June 20, 2018 Read More →

Commentary: Stock analysis shows fossil fuel divestment will not undercut fund performance

Grantham Foundation:

I have met more investment committees than I care to think about. Perhaps a couple of thousand. There is a no more conservative group on the planet than an investment committee. You could be forgiven for thinking that if you cough at an investment committee they will think they are ruined!

So if you tell them that you are going to interfere in any way, such as by removing a particular group of companies from their investment portfolio, an investment committee will likely warn that it will cause great harm to the long-term return. And the committee would definitely baulk if you wanted to remove a major group like fossil fuel companies.

So my colleagues and I finally carried out a test to see exactly how an investment portfolio would have been affected by divesting from a group of companies that are listed in the Standard and Poor’s 500, the index based on the market capitalizations of 500 large companies listed on the New York Stock Exchange or NASDAQ.

These companies can be divided into 11 sectors (not including real estate). We considered the 10 long-term sectors (real estate was added relatively recently), and analyzed how the index performed without each sector.

Initially, we considered the period from 1989 until 2017. The results [show] there is only a 50 basis points difference between the best and the worst. They are basically all the same!

So we decided to see what happened if we chose a different period, in case there was something extraordinary about the past 28 years. We extended the analysis, first to start from 1957, and secondly to begin in 1925. You will see…that changing the period of analysis does not make much difference. The difference between the best and worst is 54 basis points instead of 50. So over 90 years, it would not have cost an investor to have divested from any one of the sectors.

Who knew that the stock market was that efficient? It may be hopeless in bubbles and busts, but it has evidently priced these groups of big companies pretty well. And there is no advantage to an investor of choosing the high-growth information technology sector over, say, utilities. Utilities are priced down and information technology is priced up, but they produce the same returns. It is amazing.

What does this mean for divestment? It means that if investors take out fossil fuel companies from their portfolios, their starting assumption should not be that you have destroyed the value. Their starting assumption should be until proven otherwise. that it will have very little effect and is just as likely to be positive by 17 basis points as negative. That is an amazing contradiction to what every investment committee has ever said, as far as I am concerned.

More: The mythical peril of divesting from fossil fuels

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