Last week Donald Trump announced that the United States will withdraw from the 2015 Paris Climate Accord, much to the delight of climate change deniers and despite wide condemnation from the rest of the world. Clearly, Trump Digs Coal. He also loves Oil.
Earlier this year we announced the launch of the BetaShares Global Sustainability Leaders ETF (ASX: ETHI).
At a high level:
“ETHI invests in global stocks that have been identified as Climate Leaders that have also passed other eligibility screens designed to exclude companies with direct or significant exposure to the fossil fuel industry or engaged in other activities deemed inconsistent with responsible investment considerations.”
As such, ETHI also avoids companies with material exposure to gambling, tobacco, armaments, uranium/nuclear energy, animal cruelty, alcohol, junk foods, pornography, human rights and supply chain concerns.
Since its launch, ETHI has been strongly supported by a number of Australian institutions, advisers, family offices and retail clients. ‘Responsible’ investors are looking to avoid exposure to the fossil fuel industry and climate change risk, and instead are actively seeking investment in those companies considered to be climate leaders.
However, last week’s news made me think:
Should Donald Trump invest in ETHI ???
Historically, excluding fossil fuel exposed stocks from investment portfolios has been a source of outperformance for investors. A number of fossil fuel free indices around the globe have outperformed their traditional (fossil fuel inclusive) benchmark counterparts at times. For example, the S&P 500 Fossil Fuel Free Index has produced a 5-year return to 31 May 2017 of 16.41% per annum compared with the S&P 500 Index return of 15.41% over the same period.
More specifically, the index which ETHI aims to track shows superior longer term historical performance compared to the global equity benchmark.
Clearly, past returns are not indicative of the future. In fact, given the US President’s positive attitude towards carbon-intensive sources of energy, it is entirely reasonable to ask the question whether fossil fuels and climate polluters are in for a period of renaissance?
I would argue it unlikely. Coal is losing the battle for the electricity future, as it is being replaced by cheaper natural gas as well as renewable energy alternatives. At the same time, Trump’s support for increased oil drilling and production could well be a negative for the oil price, as expectations of increased supply from the US may work to offset OPEC production cuts.
Investments in technology over the past 5-10 years have made a number of clean energy sources competitive, without reliance on government subsidies. Innovations in LED technology, self-driving cars and development of internet-of-things will all have a positive effect on sustainability and energy efficiency.
Investing in global sustainability leaders is not just about investing with conscience. It is smart investing, avoiding inefficiencies of the old world while supporting profitable and positive initiatives for the world of tomorrow.
So, perhaps Trump should consider it?