Ethics & economics are stacking up against fossil-fuel investment

“Coal is a dead man walkin’,” Deutsche Bank global head of asset management Kevin Parker told The Washington Post in January 2011. “Banks won’t finance them. Insurance companies won’t insure them. The Environmental Protection Agency is coming after them... and the economics to make it clean don’t work.” Over two years later a growing number of investors are beginning to exclude carbon-intensive fossil fuels from their portfolios on both ethical and economic grounds.

In April, the Uniting Church in Australia took the step to screen out shares in coal and gas companies – just as a number of investors exclude ‘sin stocks’ in the alcohol, tobacco and gambling industries – to become the first faith group in the world to take such action. Three months later, a group of US protestant churches announced a plan to divest fossil-fuel holdings over the next five years.

The financing of fossil fuel projects too is a big target for environmental campaigners. In Australia, Friends of the Earth offshoot Market Forces is running a campaign to persuade customers of banks ANZ, Westpac, Commonwealth, and National Australia Bank to move their money elsewhere because it is helping the big four banks finance coal and gas projects in the resource-rich country. The campaigners say the banks are complicit in the destruction of national icons such as the World Heritage-listed Great Barrier Reef.

Perhaps sealing coal’s fate once and for all, the powerful World Bank last month said it will no longer fund coal-fired power stations in poor countries because a 2°C rise in average temperatures would leave millions of people trapped in poverty. Evidently there are many ethical reasons to get out of fossil fuels. Now UK-based Impax Asset Management has shown there are some very good economic reasons to eliminate fossil fuel holdings. Taking the MSCI World Index as a benchmark, Impax found that the strategy of excluding fossil fuel holdings yields a small positive return of 0.5%, with a tracking error (a measure of how closely a portfolio follows the index to which it is benchmarked of 1.6%). Importantly, much of the economic effect of excluding fossil fuel stocks could have been replicated with “fossil free” energy portfolios.

While coal is evidently on the way to its own ‘death row’, prospects for clean energy investments have never been better. The outperformance of low-carbon energy investments over fossil fuel stocks in the last seven years tracked by Impax was delivered in an economic climate that is far from conducive to large-scale renewable energy uptake or wider investment in environmental protection. Just think how much better they would have done with a global market for carbon emissions and policy-making tilted away from providing subsidies to polluting fossil fuel companies.

Oliver Wagg is a journalist & leading SRI commentator