Fossil Free Investing and Portfolio Performance

Fossil Free Investing and Portfolio Performance
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For 35 years, Trillium Asset Management has helped our clients align investments with values, including divesting assets from fossil fuel companies. Increasingly, investors are choosing to eliminate all traditional energy (coal, oil, gas) from their portfolios and reinvest in companies leading the transition to a low carbon economy. Whether you are an individual or institutional investor, fossil fuel companies pose distinctive risks that are not manageable to the extent required to make them attractive investments.

Our recently updated guide, “Make a Clean Break: Your Guide to Fossil Fuel Free Investing,” developed in partnership with Green Century Capital Management and 350.org, helps investors better understand the reasons to eliminate coal, oil, and gas companies from portfolios. In addition, investors learn how to adopt a clear reinvestment strategy that supports a more sustainable economy without sacrificing returns.

Below, I discuss the importance of extracting fossil fuels from your portfolio and avoiding the risk of stranded assets.

Why is divestment important now?

Given the outcome of the U.S. presidential elections, it is imperative to send a clear signal that we demand action on climate change. Divestment is a simple step all individuals, families, and institutions can do immediately to demonstrate a commitment to solving one of the most important issues facing the planet.

How is fossil fuel free investing unique to Trillium’s history?

Trillium has been on the forefront of environmental investing for decades, with a deep history in fossil fuel free investing and reinvesting in companies committed to sustainable solutions. Our fossil fuel free investment portfolios represent approximately 50% of our firm’s $2.0 billion in assets under management.

Trillium’s fossil fuel free Global Equity Strategy, available in mutual fund form, has been fossil fuel free since inception in 1999, and is one of the oldest and largest strategies in the country. In addition, Trillium’s Fossil Fuel Free Core strategy has matched the S&P1500 benchmark gross of fees for the last 10 years (net of fees 6.8% vs. 7.7%) and is among the fastest growing investment approaches at the firm.1 Both strategies exclude all companies directly involved in the extraction and production of fossil fuels as well as all utilities involved in power generation from fossil fuels. We believe that investing in fossil fuel stocks carries inherent risk.

We are also the sub-advisor to the Green Century Balanced Fund, one of the only funds committed to investing in green bonds proactively directing capital to solve climate challenges. The Balance Fund also does not invest in fossil fuel companies and was the first U.S. mutual fund to perform a carbon footprint analysis.

Do investors sacrifice returns if they choose to go fossil fuel free?

Moving your money away from fossil fuels does not mean having to sacrifice returns. A growing number of studies are beginning to find that investors can seek competitive returns without major negative impacts on portfolio performance and/or risk over the long-term.

An analysis conducted by MSCI for the period November 30, 2010 to February 28, 2017 found that investors who discarded holdings in fossil fuel companies would have outperformed those who remained invested in coal, oil, and gas during that same period.2 In fact, the analysis shows that investors who divested from fossil fuel companies would have earned an annualized five-year return of 9.53%, compared to 8.25% return earned by conventional investors.

A second study, conducted by investment firm Aperio Group in 2016, estimated that excluding all fossil fuel companies from 1988 through 2013, a 25-year period, would have an annual tracking error from its Russell 3000 benchmark of just over three quarters of a percent but which has virtually no risk in terms of volatility.3 The Aperio study showed that over the 25-year period, the fossil fuel free portfolio outperformed its benchmark by a fraction of a percent (0.05%). Aperio also reported that over rolling 10-year periods, the carbon-free portfolio outperformed its benchmark 68% of the time. Similarly, an Advisor Partners study also determined that removing energy stocks from a well-diversified portfolio has little impact on investment risk.4

What are stranded assets and what do they mean for my portfolio?

Carbon assets are the proven reserves of oil, gas, and coal mining companies. The reserves are counted as positive assets on a company’s balance sheet under the assumption that all listed reserves will be extracted, sold, and burned. In fact, most energy companies are valued by financial analysts based on these proven reserves.

