Our research has found that fossil fuel companies pose distinctive risks that we feel are not manageable to the extent required to make them attractive investments.
The economic model of carbon-based energy companies is being disrupted by increasing climate regulation, a clear trend of rising production costs without corresponding growth in reserves, and increasing competition from cleaner renewable energy technologies. As such, fossil fuel companies appear to be facing a prolonged secular decline. Furthermore, health, safety, environmental hazards, and geopolitical instability amplify these risks.
Trillium’s Portfolio 21 Global Equity Fund is one of the oldest fossil fuel free funds. A pioneer in environmental investing, Portfolio 21 has been fossil fuel free since its inception in 1999.
When excluding fossil fuel stocks from an investment portfolio, there are numerous alternative investment opportunities that provide exposure to the world’s growing need for additional energy infrastructure. Wind, solar, hydroelectric, and waste-to-energy stocks are some examples. Emerging renewable technologies, such as fuel cell and tidal generated energy, may also become attractive substitutes in the future.
Furthermore, many engineering and construction companies are leveraged to the development of energy infrastructure. Energy efficiency is another way to benefit from rising energy demand. Companies that have business models based around energy efficiency have a tendency to perform well when the economic cycle is in the expansion phase and fossil fuel costs are highest (i.e. when “traditional” energy stocks perform best.)
It is possible to produce risk adjusted returns that are competitive with appropriate broad market benchmarks through a portfolio that does not invest in fossil fuel companies. In fact, we believe it is preferable to avoid these stocks because of their unattractive risk profile. We held this view at Portfolio 21 prior to launching our global equity strategy in 1999 and our experience over the years validates this belief.