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Is fossil fuel divestment the only way to address climate change risk?

By: Fong Yee Chan, senior product manager, sustainable investment

On January 10, New York City officials announced plans to divest its pension funds of about $5 billion in fossil fuel investments. As a growing number of investors seek to address climate change risk, this initiative represents one of the more significant divestment efforts to date. The headline is indicative of a larger trend, as it comes on the heels of a recent letter to Norway’s finance ministry from Norges Bank, recommending that the country eliminate all oil and gas securities from the index tracked by its pension fund—an allocation comprising nearly 6% of the index.

As initiatives such as these have become more widespread, many have begun to question whether divestment is the most effective approach to addressing climate change risk. Some also question whether the choice to divest fossil fuels might come at the expense of portfolio returns.

An increasingly popular alternative to fossil fuel divestment is a more proactive approach, where investors engage with oil and gas companies to advocate for more robust climate change mechanisms, lower emissions and improved disclosure levels. One such example is the Climate Action 100+, a coalition of 225 global investors—representing over $26 trillion in assets under management, which will be engaging with the world’s top 100 corporate greenhouse gas emitters on management of climate change issues.

At FTSE Russell, we believe there’s a range of ways to integrate climate change into investment. As shown below, our indexes offer various approaches, ranging from fossil fuel divestment to our most evolved and holistic approach that also integrates opportunities arising from the transition to a green economy—the FTSE Global Climate Index Series.

For market participants concerned that incorporating climate change considerations into an index could have an adverse impact on returns, historical performance of the above indexes tells a different story. As shown in the two charts below, the three indexes have outperformed their respective parent indexes over the past five years. 

As interest in addressing climate change risk has grown, a debate has emerged surrounding the best approach for investors. We believe there’s no right or wrong way to incorporate climate change considerations into investment strategies. That’s why it’s important to have a range of choices available, such that investors can choose an index that best suits their preferred strategy—whether it be fossil fuel divestment or an integrated approach that also considers the transition to a green economy. 

For more information on FTSE Russell's integrated approach to climate change risk, please see our FTSE Global Climate Index Series.



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