Over the last decade, we have seen significant development and interest in fossil fuel divestment. According to data published by 350,1 a global environmental nongovernmental organization, the number of institutional investors and AUM committed to fossil fuel divestment has risen dramatically over that last several years (Figure 1). Within this group of investors, more than 80% are mission-driven institutions such as faith-based entities, as well as large insurance companies and pension plans.
Figure 1: Current Decade Sees Significant Increase in Commitment to Fossil Fuel Divestments
Institutional Investors Committed
Global Assets Committed
Overview of ex Fossil Fuels Index Strategies
One common and simple way an institutional investor can address climate change is to invest in a fossil fuel free index strategy that either fully or partially divests from companies that are involved in the extraction, refining and/or ownership of fossil fuels. Depending on the strategy or index, companies associated with fossil fuel extraction can be identified via revenues or reserves using various thresholds.
Within State Street Global Advisors, we offer three fossil fuel free index strategies that use fossil fuel reserves as the primary way to identify companies to divest from. Each strategy is conveniently linked to several marquee equity indexes, making them an easy replacement for non-climate-aware strategies.
Our three offerings are as follows:
The MSCI World ex USA ex Fossil Fuels Index Strategy
The MSCI Emerging Markets ex Fossil Fuels Index Strategy
The S&P 500 Fossil Fuel Free Index Strategy
Strategy and Index Details
The primary objective of these strategies is to minimize or eliminate exposure to fossil fuels, while still maintaining exposure to a broad market capitalization weighted index. To accomplish this, each strategy begins with a broad index universe (e.g., the MSCI World ex USA Index, the MSCI Emerging Markets Index and the S&P 500 Index) and then divests from companies that have fossil fuel reserves using a screening methodology provided by the respective index provider.
In the case of MSCI, their screening framework is built by MSCI ESG Research and identifies companies with fossil fuel reserves using MSCI’s ESG climate change metrics. Similarly, S&P Global obtains fossil fuel reserves data from Trucost, which generates data by reviewing publicly available company reports and disclosures.
MSCI’s Global Fossil Fuels Exclusion Indexes series uses proprietary screening factors to identify companies that have evidence of owning fossil fuel reserves, regardless of their industry. This includes companies providing the exact volume of reserves, as well as companies that provide general statements around reserves. Companies identified as having coal reserves with a 50% or above probability level of commercial extraction and oil or natural gas reserves with a 90% or above probability level of commercial extraction used for energy purposes are excluded from the starting market capitalization weighted index universe. The remaining holdings are then reweighted according to their market capitalization weight.
Comparably, S&P uses Trucost data, which applies a threshold for companies with a 50% or higher probability of commercial extraction for coal, as well as oil and gas reserves. The companies identified are then excluded from the starting market capitalization weighted index universe. The remaining holdings are then reweighted according to their market capitalization weight similar to the MSCI suite.
Similar to our conventional index funds, the fossil fuel free strategies rebalance when there are meaningful changes to the underlying indexes that make up the starting universe. Rebalance activities specific to each fund and index are as follows:
MSCI ex Fossil Fuels Indexes and exclusions are reviewed on a quarterly basis to coincide with the semiannual and quarterly reviews of the MSCI Global Investable Market Indexes. Changes are implemented as of the close of the last business day of February, May, August and November.
S&P Fossil Fuel Free Index portfolios are rebalanced quarterly after the close of business on the third Friday of March, June, September and December. Index changes, including additions and deletions, are applied quarterly as part of the standard rebalancing process, although ad hoc constituent changes due to corporate actions such as spin-offs and mergers and acquisitions can be implemented outside of quarterly share rebalances if certain criteria are met and approved by the index committee.
Facts and Takeaway
Climate change is arguably one of the most challenging threats of our time, impacting not only how we live but also how we invest. This has been a call to action for some investors. As noted, many institutions are implementing systemic solutions such as fossil fuel free strategies to address climate change, as these solutions are a simple way to effectively minimize or eliminate exposure to fossil fuels within their portfolios.
For additional information, please contact a State Street Global Advisors Account Representative.
About State Street Global Advisors
For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost-effective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s third-largest asset manager with US $3.05 trillion* under our care.
*This figure is presented as of June 30, 2020 and includes approximately $69.52 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For use in EMEA: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.