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The investment case for fossil fuel divestment



Divesting from fossil fuels is a compelling win-win for investors and claims of underperformance are wrong, writes Ominder Dhillon of Impax Asset Management.

Pressure is building on institutional asset owners to assess their exposure to companies that extract fossil fuels. The alarm was first raised in the US, but the arguments have rapidly broadened and gathered momentum, and investors are now facing concerns from several stakeholders to assess the risks of their exposure to companies that extract fossil fuels.

In parallel, financial analysts are increasingly warning investors of the risks from tighter regulations on carbon dioxide emissions and falling demand for fossil fuels that could make reserves substantially less valuable, or even ‘stranded’ and ultimately rendered worthless.

Click here to read The Guide to Climate Change 2013

Many investors are however still sceptical of the outcome of looming greenhouse gas regulation and are asking legitimate questions about the effects on portfolio risk and returns from the partial or complete divestment of fossil fuel stocks. So, what are the risks associated with reducing exposure to fossil fuel stocks?

Analysis of the data

Many investors are concerned that divestment from fossil fuel stocks will increase volatility and tracking error – and potentially lead to underperformance. Impax analysed the historical data over the last seven years to look at the impact of eliminating the fossil fuel sector from a global benchmark index – and it would actually have had a small positive effect on returns.

Excluding the fossil energy stocks from the MSCI World Index over the last seven years would have had a small positive impact on returns (0.5% annually) and only a modest increase in tracking error (a measure of how closely a portfolio follows the index to which it is benchmarked) of 1.6% a year.

For the five years to the end of April 2013, which excludes the dramatic run up in energy prices ahead of the 2008 financial crash, eliminating the fossil energy sector would have improved returns by almost 0.5 percentage points annually, to 2.3% a year from 1.8%.

Investors may be understandably concerned that excluding an entire industry sector such as fossil energy and reallocating this portion across the other sectors may introduce tracking error into portfolio returns, and raises the possibility that an investor may miss out on the sector’s future outperformance.

So, as a replacement for MSCI Energy, Impax modelled the performance of the MSCI World index with the fossil energy sector replaced with FTSE’s Environmental Opportunities Energy universe, which currently comprises 243 energy efficiency and renewable energy stocks. The key outcome is that, over seven years, there would have been no impact on performance.

As might be expected, the substitution of MSCI Energy with FTSE EO Energy does introduce some tracking error – but just 1.6% per year. Impax also modelled portfolios using an active fossil free allocation rather than passive, and a fourth model replacing the fossil fuel constituents with an actively managed allocation of stocks selected from a wider range of resource optimisation and environmental investment opportunities. Both of these portfolios would have delivered slightly better performance than the MSCI World with similar levels of volatility. 

So what can investors do and how can they do it?

Impax believes that investors should consider reorienting their portfolios towards low-carbon energy by replacing fossil fuel stocks with energy efficiency and renewable energy investments, thereby retaining exposure to the energy sector while reducing the risks posed by the fossil fuel sector.

Given the growing consensus around climate change science, it is rational for investors to expect much tighter carbon regulation – with profound economic effects. Many investors may be confident that they can anticipate such regulation and will be able to exit high-carbon investments before their value is significantly eroded, but there is considerable uncertainty around the timing and nature of future carbon regulation.

Recent history of financial markets suggests that few investors will be successful in anticipating any sudden re-pricing and/or stranding of fossil fuel assets that result. Additional considerations should include the falling demand for fossil fuels from the substitution of competing low-carbon energy generation such as wind and solar, and from energy efficiency and other technologies, particularly in the industrial, commercial and transportation sectors.

For many investors, a gradual or intermediate option to full fossil fuel divestment maybe a more manageable approach. Investors could pursue a ‘carbon-tilting’ strategy, where they retain their exposure to the energy sector but overweight less carbon-intensive companies and underweight those with the greatest carbon exposure, for example those with the highest levels of reserves relative to market capitalisation.

Alternatively, or in combination, they could pursue thematic strategies to supplement broader market investments and offer a hedge to fossil fuel exposure – for example, by investing in portfolios of ‘climate solutions’ providers, or in forestry assets in regions that are not exposed to significant climate change risk.  These could be developed progressively, building a low-carbon portfolio funded by incremental allocations from their fossil fuel holdings.

While forward-looking analysis is speculative by its nature, an analysis of the historical data shows that the financial risks involved in fossil fuel divestment are minimal, and can be largely offset by substituting oil, gas and coal stocks with less carbon intensive alternatives.

If these can also mitigate the large and growing financial risks of fossil fuel energy, it would be the compelling win-win most investors seek in discharging their fiduciary duties.

Ominder Dhillon is head of distribution at Impax Asset Management. The full white paper, Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment, can be downloaded for free here.

Further reading:

What fossil fuel divestment can learn from apartheid

How to invest in energy once you’ve ditched fossil fuels

Environmental tracking: a practical financial solution to climate change?

Norwegian pension fund divests from ‘financially worthless’ fossil fuel firms

The Guide to Climate Change 2013


Will Self-Driving Cars Be Better for the Environment?



self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo |

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.


Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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New Zealand to Switch to Fully Renewable Energy by 2035



renewable energy policy
Shutterstock Licensed Photo - By Eviart /

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.


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