Fossil Fuel Divestment Seen Costing Returns for U.K. Investors

  • Study funded by oil industry tracks investments since 2002
  • Investors could maintain returns without oil by boosting risk

Investors who boycott the shares of oil, gas and coal companies out of concern for the climate are sacrificing higher returns and lower risks, a study funded by the fossil-fuel industry showed.

An investment of 1,000 pounds ($1,526) tracking the FTSE All-Share Index since 2002 would have been worth about 2,800 pounds at the end of 2014, said Andrew Lilico, chairman of Economics Europe in London. Eliminating shares of oil, coal and gas companies would have cost 200 pounds, though returns could be increased if investors accepted higher risk, he said.

“Investors who wanted to exclude fossil fuels would need to pick their poison,” Lilico said late Wednesday in a phone interview. “If they want to avoid any reduction in returns, they’d have to take 20 percent more risk. If they want to avoid any additional risk, they’d have to accept 68 basis points less in returns each year.”

The research commissioned by the Washington-based Independent Petroleum Association of America adds to the debate about the impact of the rapidly growing movement calling for funds to divest their fossil-fuel holdings. Investors with $2.6 trillion of assets under management have pledged to withhold money from fossil fuels, up from $50 billion a year ago, according to a separate report on Tuesday. 

The latest research illustrates the trade offs investors face from prioritizing their environmental credentials. Environmental groups led by Bill McKibben have put pressure on fund managers to scrap fossil fuel holdings as a way of choking off support for polluting industries, part of a global effort to rein in emissions blamed for global warming.

To gauge the impact of divestment, the researchers calculated returns over the period for four broad sectors and then excluded 21 companies, including BP Plc, Royal Dutch Shell Plc and Glencore Plc.

The economists chose 2002 as a start date, because that’s when the FTSE All-Shares Index sectoral data they used began. That period included both “times when oil prices were or had recently been very low (e.g. early 2000s) and times when they were high (e.g. 2008),” Lilico said in an e-mail.

The IPAA previously commissioned a report into the U.S. market using a different methodology. It found the cost to investors in the U.S. of divestment over a 50-year time period averaged about 70 basis points a year.