A recent analysis by MSCI, an investment analytics firm, is being seized on by activists as evidence that divesting from fossil-fuel related companies actually improves portfolio performance, not weakens it. Of course, if true, it would be a provocative finding, especially as it flies in the face of decades of evidence and data suggesting that removing a major asset class such as “energy” from one’s portfolio is a sure-fire way to decrease diversification, increase risk, and destroy long-term returns.
Thankfully, it doesn’t take long to review the two-page MSCI report – and it takes even less time to figure out what they did and how they did it, and how both of those things differ from what activists continue to claim. And while activists continue to talk plenty about the report, here’s one thing they haven’t mentioned yet: MSCI itself acknowledges that divestment creates “significant” investment risks and ignores all the other asset classes that benefit from fossil fuels.
As for the report itself, the first thing to know is that it only examines investment history going back to November 2010. Prof. Daniel Fischel of the University Of Chicago Law School recently conducted an extensive report on divestment (commissioned by the Independent Petroleum Association of America) and found that “claims that the performance costs of divestment are low typically focus on shorter time frames which can generate misleading results.” For the reason, the Fischel study looks at investing over a 50-year time period as opposed to a five- or 10-year window. Leveraging that larger data set, Prof. Fischel found that divestment would have a significant impact on university endowment performance, as he explains in a Wall Street Journal piece.
As mentioned, the MSCI report compares the performance of two funds (one with energy stocks; the other, allegedly, without – more on that in second) over a five-year period, but even within that small window, the analysis shows quite clearly that the only times that the non-energy portfolio performed better than the energy portfolio were in the most recent years, when underlying commodity prices for oil and gas took a nosedive. Of course, here too, activists are looking to score some points. As noted 350.org activist Naomi Klein states in a web workshop earlier this year, “Fossil fuel stocks aren’t performing very well right now. So opponents have just lost their best argument. They won’t lose it for long. So that’s another reason to pound away at it.”
Next, it’s not clear from the MSCI analysis which energy companies are included in the fund that contains fossil-fuel related equities. Not all stocks or companies are created equal; the non-fossil fuel fund excludes companies that, according to MSCI, “hav[e] fossil fuel reserves.” Of course, merely “having” reserves is a pretty narrow definition of what constitutes a fossil-fuel related firm. Under that definition, companies like Halliburton – an oil and gas service company — could very well be included in the non-fossil fund.
Of course, MSCI does list-out a few of the companies that are included in its “non-fossil fuel fund.” Some of them, like Apple, Microsoft and Nestle, may not produce much fossil-related energy, but they sure as heck use a lot of it – both the companies themselves, and their products. But you know who else is on that non-fossil-fuel list? General Electric. The same General Electric that has an oil and gas division that generated more than $19 billion in revenues for the firm in 2014. According to MSCI’s methodology, GE is a non-fossil-fuel related investment.
For its part, MSCI has acknowledged that straight-up divestment from fossil fuels is actually a pretty bad idea. As Remy Briand, head of research with MSCI, wrote in a recent blog:
[Divesment] is not optimal from a financial perspective … because it can create significant short-term risk by potentially deviating sharply from market risk and returns. In addition, such an approach largely ignores fixed assets from non-energy sectors that are at risk of being stranded due to their dependence on burning fossil fuel reserves.
No wonder investors don’t take seriously the divestment campaign’s financial arguments: even the campaigners themselves understand the faults of their argument. Perhaps that is why a new survey released this week by IPAA shows that the divestment movement has had virtually no impact on the way the vast majority of serious investors and analysts view and/or value firms in the energy sector, and particularly those in the oil and gas space.
Nevertheless, divestment campaigners will continue to “pound away” at this argument in an attempt to score headlines in the press despite knowing full well it’s false. But rest assured: serious investors and analysts know better. And that includes MSCI itself.