Eliminate fossil fuels without sacrificing return potential
Submitted by: Genus Capital Management
Posted: Oct 16, 2015 – 12:12 PM EST
VANCOUVER, B.C., Oct. 16 /CSRwire/ - The scientific imperative and growing belief among global leaders, investors, scientists, and large corporations that the use of fossil fuels must be sharply curtailed—if not phased out—for the sake of future generations is driving policy shifts, fuelling growing public divestment movements, and creating interest among institutions, pensions and foundations to eliminate fossil fuels from their investment portfolios.
Statements from the International Energy Agency, World Bank, the Organization for Economic Co-operation and Development, the Bank of England, and United Nations General Secretary Ban Ki-moon have all reinforced the notion that most of the fossil fuel reserves already claimed by companies must stay in the ground—stranded—if the world is to avoid climate change that’s catastrophic for coastal regions, food production, water supplies and more.
In response to the need for greater action addressing climate change, Vancouver-based Genus Capital Management was first to begin divesting over four years ago when they removed all companies involved in Alberta’s oil sands from all of their socially responsible portfolios. Then, over two years ago, and long before the plunge in crude oil prices and related energy stocks suddenly made divesting more appealing to other managers, Genus went all the way and divested from all fossil fuel companies with any direct
involvement in extracting, processing, storing and transporting coal, oil and gas. A 2014 report by the Responsible Investment Association ranked the Genus fossil free portfolios in “the most robust subcategory of all currently-existing fossil free portfolios in Canada”. This means the Genus portfolios meet the most stringent requirements for eliminating hydro-carbons from the portfolios of climate-conscious investors who don’t want their capital contributing to climate change. They also provide not-for-profit foundation fiduciaries and pensions trustees with the opportunity to proactively mitigate the financial risks posed by “stranded assets” and their potential impact on the valuations of companies involved in fossil fuel extraction and related industries.
“Whether catalyzed by concerns over reputational risk, the financial risks posed by ‘stranded assets’ and their potential impact on the valuations of companies involved in fossil fuel extraction; disruption from renewable energy substitution; alignment with one’s personal values, or concerns about climate change, the Genus Fossil Free equity and fixed income solutions make it possible for investors to eliminate fossil fuels from their portfolios without sacrificing return potential”, says Wayne Wachell, one of the firm’s founding partners and CEO and Chief Investment Officer.
Wachell points out that divesting from the Canadian fossil fuel industry presents a significant challenge for Canadian-centric investors, given that the major extractors, transmitters, and emitters of fossil fuel constitute approximately 30% of the S&P/TSX Composite Index. However, with Canada representing only about 5% of world stock markets, having a wide perspective is essential to success because from a broader global perspective, the energy sector and related fossil fuel industries in the materials and utilities sectors make up around 8% of the MSCI World Index.
“This is a significantly smaller problem to solve,” says Wachell. “By combining Canada and the rest of the world into a single optimized strategy that emphasizes top industries in each region, we shrink the size of the problem for Canadian investors and then fill the void with suitable stocks from sectors around the world that are correlated to the Energy sector. These replacements currently include companies in the information technology, consumer discretionary and financial sectors. This ‘total equity’ approach, coupled with our modern portfolio risk management technology, is what makes fossil free investing work for Canadians.”
As far as potential long-term investment returns are concerned, Wachell points out that there are many different conclusions being reached as to the impact of divestment on portfolio returns. Some calculations suggest tiny underperformance by a fossil fuel constrained portfolio compared to one not so constrained. Strategy research by Genus demonstrates that fossil free strategies can outperform the average portfolio holding fossil fuel companies.
“Our research showing that shunning Big Carbon doesn’t mean sacrificing profit are supported by other studies, including one published by San Francisco-based Aperio Group, which shows that if investors had divested of fossil fuels 20 and 30 years ago, they would have had slightly higher returns within the global and U.S. markets, without any significant pick-up in overall risk” says Wachell. Another study, by S&P Capital IQ, a division of McGraw Hill Financial, modeled the performance over the past decade of the S&P 500 index stripped of its fossil fuel stocks. The study found that a U.S. $1 billion endowment invested in a carbon-free S&P 500 would have yielded an additional $119 million in profit through 2013.
Genus Fossil Free offerings include a lower-risk, higher yield portfolio of dividend-paying companies, and a Canada+Global “best-of-the-best” equity strategy. Genus fixed income options include Fossil Free green, corporate and government bonds. The stock mandates combine Canada and the rest of the world into a single optimized strategy that emphasizes top industries in each region. They are invested at around 40% Canada, 60% global, and are tilted toward the most attractive countries on a monthly basis. Genus Fossil Free CanGlobe seeks to maximize exposure to the firm’s highest-ranked stocks with market-levels of risk, while the Dividend strategy provides better income and safety.
DIVEST/INVEST THEMATIC IMPACT STRATEGY
While fossil free strategies are aimed at avoiding contributors to climate change, thematic “impact” strategies are a positive application of sustainable social and environmental investing. The idea here is to find and profit from the long term social and environmental trends that are unfolding in response to significant challenges around the world.
“In this regard,” says Genus partner and president, J.P. Harrison, “we look at population growth and how it may affect demand for scarce resources such as food, water and energy. Since supporting life for more people will increase the strain on our planet, we also like to thematically emphasize products and services that offer sustainable solutions to these challenges. We believe in the concept of win-win as well and think sustainable economic global growth can only occur if the benefits are shared more equally among everyone. As such, we strive to invest in companies who help tackle areas of inequality such as access to education, healthcare, financial services and technology. At Genus, our thematic strategy is very unique since it aims to add financial performance while helping to expand positive social and environmental impact globally.
“Our Impact Equity strategy seeks to make positive social and environmental impacts in addition to generating better financial results. This mandate focuses on investing in global companies who are leaders in areas of sustainability such as: renewable energy, energy efficiency, water and waste management, low negative impact products, sustainable agriculture, as well as access to healthcare, education and technology. This global solution is a one-of-a-kind in Canada,” says Harrison.
GENUS CAPITAL MANAGEMENT INC.
Vancouver-based Genus Capital Management was founded in 1989 and is an independent investment management firm owned by 12 of its 21 employees. Genus has more than two decades of experience investing in accordance with Environmental, Social and Governance (ESG) constraints and is Canada’s leader in complete Fossil Free portfolios. Genus is a member of the Responsible Investment Association (RIA), a signatory to the United Nations Principles for Responsible Investment (PRI), a member of the Shareholder Association for Research & Education (SHARE) and signatory to the Carbon Disclosure Project (CDP). The firm serves some 700 clients and has $1.2 billion in assets under management. Past performance does not guarantee future results. This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by and the opinions expressed are those of Genus Capital Management as of the time of issuance and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Genus does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Genus disclaims any responsibility to update such information and does not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. The material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Genus is not providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Genus to any person to buy or sell any security and is no indication of trading intent in any Fund or account managed by Genus or any of its affiliates. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
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