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Why some investors are seeing better returns without coal
20 January 2020
As institutional investors grapple with how to best incorporate ESG principles into their investment process, divestment from the fossil fuel industry entirely remains rare. However, as we can see through eVestment Market Lens documents, many investors are moving forward with thermal coal divestment and growing appetite exists for environmental/ESG-focused investment products.

Recently, coal divestment has picked up steam among institutional investors. Numerous investors have decided that their portfolios will fare just as well, if not better, without exposure to thermal coal. In September, the United Nations Staff Pension announced its intent to divest from investments in publicly traded companies in the coal energy sector by the end of 2020, arguing that coal “as a source of energy is becoming less economically viable, [and poses] a financial risk to our portfolio, with the costs of renewable sources of energy predicted to undercut commissioned coal almost everywhere by 2030.”

A recent study conducted by staff of the San Francisco ERS supports the argument that coal may be less of an asset and more of a liability within an investment portfolio. In October, staff presented a report on Fund Performance Impact of SFERS Investment Restrictions: In order to measure the fund performance impact of various ESG-related investment restrictions, staff “licensed an index that reflects the ACWI IMI after excluding all of the stocks subject to restriction” and “compared relative return and volatility of the excluded ACWI IMI index to the parent ACWI IMI index.”

The study found that exclusion of thermal coal from the portfolio did not increase risk nor have a material impact on overall returns; in fact, the portfolio may have performed slightly better (+0.01% cumulative return) without exposure to coal than it would have with exposure to coal. As investors seek to integrate ESG principles into their investment process, coal divestment may prove to be both an environmentally friendly and financially responsible means of doing so.

Custom Index Names and Inceptions

Source: eVestment Market Lens

Restriction ThemeInceptionIndex Name
TobaccoMay 31, 1998ACWI IMI ex Tobacco
SudanNovember 30, 2006ACWI IMI ex Sudan
Civilian FirearmsOctober 31, 2016
ACWI IMI ex Firearms
Thermal CoalMay 31, 2017
ACWI IMI ex Thermal Coal
Select Oil & Gas CompaniesOctober 31, 2018
ACWI IMI ex (select) Energy
All RestrictionsMay 31, 1998
ACWI IMI ex Tobacco
ex Sudan ex Thermal Coal
ex Firearms ex (select) Energy*

*Each individual restriction theme is added to this index according to the above inception dates.

Custom Index Relative Returns and Volatility Since Inceptions

Index NameRestriction Weighting*Cumulative Return**
Annualized Return**
Annualized Volatility**
Dollar Impact
ACWI IMI ex Tobacco
0.41%
-1.76%
-0.03%
+0.04%
-$88.9m
ACWI IMI ex Sudan
0.11%
+0.35%
+0.02%
-0.02%
+$25.3m
ACWI IMI ex Firearms
0.01%
+0.02%
+0.01%
0.00%
+$1.5m
ACWI IMI ex Thermal Coal
0.05%
+0.01%
0.00%
0.00%
+$0.5m
ACWI IMI ex (select) Energy
0.07%
+0.02%
+0.03%
-0.02%
+$1.9m
ACWI IMI ex Tobacco
ex Sudan ex Thermal Coal
ex Firearms ex (select) Energy*
0.66%
-1.10%
-0.02%
+0.03%
-$63.9m

*Weightings of restricted stocks in the generic MSCI ACWI IMI Index at June 30, 2019.
**Relative returns and volatility are against the MSCI ACWI IMI Index through to June 30, 2019.

Sources

  • United Nations Staff Pension, Staff, “United Nations Joint Staff Pension Fund Announces divestment from Coal Energy Sector.” (2019, September 23). Retrieved from eVestment Market Lens.
  • San Francisco ERS, Staff, “Annual ESG Update.” (2019, October 9). Retrieved from eVestment Market Lens.
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