Research Brief Series
In the year just ended, the Fossil Free Indexes US (FFIUS) outperformed the S&P 500 by about 1.5%. This is a strikingly large number, when you consider that less than 10% of the market capitalization of the S&P 500 is in companies that are part of The Carbon Underground 200 (CU200) and, therefore, excluded from the FFIUS.
This outperformance illustrates the value of an investment strategy that is carbon-aware. The reason it does so is not because stranded asset risk is the primary reason for the outperformance by the FFIUS in 2014. The outperformance story is told rather in the slowing of global economic growth, the continuing dramatic increase in shale oil production in the United States and OPEC’s decision not to prop up oil prices with production cuts on the day following the US Thanksgiving holiday.
The story inside the story is the information we can glean about the extreme sensitivity of fossil fuel prices to factors affecting supply and demand. An imbalance between the quantities available to supply and the quantities demanded always requires price to adjust. The shocking information we received is that the required adjustment process involved a dramatic impact on prices.
As a result of the price drop, the current value of underground reserves has fallen dramatically.
It is important to realize that it doesn’t matter (so much) how the quantities demanded and supplied get out of balance. We can infer from this year’s price volatility that future policy moves to reduce demand for fossil fuels can induce a dramatic reduction in the value of underground reserves.
The take-away from the 2014 outperformance by the FFIUS is not that it will be expected to outperform the S&P 500 every year. It won’t. The take-away is that the potential cost of ignoring stranded asset risk has been demonstrated to be substantial.
Disclaimer: Fossil Free Indexes LLC and its third-party data providers and licensors do not guarantee the accuracy, completeness, timeliness or availability of the information contained herein. Nothing in this document shall constitute financial or investment advice, or an offer to buy or sell, or a promotion or recommendation of any security, financial instrument or product or trading strategy.