Fossil Fuel Investments Hold Back Portfolios, New Report Finds

Fossil Fuels Investments Hold Back Portfolios, New Report Finds - Carbon Herald

Fossil fuel investments are no longer safe and hold back portfolios, a new report from the Institute for Energy Economics and Financial Analysis (IEEFA) – an independent economics non-profit, finds. The report called Passive investing in a warming world finds critical discoveries and shed new light on the fossil fuel stocks, once considered a stable investment. 

The researchers who analyzed a range of major stock market indices found that an investment of $10,000 saw both a weaker growth and a higher risk in passive funds when included fossil fuels, over five- and 10-year periods. The report also concludes that dropping oil, gas and coal stocks from portfolios is a better investment strategy both in the medium and long term.

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“Disruption and destabilization in fossil fuel commodity markets, competition from renewable energy, the electrification of transport, and growing investor consciousness of climate change’s financial risks are driving investors to re-evaluate fossil fuels’ place in the portfolio… As the economies of the past and the future collide, the fossil fuel sector is not prepared to manage the challenges of the coming decades. Investors have a responsibility to act,” said Connor Chung, IEEFA research associate and co-author of the report. 

More findings show that in 2023 the fossil fuel sector reported a 30% decline in annual profits. The energy sector also slowed down the S&P 500 performance in eight of the 10 years between 2012 and 2021. Back in 1980, the fossil fuels sector comprised 30% of the S&P 500 while currently it stands at 3.9% which points to a rapid decline in the industry’s fortune.

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Much of the optimism pinned on fossil fuels is related to past performances and notions of the sector giving blue-chip results, however, in recent years it is more associated with volatility, and being dependent on unpredictable crises and bad actors. According to the report, due to competition from less volatile and cheaper renewable energy sources growing rapidly, fossil fuel producers may find it increasingly difficult to offer managed shareholder value.

“Now, every major investment house has developed investment products with sustainable mandates. These mandates reflect the fossil fuel sector’s underperformance, its negative long-term outlook, and increasing demand for investment products with dramatically less or no fossil fuels,” commented IEEFA researcher Dan Cohn, a co-author of the report.

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