Investing goes fossil free

Divestment does not affect performance

Put it down to the rise of the divestment movement — the wish by institutional investors to rid themselves of their holdings of companies in the fossil fuel business.

At Genus Capital Management, the firm’s environmental-based clients led the way by requesting oilsands producers be removed from their portfolios. But three years back, momentum picked up when clients “asked us to totally divest, which we did,” said Wayne Wachell, the firm’s chief investment officer.

In response, the firm, which has been active in socially responsible investing, then set up a fossil free investing division. Now about one-fifth of the firm’s $1.1 billion of assets under management are in fossilfree investing with those $225 million of assets split between three equity funds and two fixed income funds.

The common characteristic behind the three funds: they all own low carbon stocks here and abroad with some adding stocks that meet either a high environmental social and governance (ESG) test or those whose business is in the renewable energy, water and waste management sector.

According to a report recently issued by Genus, divesting fossil fuels has not affected performance. Indeed, since May 2013, returns from a portfolio of stocks that didn’t include fossil fuels has been stronger than from what investors could have gained from global stock market indexes. (For that study, companies that produce, refine, store and transport fossil fuels were excluded.) Specifically the outperformance (relative to a benchmark) from a fossil free portfolio was 201 basis points a year.

Over the period, December 1996 to June 2016, when a so-called back test was performed, the studies (which are compliant with industry standards) show a similar result. In that interval, the outperformance was about 50 basis points a year relative to a Canadian benchmark and about 30 basis points relative to a U.S. and to an international benchmark.

“You don’t have to sacrifice returns when you go fossil free. It’s a myth you need hydro-carbons to get performance,” he said noting if prices stay low, fossil fuels run the risk of becoming stranded assets.

Wachell, who regards the divestment movement as a “social phenomenon,” said such phenomena normally have three waves. “We are just finishing the first wave,” he said where churches and foundations were particularly active, a pattern that also occurred in South Africa (because of its apartheid policies) in the mid-to-late 1980s and with tobacco.

Combine the pressure from groups such as 350.org — which estimates US$3.5 trillion has already been divested — with improved technolog y, government policies and the actions of the major Middle East players to keep prices low, and the stage is set for “expectations to be beaten.”

“The forces are real and will accelerate,” he added, noting involvement from universities and public institutions are characteristics of the second wave while greater wider public involvement will mark the final stage.

And there are lessons for Canadians. “After doubling down on oil for the past decade, its time to be aware that there are forces than won’t be beneficial for us.”

At least one mutual fund manager has followed the Genus path. In April, the BMO Fossil Fuel Free Fund, which “excludes companies primarily involved in the development and infrastructure of fossil fuels,” was launched. It now has $2.8 million of net assets.

Other mutual fund companies — including NEI Investments and AGF Investments — offer environmental-themed funds, while Greenchip Financial offers an accredited investor fund that invests in “blue chip businesses operating in the green economy.”

IT’S A MYTH YOU NEED HYDRO-CARBONS TO GET PERFORMANCE.