https://theconversation.com/want-a-richer-pension-divest-of-fossil-fuels-93850
[links and images in on-line article]
Want a richer pension? Divest of fossil fuels
April 3, 2018 6.56pm EDT
After several years without an increase in greenhouse gas emissions, the
world experienced a spike in 2017 even though many governments had
promised to cut their emissions.
Some NGOs, including 350.org and DivestInvest, promote divestment from
the fossil fuel sector as a way to reduce carbon emissions. Furthermore,
some investors like Quebec’s Caisse Depot and The New York City Pension
Funds have announced that they plan to reduce their fossil fuel
investments or divest totally from the sector.
This movement is also part of private and governmental efforts to
connect the financial sector with climate finance by both divesting from
fossil fuels and reinvesting in a low-carbon economy.
Though the divestment movement’s outreach goes beyond direct financial
impacts, questions remain about the financial and carbon-related
consequences of divestment.
Pensions in danger?
Without knowing the answers to these questions, institutional investors,
such as pension funds, are at risk with regard to fiduciary duty. Some
beneficiaries will rightfully ask whether they’ll lose parts of their
pension if their pension fund divests from fossil fuels.
What’s more, it’s still unclear what types of investment strategies are
able to significantly reduce the carbon footprint of financial portfolios.
Finally, it’s important to understand the consequences of divestment in
a fossil fuel-heavy market like Canada. Many argue that divestment in a
small and concentrated market increases financial risks.
In a recent study at the University of Waterloo, we analyzed what
happens if different divestment strategies are applied to the Canadian
stock index TSX 260.
We simulated six different divestment strategies presented in the table
below, and assessed the financial and carbon-related consequences. The
strategies in the table are ranked from low to high by the number of
stock divested.
In our simulation, we took the divested funds and distributed them into
the remaining sectors. We then used a commonly used stock-market model
that predicts whether prices for individual stocks are likely to move up
or down. Our simulation showed that after divestment, the value of the
portfolio continued to grow, and performed better than the TSX 260.
The following graph compares the financial returns of the different
divestment strategies and the original benchmark TSX 260. The black line
represents the TSX 260. The other lines show the financial performance
of the different investment strategies. The divestment portfolios
out-perform the Canadian benchmark with regard to risk-adjusted
financial returns.
After demonstrating that divestment portfolios out-perform the Canadian
benchmark financially, we present the effect of divestment on the actual
carbon footprint of the various divestment strategies.
The carbon footprint consists of the carbon equivalent emissions (CO₂e)
of the invested firms per millions of dollars in sales. For instance, if
an investor invests money in a high carbon-emitting industry, such as
fossil fuels, the carbon footprint of the portfolio is also high.
Investing in low-emitting industries results in a portfolio with a low
carbon footprint.
The carbon footprint chart below shows the CO₂e emissions of the
different divestment strategies, and the benchmark. It demonstrates that
excluding all fossil fuel-related industries, including utilities,
creates the biggest reduction of the carbon footprint at 77 per cent.
The results of this study suggest the following: Divestment increases
risk-adjusted financial returns even in a fossil fuel-heavy financial
market such as Canada.
And so the socially responsible investment strategy that is mainly
ethically driven also happens to be beneficial from a financial point of
view.
Therefore, it can also be applied by investors that are bound to
fiduciary duty. Pensioners don’t need to fear their pension income will
be reduced if their pension fund managers opt to divest from the fossil
fuel sector.
In addition, divestment helps to reduce the carbon footprint of
investment portfolios. This reduction lessens the exposure to carbon-
related financial risks, such as the risk of being exposed to costly
carbon-related regulations, taxes or mandatory cap-and-trade markets.
Furthermore, divestment strategies create portfolios that attract
ethical investors. These types of investors want to reduce their
participation in the fossil-fuel industry because of climate change
concerns.
Though divestment should not be the only way for investors to address
climate change, it seems effective in reducing financial risks, in
helping people to invest ethically — and even to increase financial returns.