New Research Demonstrates Expected Superior Performance of Divest-Invest Portfolio as World Transitions to Clean Energy
Divest-Invest Philanthropy, a coalition of more than 155 foundations around the world committed to divesting from fossil fuels and investing in climate solutions, is marshalling powerful new evidence that its members’ portfolios will outperform as the clean energy transition continues and governments fulfill their commitments under the Paris Agreement to limit temperature rise to no more than 2°C.
Divest-Invest Philanthropy commissioned Mercer Investment Consulting LLC (“Mercer”) to research the impact of fossil fuel divestment and climate solutions investment on DivestInvest signatory portfolios. Mercer found that fossil fuel free and sustainable asset classes can exhibit improved expected return outcomes versus their parent asset classes under a 2°C climate change scenario. This translates to overall superior performance of a DivestInvest portfolio versus a more traditionally managed portfolio in a low-carbon world, producing a scenario-specific “DivestInvest premium.”
“What started as an ethical call for foundations to divest from fossil fuels is fast becoming a financial imperative,” said Clara Vondrich, Director of Divest-Invest Philanthropy. “Fiduciaries still have time to heed the warnings of global financial regulators like the Bank of England before the carbon bubble bursts. DivestInvest foundations are leading the way, insulating their portfolios from growing climate risk and positioning themselves to capture the upside of the clean energy revolution.”
This analysis expands upon Mercer’s unique climate change risk modeling framework described in the firm’s 2015 report, Investing in a Time of Climate Change. That report concluded that climate risk was a material threat to investor portfolios that must be managed.
“This new analysis suggests a DivestInvest strategy may be a prudent consideration for investors seeking to manage risks related to a low-carbon transition,” said Alex Bernhardt, US Head of Responsible Investment at Mercer. “It complements prior research relying on back-testing to show that divestment does not materially increase risk or hamper returns over the long term. For investors considering divestment, however, back-testing can only get you so far – adding a prospective dimension to cost-benefit assessments is crucial to more fully understanding the potential impact of stranded asset risk on portfolios.”
DivestInvest also worked with Mercer to publish a list of over 200 investment strategies consistent with the transition to a low carbon economy. This robust list of strategies, spanning all asset classes of a portfolio, is a vital resource for investors struggling to identify satisfactory investment vehicles into the clean energy future. Mercer leveraged its Global Investment Manager Database (GIMDTM), network and research capability to develop the list, which comprises current investment strategies across major asset classes.
DivestInvest signatories now have access to the strategy list in a searchable spreadsheet, which includes the manager and strategy name; description of the investment strategy; classification of the approach to ‘Divest’ and ‘Invest’ criteria and other details including fees, minimum investment size, inception date and assets under management (AUM). Other investors should inquire with Mercer for access to the list.
“This list is the most comprehensive array of strategies available today. It spans across asset classes and uses unique criteria not otherwise available in the marketplace,” said Alex Bernhardt. “While the aggregate amount of strategies available to investors interested in divesting from fossil fuels has grown significantly over the years, Mercer found areas in the market where strategy options are low or non-existent through this research. This represents an opportunity for signatories to work together to fill these gaps making it easier for future signatories to implement the DivestInvest pledge.”
