The Sustainability Report: Eliminating the fossil fuel sector from a global benchmark index can yield a small positive return effect with low tracking error, according to analysis by Impax Asset Management.” “Impax created model equity portfolios structured around fossil fuel divestment and tilts towards energy efficiency and renewable energy investments. Impax evaluated the impact of fossil fuel divestment because there is a strengthening campaign seeking to persuade institutional investors to divest from fossil fuel-based assets as a way of protecting against the downside risk of climate change as well as the potential return of renewable energy investments.
Impax used the MSCI World Index as the baseline and then presented four alternative approaches to portfolio construction, built around the theory of fossil fuel divestment. In the first scenario, the fossil free portfolio, Impax removed the fossil fuel energy sector. In the second, the Fossil Free Plus Alternative Energy (Passive) portfolio, Impax replaced the fossil fuel stocks with a passive allocation to renewable energy and energy efficiency stocks. In the third scenario, the Fossil Free Plus Alternative Energy (Active0 Portfolio, Impax replaced fossil fuel stocks with an actively managed portfolio of renewable energy and energy efficiency stocks. In the fourth scenario, the Fossil Free Plus Environmental Opportunities (Active) portfolio, Impax replaced fossil fuel stocks with an actively managed allocation of stocks “selected from a wider range of resource optimisation and environmental investment opportunities.” The resulting portfolios were analysed over five, and where possible, seven year time horizons.
“The results show that removing the fossil fuel sector in its entirety and replacing it with ‘fossil free’ portfolios of energy efficiency, renewable energy, and other alternative energy stocks, either on a passively managed or actively managed basis would have improved returns with limited tracking error,” Impax said in the report”
Future Today
