Socially responsible investors today face a paradox: They are setting aside savings today for a brighter, more secure future for themselves and their children. But some of the companies in their 401k’s or mutual funds actually present a dire threat to that future and those children. If they attempt to divest, investment managers will normally warn that they can expect lower returns, or greater risks. So how much does an investor have to give up for the sake of a livable future?
When it comes to fossil-fuel divestment, the answer seems to be – nothing at all. A new study has shown that there is no significant difference whatsoever in long term risks and returns between comparable portfolios which include fossil fuels, and those which don’t. And if that’s true, it’s great news for ethical investors, university boards and foundation managers.
The movement for fossil-fuel divestment has been sweeping the country in recent months. Foundations like the Rockefeller Brothers have divested. So have sovereign wealth funds like Norway; cities like San Francisco, Portland and Seattle; and universities like Syracuse, Stanford and the University of Maine. Last year, Union Theological Seminary in New York also divested, leading the way among Christian and religious institutions.
Their logic is simple: To avoid major ecological collapse around the world, we need to take serious steps to keep planetary warming to within 2 degrees Celsius above pre-industrial levels, or bear the impact of major ice-sheet collapse and sea-level rise, and climatic disruptions resulting in widespread hunger and accelerated species extinctions. Worse, passing the 2-degree threshold exposes the world to the risk of positive feedback loops, which could drive runaway warming beyond 4 degrees, with imponderable consequences. And virtually everyone agrees that the poor will be hit first and hardest.
The scientific consensus tells us that to remain within the 2-degree threshold, we must limit total additional global carbon dioxide emissions to 565 gigatons from here forward. However, major coal, oil and gas companies today own fossil-fuel reserves which – when burned – would produce 2,860 gigatons of carbon emissions – or more than five times the maximum that can be permitted globally. Furthermore, fossil-fuel companies invested $674 billion last year to discover even more carbon reserves, none of which can be produced without further severe harm to the Earth and its living creatures, including mankind.
So, if the scientific consensus is correct, fossil fuels would be a terrible thing for an ethical investor to put money into. Perhaps it’s obvious: An investor in these companies can only hope that these carbon reserves will in fact be sold and burned, and that those billions invested in further exploration will uncover even more reserves which will also be burned. By extension, this investor can only hope that the global carbon budget will be blown through many times over — an outcome that will assure that his or her children will inherit a world facing runaway climate disruption. From this perspective, there is virtually no better or worse fossil-fuel company: their fundamental business model requires them to do something that will bring calamity on others and on the entire creation.
If investors place any credence in science, if they think about the known facts, if they have any concern for the earth and for others, they won’t want to invest in these companies.
Okay then. But how much will it cost us to be ethical? Well, if you’ve been following the debate, you’ve seen some confusing numbers. The fossil-fuel proponents have produced reports going back 50 years which show that you’ll make more money if you stick with them. Climate activists have relied on numbers over the last ten years showing that you’ll do better if you divest from carbon-polluting energy. I have no reason to doubt the accuracy of either of these studies, but they’ve carefully chosen their timeframes. The former group places a lot of stock in the golden age of oil, back when I was a kid. The enviros like to focus on the new era where we all know what carbon pollution can do.
So I was delighted to find a report issued by Advisor Partners, a research firm that provides portfolio design information to investment professionals. The report traced investment performance for the Standard & Poors 500, which includes fossil fuels, and compared them with a fossil-free version of the same portfolio over a 25-year period, from 1989 to 2014. Twenty-five years is long enough to span several cycles – including oil booms and busts – but not so long as to include largely irrelevant ancient financial history. And they are clearly not trying to prove a point for anyone.
But the findings are striking: over twenty-five years, both the S&P 500 and the fossil-free alternative generated virtually identical returns in aggregate. There is no difference. If you had divested from fossil fuel stocks in 1989, by 2014 you wouldn’t have been richer, and you wouldn’t have been poorer. Period.
Over shorter timeframes, the report found that the fossil-free investment portfolio varied from the S&P 500, but these variances canceled each other out over time. In the 1990’s the fossil-free portfolio did better. In the first decade of this century, the S&P 500 did better, as oil prices skyrocketed. Since 2010, the fossil-free index did better again, as oil prices fell again. In aggregate, there’s been no difference.
But investors also care about volatility – how much an investment rises and falls from day to day compared to broad market averages. Surprisingly, here again the fossil-free index held up remarkably well. On average, the “divestment portfolio” moved around 1.07% more than the S&P 500. For every dollar of fluctuation (up or down) in the S&P index, the fossil-free portfolio moved an extra penny. I never would have imagined this small a difference. If an investor has a very short time horizon, then maybe all volatility is bad. But the difference is so little that most investors should hardly ever notice.
So, ethical investors, doing the right thing may be easier than you imagined. Your 401K, your alma mater, you church or your city may be able to divest from fossil fuels with the confidence that their morals and their prudence are not in conflict, as they might have feared.
It’s often costly to do the right thing. In this case, the numbers tell a different story. You don’t have to choose between your retirement and your kids’ world. You can hold fast to your good ethics, and still make good money.
That’s good news, no?