Over recent months there has been a discernible change in attitudes towards addressing climate change. A combination of scientific, social, political and technological factors has led many to believe that serious action by governments to reduce greenhouse gas (“GHG”) emissions is now increasingly likely.
Several financial analysts are warning that energy portfolios face a risk that tighter regulations on emissions of carbon dioxide (“CO2”), a GHG, could lower demand for fossil fuels, making these assets substantially less valuable. Some are taking a radical view and recommending complete divestment from companies holding fossil fuel assets.
Impax has discussed elsewhere* the pros and cons of full divestment, arguing that, given an increased likelihood of regulatory intervention affecting the fossil fuel sector, the most compelling strategy for investors is to:
- ascribe a higher risk premium to the ownership of fossil fuel assets,
- reduce levels of ownership of fossil fuels accordingly, and
- invest the proceeds of partial divestment in assets that have similar energy price factor risk.
To illustrate the financial consequences of full divestment, we have analysed historical data to show that over the past six years**, eliminating the fossil fuel sector from a global benchmark index would actually have had a small positive return effect. Furthermore, much of the economic effect from owning fossil fuel stocks could have been replicated with ‘fossil free’ energy portfolios consisting of energy efficiency and renewable energy stocks, with limited additional tracking error and further improved returns***.
* Pension Consulting, S.Bernstein, May 2014, "Academic and Market Research on Divestment" pg.14 and refer to original document “Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment”, July 2013
**Five year data used in Impax’s first White Paper: Beyond Fossil Fuels, The Investment Case for Fossil Fuel Divestment. Now updated here with 6 year data to 30 April 2014.
***Our original research was an analysis of historical data for the five years to 30 April 2008, which has now been updated for six year period to 30 April 2015 - Data for the global benchmark index minus fossil fuels is available for the last six years.