Allocating a larger portion of equity assets to environmentally friendly stocks doesn’t mean just keeping up with broader stock indexes but actually outperforming them.
According to data from FTSE Russell, five of its indexes that are more heavily focused on clean energy companies and technologies outperformed their broader benchmarks over various time periods.
“FTSE Russell believes that an additional 1% investment in green is very achievable for mainstream investors and, in fact, can actually improve performance relative to the broad benchmark, and has the index returns to back it up,” according to a recent analysis from the company.
It compared the performance of five of its climate indexes which meet the 1% green and clean technology threshold put forth by Christina Figueres, former Executive Secretary of the UN Framework Convention on Climate Change, to their benchmarks, and found that with one exception all outperformed their respective benchmarks for one, three, and five years ended October 31, 2017.
The one exception was the FTSE All-World ex CW Climate Balanced Factor Index, which underperformed the FTSE All-Index by 1.9 percentage points for just one year.
The analysis found that two FTSE Russell Indexes more heavily invested in environmentally friendly stocks than three others outperformed their respective benchmark by a wider margin.
The two are the FTSE Environmental Opportunities Index, consisting of about 450 large- and mid-cap companies that derive at least 20% of business from environmental markets and technologies, and the FTSE Environmental Technology 100 consisting of 100 stocks, including small cap, that derive at least 50% of their revenues from environmental technology.
Both indexes are market-weighted and substantially invested in companies addressing the challenge of climate change — companies involved in promoting energy efficiency, waste and pollution control, water technology and renewable energy sources. The outperformance of these indexes versus the FTSE Global All Cap Index over several time periods is impressive, as follows:
- The FTSE Environmental Opportunities Index gained 31.1%, 41.4% and 101.1% over the one year, three years and five years, respectively, ended October 31, 2017. In comparison the FTSE Global All Cap Index returned 23.9%, 28.3% and 72.7% over one, three and five years. The outperformance of the Environmental Opportunities Index, then, ranged from 7.2 percentage points to 28.4 percentage points.
- The FTSE Environmental Technology 100 Index gained 33.1%, 31.4% and 99.8% over the same one, three and five-year periods. Its outperformance over those time periods ranged from 3.1 to 27.1 percentage points.
The Environmental Opportunities and Environment Technology indexes also outperformed the three other FTSE Russell indexes that are tilted toward environmentally friendly companies over the past 12 months but not over longer periods of time.
These three other indexes are the FTSE All-World ex CW Climate Index, FTSE All-World ex CW Balanced Factor Index and FTSE All-World Green Revenues Index. Each is a smart beta index that gives heavier weights to companies based on their carbon emissions, fossil fuel reserves and green revenues. They all integrate climate change into their core strategy but are less targeted on companies dedicated to addressing climate change.
The three smart beta indexes also have use a different benchmark than the FTSE Environmental Opportunities and FTSE Technology 100 indexes. Their performances are compared to the FTSE All-World Index, which includes only large and mid-cap stocks, and their performances relative to those indexes is small, ranging from a 1.9 percentage point deficit for the FTSE All World ex CW Climate Balanced Factor Index for one year to a three percentage point outperformance for the FTSE All-World ex Climate Index over five years. Still, over most periods, however, even those indexes outperformed their benchmarks.
“Our experience is not pure and ethnical but as a large fiduciary trying to look long term,” says Tony Campos, director, ESG Product Management at FTSE Russell. “It doesn’t take much past the Paris Climate Change agreement to figure out the risk of owning a huge portfolio of companies with fossil fuels in the ground that won’t see the light of day.”
Coal companies especially are under pressure given the growing consensus that coal is a dirty fuel and the divestments by such large investors as CalPERS and CalSTRS, the pension funds of the California Public Employees and State Teachers Retirement Systems, which together have almost $480 billion in assets.
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