Dumping Oil And Gas Stocks Improves Investment Returns: New Report

Investments in oil, gas and coal underperformed the broader stock market over the last 10 years, while portfolios that avoided investments in fossil fuels altogether saw superior returns, a new report from an independent economics non-profit has revealed.

Looking at a range of major stock market indices, researchers at the Institute for Energy Economics and Financial Analysis (IEEFA) in Ohio found that, across the board, an investment of $10,000 saw both markedly weaker growth and higher risk in passive funds that included fossil fuels, over five- and 10-year periods.

Even taking into account an energy crisis and surge in prices following the Russian invasion of Ukraine, the researchers discovered that dropping oil, gas and coal stocks from portfolios proved a winning investment strategy in the medium and long term.

The findings, released Thursday, pour cold water on the conventional idea that fossil fuel stocks offer a safe bet, IEEFA research associate Connor Chung tells me.

“There was an age when fossil fuels underpinned much of broader market performance,” Chung says. “This era continues to shape a lot of investors’ worldviews, even as markets these days tell a drastically different story.”

“Fiduciaries need a wake-up call,” he continues. “Climate risk is financial risk, and few sectors illustrate this better than fossil fuels. A goal of this report is to help investors understand just how far the traditional energy sector has fallen.”

Recent decades have seen a rapid decline in fortunes for the fossil fuel sector, which in 1980 comprised some 30% of the weight of the S&P 500, but now stands at just 3.9%. Despite this, the under-performance of the sector continues to act as a significant drag on equity markets, the researchers found, noting that the energy sector trailed the performance of the S&P 500 in eight of the 10 years between 2012 and 2021, and placed dead last in five of those years.

The report notes that much of the optimism pinned on fossil fuels in recent years has been attached not to their stability, but to their volatility, depending on unpredictable crises and bad actors to deliver shocks to the system. With competition from less volatile and cheaper renewable energy sources growing rapidly, hydrocarbon producers may find it increasingly difficult to offer managed shareholder value.

Furthermore, the authors warn, a growing assortment of material risks—from physical risk in the form of increased flooding, to legal risk from the rising tide of climate litigation worldwide—make the long-term prospects for oil, coal and gas investments look ever more bleak.

Conventional investment theses, then, are being upended.

“The era of stable, blue-chip returns from the fossil fuel sector is long gone,” says IEEFA researcher Dan Cohn, a co-author of the report. “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.”

While acknowledging that “past results are no guarantee of future outcomes”, the IEEFA sounds a further warning to investors still weighing the pros and cons of oil, gas and coal.

“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,” Chung says. “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.”