Fossil fuel-free funds outperformed conventional ones, analysis shows
Investors who have dumped holdings in fossil fuel companies have outperformed those that remain invested in coal, oil and gas over the past five years according to analysis by the world's leading stock market index company.
MSCI, which runs global indices used by more than 6,000 pension and hedge funds, found 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 figures indicate that if a major charitable institution or foundation with £100m in funds had divested from fossil fuels in November 2010 they would be around £7m better off today than if they had maintained their holdings in coal, oil and gas companies.
In total, a portfolio of shares with fossil fuel companies included has grown in value by 62.2% since 2010, but this compares to the 69.9% growth of a fund without fossil fuel investments.
The data will challenge the widespread belief among asset managers that divestment hurts the financial performance of investment funds.
One reason why funds without fossil fuel companies have outperformed is that the precipitous fall in the oil price that began in June last year has driven down the share price of companies such as BP and Shell. But the MSCI data reveals that its ‘All Companies ex Fossil Fuels Index’ outperformed throughout 2012 and 2013, before the fall in the oil price.
Matt Davis, director of Share Action, a charity campaigning for responsible investment, said: “The conventional wisdom amongst financial experts is that ‘you have to have fossil fuels in your portfolio in order to get good returns’, but these figures call that into question.
“Not everyone wants to divest because some believe that engagement with fossil fuel companies is the best way to get them to change their ways, and we do believe the two approaches can exist side-by-side. But whereas the industry belief seems to be that there is little demand for fossil-free savings products, these figures do give added weight to our ‘I want to break fossil free’ campaign, which says that regular savers should be offered low-cost ways to save fossil free, if they choose to.”
MSCI launched the index late last year amid growing pressure from both climate-focused campaign groups such as 350.org and demands from major charitable groups and foundations with large endowments for investment funds that are free of fossil fuel companies. It analysed the 9,500 biggest stock market-quoted companies around the world, worth $37.5tn in total, and tracked their performance over the last five years. It found that eliminating fossil fuel companies reduced the ‘investable universe’ by 7%, to $34.9tn, but improved returns for investors.
However, it added that before the financial crisis struck in 2007, investors who included fossil fuel companies in their portfolios would have outperformed those that excluded them. Before 2007, most resources companies enjoyed a long boom in sales and profits, driven by ravenous demand from China’s industrialisation.
The indices run by MSCI, similar to those such as the FTSE 100 in the UK, are hugely influential among institutional investors. Around $7.5tn in funds globally are benchmarked against MSCI world indices, and apart from the Ex-Fossil Fuel Index, the company (which originated from Wall Street investment bank Morgan Stanley) has also launched “low carbon” indices that eliminate 70%-90% of major carbon emitters.
It is understood that several major foundations and charitable institutions are in negotiation to switch their benchmark from the standard MSCI World Index to the ex-fossil fuel or low-carbon world indices, with announcements expected later this year. By switching benchmarks, institutions effectively divest from fossil fuels. The indices will also provide a stepping stone for pension funds to offer individual members a route to personally divest from fossil fuels.
In Britain, major institutions that look after billions in pension savings from small investors have also begun assessing the long-term financial risk that coal, oil and gas companies will become ‘stranded assets’ worth much less than their book value today.
In November, Standard Life, which manages £250bn on behalf of five million savers, undertook research into stranded assets which concluded that the greatest risk for investors was holding shares in coal companies.
It said: “The research has stimulated a frank discussion between investors and fossil fuel companies about the likelihood of a carbon-constrained world and its financial implications. In our view, thermal coal is the fossil fuel most vulnerable to climate regulation.”
HSBC and Aviva have also funded a four-year research programme at Oxford University into the risks posed by stranded assets.