There’s a piece of investing wisdom that fossil fuel stocks are important for a competitive portfolio. In a recent post, we pushed on it with a study that found renewable energy stocks far outperformed fossil fuel stocks from January 2010 – January 2020.
What happens if we look farther back?
Perhaps 2010 – 2020 was an anomalous period.
Fossil fuel stocks represented as much as 29% of the value of the S&P 500 in 1980. Fossil fuels powered the growth of the American economy in the 20th century. Surely in other periods this wisdom must have been correct.
Jeremy Grantham, the founder of asset management firm, GMO, looked at this question with his colleagues. (Jeremy Grantham is famous for predicting bubbles, having done so with tech stocks in the 90s and the subprime crisis in 2007).
One trend that Jeremy and his colleagues are tracking closely is around climate change. They argue that our global economy will be severely disrupted by it.
As a part of their detailed article (The Race of our Lives Revisited), they ran an analysis looking back at how the S&P 500 would have performed if you had divested or cut out various sectors.
Check out the results.
The first thing that Jeremy points out in the paper is a pretty astounding testament to compound interest. $1 dollar invested in 1925 would have become $22,911 by 2017 (not allowing for inflation and taxes). Wow.
More relevant to our question, is what happened when you cut out the energy stocks. In all three of the date ranges, removing oil stocks did not have a significant impact.
- From 1925 to 2017 the ex-energy, fossil-fuel-free portfolio would have delivered a return that underperformed the S&P 500 by just 0.05% per year.
- From 1957 to 2017, it would have underperformed by 0.07% per year.
- And from 1989 to 2017, a fossil-fuel-free portfolio would have actually outperformed the market by 0.03%.
So if you’re a long term investor who is looking to give up fossil fuel stocks, history indicates you’re not missing out on much. In fact, over the past 31 years, you would have been better off without them.
It would be interesting to see an update of this data since it was captured on 09/30/17. The energy sector has not done well, having fallen 51.74% as of 10/21/20.
Will this conventional “wisdom” about fossil fuel stocks ever come true?
Who knows. But if history can be our guide, the answer seems to clearly be: no.
About Carbon Collective
We built Carbon Collective because we couldn’t find anywhere to invest our retirement savings that made both ethical and financial sense in the age of climate change.
So we built the world’s first climate-friendly, diversified investment portfolios and teamed up with a world-class online brokerage platform to automatically manage them.
Imagine an index fund for a world without fossil fuels. That’s how we build our portfolios. We replace the high-carbon parts of the stock market (fossil fuels, dirty utilities, airlines, etc.) with the companies building solutions to climate change (renewable energy, circular economy, energy efficiency, etc.).
Check out our historical performance, carbon footprint, and fees compared to some common standard and ethical portfolios.