JUNE 26, 2015: On Wednesday, Trillium Asset Management testified in support of CA SB 185, a bill which would require bill California’s state pension funds, Calpers and CalSTRS, to divest investments in companies that generate 50% or more of their revenue from coal mining.
Jodi Neuman, who represented Trillium at the hearing, testified:
“Our employee-owned firm has managed socially and environmentally screened investment portfolios for individuals and institutions since 1982. We have seen growing interest in our Fossil fuel free investment portfolios, which currently represent approximately 50% of our firm’s $2.2 billion of assets under management.
Trillium also acts as sub-advisor for the Green Century Balanced Fund, an environmental mutual fund with a fossil fuel free mandate. This fund, which is represented here today by my colleague Erin Gray, is rated highly on performance by Morningstar, earning a 4 star rating. Through April of this year, the fund has outperformed the Lipper Balanced Fund average for 1, 3, 5 and 10 years.
In our experience, fossil fuel free investing has been a credible investment approach. Since 2007, our Fossil Fuel Free Core strategy has outperformed the S&P1500 benchmark by 40bp annually net of fees. I want to share my perspective as an investment manager who fully understands the demands of building portfolios that seek to maximize returns while managing risk.
Some have argued that divestment from fossil fuels could potentially increase risk and lower return because you are narrowing your investment universe.
Recent independent studies have shown that investors can go fossil fuel free without major negative impacts on portfolio performance.
Investment firm, Aperio Group, estimated that excluding all fossil fuel companies from 1988 through 2013, a 25-year period, would have an annual standard deviation from its benchmark of just over the quarters of a percent but which has virtually no riskier in terms of volatility . They also report that over a 10 year period, a carbon-free portfolio outperformed its benchmark 73% of the time.
MSCI, a leading provider of investment decision support tools, looked at the impact of excluding companies owning carbon reserves from one of its index funds, the MSCI All Country World Index (MSCI ACWI). It determined that over a five year period the active return differential was 1.2% better for the same index without fossil fuel investments .
At Trillium, we utilize portfolio optimization software to help us manage the exclusion of fossil fuel stocks from a portfolio. It helps us to find other stocks that closely correlate with these stocks in terms of beta, or volatility of a stock in relationship to the market, and the size of the companies we invest in.
Investors can also seek to identify substitutes that most closely correlate with fossil fuel companies to minimize risk and tracking error or variation from benchmark. Many clean technology and industrial companies provide energy efficiency products such as LED lighting, power management, commercial building energy/efficiency controls.
The cost of transitioning a portfolio out of fossil fuel stocks over a 3 or 5 year period should be relatively inconsequential, as there is normal portfolio trading which should occur over that time period. This allows investment managers the opportunity to swap fossil fuel investments into other parts of the investment universe, with minimal additional cost.
I believe that an investment portfolio can provide competitive returns over the market cycle — while managing a conscious choice to avoid fossil fuel investment exposure — and I am pleased to know that this committee is exploring that option.”
The bill was moved out of committee by a vote of 5-1 and now heads to the California Assembly Appropriations committee.
 The MSCI ACWI ex-carbon vs. the MSCI ACWI for the time period February 2008- March 2013
Disclosure: Returns include the reinvestment of all income. Past performance is not indicative of future results. The S&P 1500 Index is a widely recognized, unmanaged index of common stock that 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. It is not possible to invest directly in an index.
The views expressed are those of the authors and Trillium Asset Management, LLC as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data.