The IEEFA report on the reliability of fossil investments
(sustainabilityenvironment.com) – If you are a small saver, when you go to a financial advisor, one of the first assurances you get is that your investment is sound and reliable. A low-risk profile, low yield but safe. In short, the advice is to jump on the “blue chip” holdings. So do institutional investors (in part). For decades, fossil companies were the ideal solution. Today, however, energy transition on the one hand and the climate crisis on the other have upset this assumption: fossil investments are already considered too risky.
“Disruption and destabilisation in fossil fuel commodity markets, competition from renewable energies, Electrification of transport and increasing investor awareness of the financial risks of climate change have prompted some investors to reassess the role of the energy sector in the portfolio,” explains an IEEFA report published last week. The result is that for some years now “the panorama of passive investments” – that is those low-cost investments linked to an index to reflect the results of a specific market – “is beginning to reflect this change”.
The decline of fossil investments
Many stock indices developed in recent years have reduced exposure to fossils, yet have passed reliability tests and are available at reduced transaction costs. It’s a reflection of the negative performance of fossil investment over the last decade. In eight of the ten years between 2012 and 2021, he calculates the ratio, the energy sector has lagged behind the performance of the S&P 500 index. And in five of those years he finished last. “At its peak in 1980, traditional energy accounted for almost 30% of the S&P 500 index in terms of market capitalization,” they reconstruct. By the end of 2010 it was below 10%.
The shocks of Covid-19, the energy crisis and the war in Ukraine have also confirmed this trend. Although it temporarily regained share in 2021 and 2022, the fossil fuel sector recorded a yield of -4.8% in 2023, notes the report. “Industry share prices and market weighting rose from record lows in 2020 to a modest 5.2% of the S&P 500 index in December 2022 before reversing course in 2023, with fossil fuels falling to 3.9% at year-end,” the authors point out. So much so that the analysis of the main stock indices, such as Standard & Poor’s 500, Russell 3000 and MSCI All-Country World Index, reveals that all their versions without fossil companies have had better returns than those that include them.