Fossil Fuel Divestment ‘Virtually Risk Free’

by | Jan 30, 2013

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As the campaign for universities and other institutional investors to end investment in fossil fuels gathers pace, a report by financial advisory firm Aperio Group has found that such divestment carries a “statistically irrelevant” amount of risk.

In Do The Investment Math: Building a Carbon Free Portfolio, Aperio Group CIO Patrick Geddes conducts two studies to analyze the impact of divesting from: 1) the “Filthy Fifteen,” a group of coal utility and extraction companies designated by a university coal divestment campaign as the dirtiest public companies to hold; and 2) the exclusion of the entire industry of oil, gas, and consumable fuels.

The study finds that removing all of the oil, gas, and consumable fuels industry results in a forecast tracking error versus the Russell 3000 of leading companies of only 0.60 percent, which adds incremental portfolio risk of 0.01 percent.

The more narrow divestment of just the Filthy Fifteen results in a tracking error of only 0.14 percent with an incremental risk of 0.0006 percent. Tracking error can be converted to incremental portfolio risk to give investors a more accurate measurement of the impact upon a portfolio, Geddes says.

According to Geddes, after stripping investments in the Filthy Fifteen, the portfolio becomes riskier by a “trivial amount” that is statistically irrelevant. The impact of screening for coal and carbon is “far less significant” than skeptics often presume, Geddes adds.

Earlier this month, the city of Seattle announced that it will not invest its cash balances in fossil fuel companies and that it is taking additional steps to divest employee-deferred compensation funds and pressure its pension fund system to pull money from Chevron and ExxonMobil, two of the system’s top 10 investments.

The moves follow Mayor Mike McGinn’s pledge last year during’s 21-city campaign to encourage colleges, churches and governments to pull their endowment funds out of the fossil fuel industry.

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