That idea has received some attention on the left, through the environmental writer and activist Bill McKibben, and from the center-left through a U.K.-based investment think tank called the Carbon Tracker Initiative. (The right, center or otherwise, still won't have any of it.)
Whether to dump $5 trillion in carbon stocks from portfolios “is one of the fastest-moving debates” in 30 years, Kevin Bourne, a managing director of FTSE, said earlier this year. It’s a topic tackled this week in a Bloomberg New Energy Finance report.
Though the Carbon Tracker Initiative and McKibben's climate group, called 350.org, are not in cahoots, their work has inspired offspring trying to make de-carbonated money management a real thing.
Stuart Braman is a PhD environmental scientist who teaches at Columbia University and a former managing director at Standard & Poor’s Risk Solutions Group. He said that after seeing McKibben speak in 2012, he wanted to invest in a carbon-free index.
Turns out, there weren’t any. So he founded an effort called Fossil Free Indexes, which earlier this summer published research on how the S&P 500 performs when stripped of the more than 25 companies that hold coal, oil or gas reserves The full energy sector makes up more than 10 percent of the S&P 500.
What happens when you kick out the companies that make civilization go?
Not much. What Fossil Free Indexes shows is a tight correlation between the full S&P 500 and the same index stripped of the fossil fuel businesses:
Braman’s not sure. “It’s a question we’ll probably be exploring as time goes on,” he said. “We were delighted -- right? We were very pleased to see the result.”
There’s no reason they should or shouldn’t necessarily move in lock-step, he said. The fossil fuel companies they pulled out made up less than 10 percent of the S&P 500.
Yanking energy companies out of the benchmark U.S. index may not yet sit well even with investors inclined to think climate change is a battle worth fighting.
First, chucking a lot of big important companies -- even if it isn’t every company in the sector -- may amplify anything that goes wrong in other sections of the economy. Investors diversify their portfolios to avoid risk. De-diversifying increases risk. Full stop.
“The holy grail of investing is more return, less risk,” said Dan Thorn, senior securities analyst at Zevin Asset Management, a socially responsible investment firm in Boston. “The most basic tool for achieving that is to diversify.” Less diversity “limits the amount of return you get for an amount of risk you take,” he said by email.
Fossil Fuel Indexes caps the concentration of each company in its index to 1.25 percent, to avoid giving any of them outsize influence.
Second, global economic risks from climate change are not necessarily financial risks to companies. Companies won’t necessarily go south because the rest of the world eventually world may. That’s the thing about climate change. It’s hard to motivate people to address it until it’s too late to do anything about it.
Would carbon-free investing perform as well in decades prior to 2004-2014? Dunno yet. Maybe there’s something idiosyncratic about big energy companies that explains the tight Fossil Free-S&P correlation. If somebody founded “Information Technology Free Indexes” or “Consumer Staples Free Indexes” would they also track the S&P 500 as closely? Dunno yet.
In the meantime, the results have led Braman to an unorthodox hypothesis: that reducing diversification in a portfolio won’t necessarily reduce its risk. The group will begin publishing blog posts exploring the idea soon.
It might be true. It’s definitely true that extraordinary claims demand extraordinary evidence.
More by Eric Roston (@eroston on Twitter):
- How to stop tax inversions with a carbon levy. Seriously
- Bet against the seven horsemen of the apocalypse
- What CEOs are starting to do about that 'huge gap' Obama mentioned
- Warmer ground blows 'rather spooky' crater in gas-rich Russian north
- This happened while everybody was putting on war paint for the Obama climate hearings
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