Seattle City Report: Fossil-Fuel-Free Fund “Outperforms” Standard S&P 500
The city of Seattle’s potential move towards divestment from fossil fuels is looking increasingly likely based on a recent report.
While the consultant’s report initially argues that divesting from fossil fuels is “reckless,” the analysis posted later in the report seems to show the opposite (humorously).
Presumably owing to this and other factors, city council member Nick Licata recently sent the city employee’s retirement fund board “back to the drawing board,” rather than simply accepting the report’s suggestions at face value.
The Seattle Met provides more:
Dig deep into the report, and you’ll find that even as the consultants lecture the Seattle City Employees’ Retirement System (SCERS) on the supposed recklessness of divestment — “We believe that divestment from fossil fuel companies has the potential to reduce expected returns and increase risk in the fund and, therefore, violates the SCERS … Policy” — there’s some actual (though intentionally? inscrutable) analysis ten pages into the report that notes the opposite (FYI, the CU200 are the biggest carbon polluters):
“From a performance perspective, the S&P 500 screened against the CU200 outperforms the standard S&P 500 by approximately 30 basis points over 10 years ended May 2014.”
In other words, (in English): Take the CU200 out of Seattle’s S&P 500 investment portfolio and employees do better, the report says.
Lol. I’m not even sure what to make out of this. “Interesting,” I suppose….
That’s being charitable, though. You could very easily make the case that the only way that an interpretation like that would come about was if money signs were influencing someone’s thought processes.
Related:
Norway’s Biggest Pension Funds Manager Divesting From Coal
Fossil Fuel Divestment (Part I: The Whys and Hows)
Fossil Fuel Divestment (Part II: Reinvesting in the Green Economy)
Image Credit: City of Seattle
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Returns tend to be strongly associated with risks: many companies in the renewable sector are small-ish and/or strongly dependent on government incentives subject to frequent revision. Unlike the large, stable fossil fuel companies that yield steady if uninspiring returns, renewables is a tricky business.
Of course, renewables are well on their way to becoming the new mainstream. That means they too will gradually move into the ‘slow and steady’ category.
I’ve seen some great returns from investing a bit in renewable energy businesses, but it has been a rollercoaster. Putting my money in big oil would certainly have been better for my blood pressure if nothing else 😉
Sounds like Internet stocks in the 1990s: individual companies are very risky, but the sector is growing. Under such conditions, as you said, a broad portfolio can outperform the market, but it’s quite a roller coaster ride as the companies rise and fall.
I wouldn’t go quite that far. During the dotcom bubble, companies were given high valuations without a business model or revenue stream. That’s not happening in the renewables sector: while many companies are trading above their intrinsic value, you’re not seeing the same crazy valuations with absolutely no basis in reality you saw with tech stocks back then.
The problem is mainly that companies are small (a round of consolidation will happen soon I’d wager) and vunerable to even fairly small changes in the political or economic climate. An oil major can sit out a rough patch without breaking a sweat because of their sheer scale, something very few renewable companies can at the moment.
As renewables mature and becomes less dependent on government support, things will improve massively. The business cycle, for all its vagaries, is far more predictable than the political climate. The increasing geographic spread of many larger renewable companies is also a huge improvement: a company focusing on a single market, even a large one like China or Germany, is hugely vunerable to the actions of government. A company with global reach isn’t.
But the proposal isn’t to divest from fossil fuels and put the money into renewables. At least that’s not what’s been reported. Moving money out of fossil fuels and into the broader stock market may be prudent, and at wost would not greatly hurt performance.
That would be a decent bet indeed. Divesting from coal in particular is a very solid strategy. Demand for oil isn’t going away anytime soon (quite the contrary), but coal is going nowhere fast.
Investing in oil has its own risks. Profitable investments require either increasing profits or very high dividends. Oil companies are in the bind that at low prices their costs of finding and extracting new oil isn’t covered, and at high prices the economy suffers, and therefore so does demand.
True, but overall they have never failed to yield extremely tidy profits relative to their low risk. That being said, I wouldn’t touch those shares with a ten feet pole for ethical reasons.
In case you run into an incredible opportunity in oil….
Divestment does not imply putting all the money from fossil investments into renewables. If say you ran a simple index fund without the 200 polluting companies, you would just be underweight energy.
Interestingly, Norway’s giant $800bn state rainy day fund is leaning the other way, and has made renewable energy a priority for new investment (link). They are considering finance for projects, which are of course less risky than shares in equipment manufacturers, though also less liquid. The smaller Danish state pension fund has already gone down this route.
Did the dotcom companies ever actually make anything?
Yes, I was in one. Having a product to sell hurt our evaluation, at the time dreamware was better than software. Then when the bubble popped, clients said they were not sure we would be around in the long run so come back in 12-24 months and talk to us then. Needless to say we were acquired at a fire sale. The software runs to this day, but now owned by a large corporation.