Does divestment reduce risk-adjusted returns? Well, the context of the question matters. If we're thinking about side-by-side comparisons, there's some measure, at least, historical measure of evidence suggesting that some divestment, in fact, may not impact returns very much. On the other hand, one has to ask questions about diversification and the implications for diversification of leaving perhaps, in some cases, entire industries out of the portfolio mix. It also may depend on what time period is examined. A BlackRock study of the returns of two public pension plans, cited by Bill McKibben, an activist in a New Yorker article recently, found that divestment increased returns actually. What they said was no investors found negative performance from fossil fuel divestment, and in fact, the financial debate, and I quote, "About divestment is as settled as the ethical one," so writes Bill McKibben, "you shouldn't try to profit off the end of the world, and in any event, you won't." Now, part of the challenge with studies that focus on any recent time period has to do with what's going on in the oil industry. A recent study by my colleagues at Wharton: Rob Stambaugh, Luke Taylor, and Lubos Pastor, our former student who's now an endowed chair in Chicago, found that much of the value and growth differential that has been so strong in the last decade with growth outpacing value, countermanding, if you will, or rising up against the long-term evidence of value outperforming growth might substantially be related to the difference between green and brown firms. In other words, relating somehow to fossil fuel exposure. In any case, that last 10-year time period, especially most recently when the price of oil collapsed starting in 2015, may have an outsized influence on the analysis. It might be no surprise that most institutions divesting from fossil fuels would have outperformed their benchmark, that is, US equity benchmark, because the performance of the S&P 500 energy sector has lagged the broad index since 2012. The performance disparity snowballed following the global collapse of oil prices in 2015. This chart compares the performance of the S&P 500 energy sector total return index to the S&P 500 total return index itself over the last 10 years, and you can see a dramatic difference in the pathway. The S&P 500 total return, which by the way, has especially recently been concentrated in what is known as the FANG stocks: Facebook, Apple, Netflix, Google Alphabet, and so on, has dramatically outpaced the oil sector. If oil companies are screened up from a portfolio and the weights go to the rest of the companies in the S&P 500, you can see that it might have a significant effect. The S&P 500 energy index inception date is June 28th, 1996, and its performance is worse than the broader index over the approximately 25 years since inception, but it did outperform the broader index measure over a 15-year period starting in 2003 ending in 2018. Once again, time period matters. Remember, if we go back to 1926 and account for all firms in US markets that either existed before that point or were started that point or were even birthed after that point into public markets, until 2016, the number 1 wealth-producing stock was indeed Exxon Mobil and its antecedents. This is research published by Hank Bessembinder from Arizona State. He also found that as of 2016 and after, Apple created the most wealth of any firm. But remember, just five years ago, Exxon Mobil was in the group of the largest five stocks in the S&P 500. If you are screening out fossil fuel companies or divesting from firms with heavy carbon footprints, including the oil producers, you might be screening out a sector that historically has delivered tremendous wealth, again underscoring the question of fiduciary duty. That said, performance can be compared over and even longer period. The Center for Research on Security Prices or CRSP, maintains the most famous research database of US stock prices going back to 1926 along with other firm characteristics. In fact, the S&P 500 itself existed then but not with 500 stocks, only 90 stocks, and it didn't become 500 until 1957. The point is that performance comparisons over a single arbitrarily selected timeframe can be misleading, unless that period is the whole dataset of prices for the instrument being examined and we don't expect or we don't observe structural changes, which simply says that the frailty of an analysis could be high with respect to a timeframe. Divestment advocates argue that the performance of fossil fuels and the whole fossil fuel industry will continue to decline over time relative to the broader stock market, due in part to the industry's political unpopularity along with the shift away from fossil fuels and energy productions. That's possible, but it's also possible that sector performance would revert to its long-run mean with accelerating global growth and the associated increase in demand for legacy energy sources balancing out the shift to alternative energy technologies. Some site the birth and the growth in electric vehicles as a data point there. Well, some estimate suggest that we have around four million electric vehicles on Earth, but we have also four billion gas-oriented vehicles or gas-powered vehicles. In short, the assumption seem suspect that the stock performance disadvantage of fossil fuel producers observed over the past few years will continue and perhaps intensify without uncertainty. In fact, that was one warning that the recent Wharton paper by Stambaugh, Taylor, and Pastor, actually described, that we have to be careful of changes in preferences and the impact that those might have on prices unless they're permanent. All of which says that we have to have our eyes wide open, especially if we're fiduciaries when we make those investment decisions. Recognizing that ESG, that impact sustainability, social impact, and all the related considerations may have a de facto legitimacy for someone who simply cares about it as part of their preferences, but also again for fiduciaries who are naturally considering and maybe making all of their decisions on a financial basis, that may raise a concern.
