Interesting options for dealing with fossil fuel investments….report from Ross Kendall at www.ethicalinvestor.com.au
| The portfolio risk from stranded, or rapidly depreciating, fossil fuel-based assets is the big question for the year according to Michael Salvatico MSCI ESG resercher, and the basis of an updated paper comparing the cost of different investment responses.MSCI’s ESG issue brief Options for Reducing Fossil Fuel Exposure re-released in January, examines four plausible options investors can take to minimise their exposure to fossil fuels, assuming a carbon constrained world, he said.It is also a response to the 360 degree.org campaign asking superannuation members and other investors to challenge their fund mangers on how they are dealing with the risk of stranded fossil fuel assets, Salvatico said.The first option for investors involves full divestment from any company with fossil fuel reserves in the mining, oils and gas sectors included in the MSCI All Country World Index (some 2500 companies).The second excludes the biggest fossil fuel reserve holders and carbon emitters in the ACWI, while the third ‘carbon tilt’ option shifts a portfolio towards companies that are managing fossil fuel risks better than their peers.The fourth option takes a thematic approach by investing in MSCI Global Environmental Index based on cleantech stocks.Over the test period (2007-2013), the first three options performed roughly in line with the MSCI ACWI, with annualised returns ranging from 4.22 per cent to 4.40 per cent, compared to 4.30 per cent for MSCI ACWI. Tracking error ranged from .47 to 1.23.The fourth option also closely matched the returns of the ACWI, its parent index.The results are dependent on the time frame and will also vary in different markets. Australian-only results show a bigger cost from excluding fossil fuels because of the relative importance of the sector to the local market he said.But the analysis does show the realistic options open to trustees and the difficult position they are in, Salvatico said.The updated paper follows on from other work that MSCI has done in the area, prompted by the high level of client demand for information on the issue, he said.”It is one of the top questions we get from clients, and will definitely be the issue for the year,” he said.Investment managers have a diversity of responses, some are ready to take a strong view and enact disinvestment, others are not yet ready to act. The timing is a big issue he said.
There is also interest in portfolio level audits so investors have a better understanding of their fossil fuel exposure he said. “The issue is far from settled and many questions remain,” Salvatico said. “A next step will be to try and determine which assets in particular will be stranded, will it be coking coal or brown coal?” he asks. Running indices that do screen out certain sectors and assets will provide ongoing benchmarks he said. |
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