Fossil Fuel Divestment Means Lower Returns – Huh?

One of the key arguments against divestment that shows up again and again in the press and on the web is the idea that fossil fuel divestors will sacrifice investment performance. Or, stated another way, their investments will do worse then those of people who choose not to divest. On the surface, it seems a simple point – if you don’t invest in a major sector of the economy (i.e., the fossil fuel industry), you’ll be missing out. But, as is true with most simple arguments in an increasingly complex world, this soundbite analysis is wrong on multiple levels.

By a big majority, most people who have stock market investments put their money into mutual funds or exchange traded funds (ETFs). And many people also follow the general investment axiom that it’s a smart idea to be diversified. So, the more relevant question is – what happens if a diversified mutual fund or ETF does or doesn’t hold stock in the fossil fuel industry?

By definition, a diversified fund isn’t going to invest a high percentage of its money in any one industry. If you look at the Security and Exchange Commission filing information for diversified funds, you’ll generally find that somewhere between 0-4% of such a fund’s holdings are in the fossil fuel industry. So, for the sake of argument, let’s say that on average a typical diversified fund invests 2% of its investors’ money in these companies.

Let’s look at a hypothetical fund we’ll call the “incredibly neutral mutual fund (INMF).” The INMF manager’s general performance turns out to be supremely neutral. Somehow, with all the ups and downs of all the industries in the fund’s portfolio of stocks, the gains of almost all the stocks that do well are almost exactly counter-acted by the stocks that do poorly, and every year the fund’s annual return is basically 0%. But, there is one exception to this staggeringly bland performance – the fund’s investments in the fossil fuel sector.

Suppose that in an incredibly amazing 10-year streak, the combined fossil fuel investments in INMF go up 50% every single year. But, since the fund only invests 2% of its money in fossil fuels, the investors will gain just 1% each year. A return of 1% per year — that’s what you get if the fund manager has a completely unrealistic ability to pick an astounding set of fossil fuel stocks year after year after year.

Human beings and markets being what they are, a more realistic view of a fund manager who has a strong ability to pick fossil fuel winners (and avoid losers) would be if that part of the fund  had a consistent return of 5-10%. Now, the annual total return to you as a fund investor has fallen to between 0.1-0.2% per year. If you had invested $5,000 in INMF, your first year return would be $5-$10. The total cumulative ten-year return range would be slightly more than $50-$100 (due to compounding).

So, can moving away from fossil fuels negatively affect investment performance. Possibly. But if you invest in broadly diversified funds, the potential effect is tiny. The variation would be swamped out by the manager’s many other fund investment decisions, and also the myriad economic impacts that push all the other sector investments in the fund  up and down.

And, here’s a far more important point. New stocks that replace the fossil fuel investments may do as well as, or better than, the fossil fuel stocks that were removed. In which case, the divestor has lost nothing or may indeed do better after divesting.

The core argument that divestors should expect to lose out is just not accurate or reasonable.  More to come on how to put this idea into action…..

Personal Divestment From Fossil Fuels: What’s Your Goal?

In the run-up to the recent UN Climate  Summit, the idea of personal divestment from fossil fuels went from virtually total obscurity to receiving some coverage in the popular press. Unfortunately, many of the stories and blog posts missed key points — and others demonstrated muddled thinking and misleading conclusions including the idea that divestors will lose out financially (more on this in future posts).

In talking about the emerging discussion of personal divestment, an obvious place to start is the simple question: “Why should I make the effort to divest from fossil fuels?”

Here are four good reasons:

  • Divestment means not benefiting from the damage being caused by the fossil fuel industry. Every dollar earned from an investment in the fossil fuel industry represents a benefit derived from the continued growth of an industry that is the core driver of global warming and of growing hardship across the planet. Fossil fuels are also a focal point of on-going conflicts and wars  – carrying with them vast loss of life and displacing families by the hundreds of thousands.  (Coverage of the latest Pentagon assessment.)
  • Divestment sends a clear, unequivocal message. This is about numbers – not in dollars – but in people. If millions of people remove their financial interest in fossil fuel companies, that will send a very clear and very powerful message to governments, legislators, institutional investors, and the global business community. It will also signal a demand for change in other pivotal parts of the economy where consumption of fossil fuels can be reduced through innovation – enabling  new ways to generate energy and improving the energy efficiency of the things people use every day.
  • Divestment is a reminder. The more that each of us pays attention to all the ways in which energy plays into our lives (including our investments), the more likely we will move ourselves and our families toward generating and consuming energy in a sustainable and socially responsible way.
  • Divestment provides reinvestment opportunities. The clean energy economy is growing, and that growth is going to accelerate. New companies are being created every day, and established companies are quickly moving to create new products – including things like home energy networks, advanced energy storage systems, and smart efficient vehicles. That innovation will continue to ramp up, and it will last for decades. Whether your investment style is aggressive and “growth” oriented, or conservative and “income” oriented, the emerging new energy economy provides compelling reinvestment opportunities.

Whether these ideas, or others put forward by other divestment proponents, resonate for you, the most important thing is to realize that what you do with your money matters.  It matters a lot.

If you’re already a divestor, “thank you.”  If you haven’t already, head over to GoFossilFree and DivestInvest – and add your name to the lists of people who have become divestors.

If you’re not yet a divestor,  ignore the noise – the science is telling us that there is absolutely no time to waste.

Hello….

The divestor.org site is now up-and-running!  We hope you find the information useful and interesting.

Over the coming weeks, we’ll be adding more thoughts and information around personal divestment away from fossil fuels, and providing updates on new happenings from around the divestment world.

Thanks for tuning in – and for supporting the push toward a new clean energy economy.  Your investments matter!

Dan Quinlan