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.
© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.
All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.