There are many state, national, and global initiatives to press for a cost of carbon that could meaningfully address the risks of climate change. While the outcomes of many of these efforts are still in flux, such as the 2015 Paris Climate Agreement, we certainly believe over the long-term there is a very clear risk to the value of any carbon assets. If ultimately regulatory efforts prohibit extraction of these carbon assets, or make them too expensive to develop, they become “stranded assets.” Investors in energy companies with such potentially stranded assets face the very real risk that their investments may lose value.

Why is reinvestment a critical component as well?

Removing fossil fuel related companies in a portfolio is just a first step. Just as important is reinvestment in companies involved in the transition toward a more sustainable economy. In the updated guide, we identify seven pillars of reinvestment that represent strong long-term growth opportunities: energy efficiency, power generation, storage and distribution, transportation, sustainable agriculture, water, and sustainable design. We believe companies that proactively address climate change through their supply chain, products and services offered, and operations may be better positioned to succeed in a low-carbon future. Investment in these solutions-oriented companies helps create exposure to new opportunities in a portfolio, and helps catalyze the shift of capital to innovative, solutions-focused technologies.

Additional Resources

By eliminating ties with fossil fuel companies, investors can avoid the risks of fossil fuels and make a positive impact by actively supporting companies that pay attention to environmental, social, and governance factors.

For institutions or individuals interested in fossil fuel free investment options, visit www.trilliuminvest.com.

If interested in tracking the current carbon footprint of your funds, visit fossilfreefunds.org, brought to you by As You Sow.

1.  Annualized returns for Fossil Fuel Free Core composite through 3/31/2017. GIPS composite inception is 1/1/2007 for the Fossil Fuel Free Core. Please see important performance disclosures at the end of this post.
2. “MSCI ACWI ex Fossil Fuels Index (USD)” MSCI.
3. Patrick Geddes, Lisa Goldberg, Robert Tymoczko, Michael Branch. “Building a Carbon Free Portfolio”. Retrieved from https://www.aperiogroup.com/resource/138/node/download.
4.  Jim Blachman, CFA, Gerard Cronin, CFA, Daniel Kern, CFA. “Fossil Fuel Divestment: Risks and Opportunities”. Retrieved from www.advisiorpartners.com



Matthew Patsky, CFA

CEO and Portfolio Manager at Trillium Asset Management

Matthew Patsky, CFA, is CEO and Portfolio Manager at Trillium Asset Management. He leads Trillium’s Sustainable Opportunities strategy and has over three decades of experience in investment research. In 1994, he became the first sell side analyst in the U.S. to publish on the topic of socially responsible investment.

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Trillium Asset Management, LLC (Trillium) claims compliance with the Global Investment Performance Standards (GIPS®). Trillium is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors act of 1940. For the purposes of establishing and maintaining compliance with the GIPS standards, the firm has elected to define itself exclusive of wrap fee assets under management historically until 10/1/2013. Effective 10/1/2013 the firm has redefined itself to include wrap-fee assets under management. Previously, the firm included only institutional and high net worth accounts. The firm was redefined to include the wrap-fee business to reflect all business lines managed by the organization.

The Fossil Fuel Free Core Composite was created on August 28, 2011 and has an inception date of January 1, 2007. The U.S. Dollar is the currency used to express valuations and performance.

Performance is presented net of trading costs and both net and gross of management fees, includes the reinvestment of all income, and is vested and calculated on a trade date basis. Individual performance will vary from that of the composite.

Lists, descriptions, and GIPS compliant presentations are available upon request for all Trillium performance composites.

The S&P Indices are widely recognized, unmanaged indices of common stock. It is not possible to invest directly in an index. The S&P 1500 combines three indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 to cover approximately 90% of the U.S. market capitalization.

Past performance is no guarantee of future results. Every investment carries the potential for both profit and loss.

Investments in smaller companies generally carry greater risk than is customarily associated with larger companies for various reasons, such as narrower markets, limited financial resources and less liquid stock.