies said about the positive impacts of divestment?
There are a variety of studies of what a portfolio would have looked like had it divested from fossil fuels years ago, under certain assumptions. Relevant assumptions include the timeframe examined, projections for renewable energy demand, political decisions, etc. Essentially, divestment may or may not lead to positive returns, as continued investments in fossil fuels may or may not (i.e., past performance is not indicative of future returns).
In a meeting, President Bollinger told Columbia Divest for Climate Justice that he and the Trustees accept that the financial impact of divestment on the endowment would be negligible and that they are considering whether it is the right way for Columbia to take action on climate.
In any case, here are some of the major studies that have shown conditions under which going fossil free outperformed fossil fuel investments:
1) Most significantly, MSCI, the world’s largest stock market index company, completed a study in April 2015 which concluded that investors who divested from fossil fuel companies would have earned an average return of 13% a year since 2010, compared to the 11.8%-a-year return earned by conventional investors. The data shows that this outperformance was also happening in 2012 and 2013, even before the fall in oil prices that drove down company share prices in 2014. The data acknowledges that before the financial crisis in 2007, indexes that included fossil fuels would have outperformed others. A file with the data on the ‘MSCI ACWI ex Fossil Fuels Index’ can be found here, and there’s more info at this Guardian article.
2) Fossil Free Indexes US (FFIUS) is based on the capitalization-weighted S&P 500 index negatively screened for the Carbon Underground 200. In 2014, the FFIUS outperformed the S&P 500 by 1.5% – a “strikingly large number.” At the link, there are some interesting thoughts about the significance of this – essentially, the FFIUS can’t be guaranteed to outperform the S&P 500 every year, but that “future policy moves to reduce demand for fossil fuels can induce a dramatic reduction in the value of underground reserves.”
3) In a study by Impax Asset Management, analysis of historical data showed that eliminating fossil fuel stocks from a global benchmark index over the past 5-7 years would have had a small positive return effect (0.5% annually). They also found that the economic effect of excluding fossil fuel stocks could be replicated with improved returns by investing in a ‘fossil free’ energy portfolio of energy efficiency and renewable energy stocks. That goes to show one of the structural arguments with many arguments against divestment that say excluding “energy” decreases the diversification (basically, investment into different sectors as a security measure) of a portfolio – that argument conflates “energy” and “fossil fuels” as an investment and opportunity for diversification.
4) In another study by Sustainable Insight Capital Management (SICM), the three fossil fuel free portfolios they constructed outperformed the S&P 500 Index over one-year, three-year, and five-year time periods, all ending in December 2013. The analysis essentially showed that performance of a fossil fuel free fund comes down to the skill of the asset manager – “investors in fossil free funds could have made superior returns to some well-known benchmarks, but unintended risks could easily have eroded these investor returns if portfolio construction was ineffective.” It is not only a question of the inherent harm of divestment, but where to reinvest the money that will impact the portfolio (also addressed in the Impax study).
5) Another study by the Aperio Group examined the effects of removing from the Russell 3000 index the 13 listed members of the ‘Filthy 15’ group of US coal companies singled out by some divestment campaign groups as most harmful to the climate. Using a multi-factor model, they found that excluding the Filthy 15 from the Russell 3000 index generated tracking error of 0.14% and an increase in risk of just 0.0006% (statistically irrelevant). Excluding the entire fossil fuel sector increased tracking error by 0.60% and risk by 0.01%.
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