Divest from fossil fuels and win
The evidence for decarbonised investment returns
We’ve recently been asked for evidence of ‘the relative [out]performance of fossil fuel free investment portfolios versus fossil fuel heavy versus market average’.
Those asking assert that ‘it will be impossible to generate the same returns for [a South African institution’s] overseas investments if they are made fossil fuel free’.
But there’s lots of evidence they’re wrong, the evidence stacks up strongly in favour of fossil fuel divestment.
The considerable evidence for outperformance following divestment
Here are some of the sources we have assembled:
The MSCI Emerging Markets Index outperforms when fossil fuels are excluded.
The MSCI World Index offers improved performance when fossil fuels are excluded.
Rockefeller Brothers Fund, 2019: 'New Report Shows Divesting Foundations Can Build Value Without Sacrificing Values’: 'Among 60 foundations who participated—half of which were first-year signatories that could reflect on five years of financial data—94 percent report that dropping the conventional carbon-intensive energy sector resulted in a “positive or neutral” impact on returns.'
S&P Global, 2021: 'Renewable energy returns outpace fossil fuels over past decade: study’: 'Investment returns from renewable energy were triple those of fossil fuels over the last decade, according to a joint report by the UK's Imperial College and the International Energy Agency.' (Original paper here.)
Climate Policy, 2020: ‘The financial impact of fossil fuel divestment’: ‘we investigate the impact of divestment and the transition of the energy system on investment performance. We rely on an international sample of almost seven thousand companies and study a period of forty years. Further, we investigate scenarios with very different pathways to the transition of the energy system. We find that the investment performance of portfolios that exclude fossil fuel production companies does not significantly differ in terms of risk and return from unrestricted portfolios. This finding holds even under market conditions that would benefit the fossil fuel industry.’
Quartz, 2018: ‘Divesting from fossil fuels doesn’t hurt long-term returns’: ‘So, what effect would divesting from oil companies have on the fund? Research by Jeremy Grantham, founder of Grantham, Mayo, and van Otterloo (GMO), a Boston-based fund manager that manages more than $100 billion in assets, suggests not much. '
Institute for Energy Economics and Financial Analysis (IEEFA), 2018: ‘The Financial Case for Fossil Fuel Divestment’: ‘The financial case for divesting from fossil fuels is strong. Over the past five years, global stock indexes without fossil fuel-based funds have performed better than those with fossil fuels.’
A new ‘state’ of divestment’ report from IEEFA (2022) concludes that: ‘For investors seeking a steady, stable investment, fossil fuels are an unreliable option. They offer volatility, spurious innovations and political calamity. In this sense, divestment is a defensive strategy designed to compel innovation in cleaner alternatives across the power, transportation and petrochemical sectors. Divestment has the potential to be a key ingredient for an emerging, sustainable and profitable economic order.’
Ecological Economics, 2017: ‘Fossil Fuel Divestment and Portfolio Performance’: ‘Contrary to theoretical expectations, we find that fossil fuel divestment does not seem to impair portfolio performance. These findings can be explained by the fact that, so far, fossil fuel company stocks do not outperform other stocks on a risk-adjusted basis and provide relatively limited diversification benefits.’
Lastly, but perhaps most pertinently:
For a local South African example of good decarbonised investment performance, the only SA equity fund we know of that excludes all thermal coal and Sasol is the Select BCI ESG Equity Fund – and it’s performing respectably well after 18 months with these substantial fossil fuel exclusions.
Having considered all that evidence for potentially reasonable investment returns on divested assets, let’s remember the context. Because…
High short-term investment returns are now not nearly as important as avoiding climate collapse
In the past two months, several very significant new and urgent warnings on climate have been issued:
‘World close to ‘irreversible’ climate breakdown, warn major studies’
‘World on brink of five ‘disastrous’ climate tipping points, study finds’
There is an emerging methane emergency alongside the carbon dioxide emergency
It’s no doubt still possible in some instances to get good investment returns on fossil fuels. But bear in mind, this is an uneconomic investment (costs to society exceeding user benefit) that provides some short-term returns to a few (shareholders and other direct stakeholders), while impoverishing the rest of us in the long run via the considerable externalised costs of these investments.
Before the recent catastrophic floods in Pakistan, following rainfall that was in some areas 500–700% higher than usual, Pakistan’s GDP was already heavily degraded by climate change, according to that country’s climate minister Sherry Rehman: ‘Even in a disaster-free year, Pakistan typically loses 9.1% of its GDP to the compounding impacts of climate stress.’
The global economy is already facing immediate and substantial damage due to climate change, with the World Economic Forum warning climate change could wipe 18% off of global GDP by 2050 (and that may be conservative, given the problems economists have with modelling climate chaos).
In these circumstances, demanding the highest short-term returns is like fighting over the seat with the best view on a bus that is headed over a cliff – because continued investments in fossil fuels obviously pose immense risks to the global economy and financial system as a whole, risks that far outweigh any outperformance that might still in some instances be gleaned from continued fossil investment.
As one of our board members comments, ‘As an aside, it blows my mind that the moral question can be ignored so easily. If they were invested in human trafficking and we asked them to divest, would we still be having a discussion about ROI?’
It’s a moral question, yes. But also a profoundly practical question: how we assure our common survival and thriving.
Many people get this now. We recently presented some of these insights at a conference of financial advisers, and one of the standout comments was to the effect of: ‘I’m willing to sacrifice some returns if that means we can properly address these issues.’ No-one disagreed.