The findings of Genus Capital's Divestiture Report indicate that optimized divestment strategies can outperform in the long term
Although divestment is not a new notion, the approach has captured the spotlight in recent weeks. Russia’s aggression against the Ukraine has prompted investors the world over to remove any trace of Russian exposure in their portfolios.
But as that same conflict has spurred increases in energy prices, the usefulness of divesting from fossil fuel-focused firms has also been called into doubt.
While the short-term repercussions of these events have had a detrimental impact on divestment strategy success, new research from BC-based asset manager Genus Capital indicates that divesting is still a viable method to effective investing with the goal of long-term growth.
"In previous years, uptake of divestment among investors has been clouded with misconceptions that reducing exposure to the fossil fuel value chain, negatively impacts annualized returns,” Mike Thiessen, Genus' Chief Sustainability Officer, said in a statement. “But, this view is outdated. Our Fossil Free fund data continues to show that divestment pays over the long-run.”
In its 2021 Divestment Report, which includes eight years of fossil-free investing data, Genus found that divesting from fossil fuels not only boosts return, but also reduces portfolio volatility and improves portfolio robustness.
Using Genus Capital’s flagship Fossil Free CanGlobe Equity Fund to enact a fossil-fuel divestment strategy from April 30, 2013, to September 30, 2021, it found, earned a 13.54% average return while also contributing to climate-focused initiatives. The Fossil Free CanGlobe Equity Fund surpassed its benchmark (12.48%) and the S&P/TSX Composite (9.07%), which both include coal and large carbon-producing sectors.
The analysis also captures the improved resilience of investments that incorporate environmental, social, and governance (ESG) aspects as a result of the pandemic.
Canadian investors are becoming aware that divestment is not just a morally and environmentally responsible option, but also a financially sound one. The report indicates that divestment is still a feasible option.
Genus’s research also concluded that optimized portfolios with no exposure to companies involved in the extraction, processing, or transportation of fossil fuels can outperform portfolios with investments in energy industries that pollute the atmosphere, which calls into question the premise of a return penalty.
It also found divestment from fossil fuel stocks, when combined with prudent, well-managed reinvestment in cleaner, more efficient energy solutions and active stock selection, can be a sound strategy for investors looking to avoid climate-related risks while also taking advantage of investment opportunities.
With the transfer of assets from the energy sector to companies in climate-friendly industries that are highly associated with it, Genus believes that fossil fuel divestment can potentially lower overall portfolio risk driven by energy sector volatility and stranded asset risk.
"Sustainable investing's popularity continues to accelerate; not only do Canadian investors want reliable returns, but an increasing number will also consider climate change an important priority to factor into investment decisions." Thiessen concluded.
