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Fossil fuel-free portfolios reap higher returns, report finds

With concerns about volatility and stranded assets, there is increasing pressure for colleges and other institutions to divest away from fossil fuels.

While Harvard and other institutions have yet to divest from fossil fuels because of fears their portfolios might suffer, mounting evidence counters that rationale. 

MSCI Inc. calculates that portfolios without coal, gas and oil earned 1.2 percent more since 2010. Average fossil-free returns have been 13 percent a year, as opposed to 11.8 percent for conventional investors, reports The Guardian.

Sure, during this period the price of oil tanked, driving down shares of companies, but fossil-free indexes outperformed before this happened, said MSCI. And the volatility of oil shares is another reason to get out of these stocks.

Environmentally focused mutual funds that exclude fossil fuels have been around for at least a decade from groups such as Calvert and Green Century. 

Last year, the environmental group Natural Resource Defense Fund joined with FTSE to form the first fossil fuel-free index, and then MSCI — the world's largest index provider — jumped in.

Forming fossil-free indexes

MSCI launched a family of indexes in response to requests from two major pension funds and an asset manager "who were looking for representative benchmarks in the transition to a low-carbon economy."

MSCI analyzed performance over the past five years and concluded that omitting fossil fuel companies would improve returns while only reducing the investable universe of companies by 7 percent.

Performance would have been higher for portfolios with fossil fuels before 2007, however, when those companies were experiencing boom years with high prices, said MSCI. But fossil-free portfolios still could have competed by adding renewable energy and efficiency stocks.

Today, concerns are growing about the potential for "stranded assets" where fossil companies spend billions of dollars exploring for oil, gas and/or coal that ends up left in the ground — because of low prices, regulations and/or action on climate change.

The Carbon Tracker Initiative identifies $91 billion-worth of oil projects, for example, that are on the drawing board over the next decade alone that will be losers with prices below $95 a barrel. 

MSCI also launched MSCI ESG CarbonMetrics, which help institutional investors measure their exposure and screen out carbon risks from their portfolios. It includes quantitative data on companies' fossil fuel reserves and carbon emissions. It acquired GMI Ratings, an ESG (environmental, social and governance) research firm, to this end.

This article originally appeared at SustainableBusiness.

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