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Institutions advised to analyse portfolios/managers for fossil exposure by Cambridge Associates

Investment consultant publishes framework to help assess divestment

Institutional investors have been advised to analyse their portfolios – at both the manager and portfolio level – for exposure to fossil fuel companies by Cambridge Associates, the leading investment consultant.
The Boston-based firm, which has helped a number of its clients analyse whether fossil fuel divestment is right for them, has put together a framework to assist institutions assess whether and how to respond to calls for divestment.
The first step in the process, it says, is to ensure appropriate governance: “At the highest level, divestment is a question of policy, and many institutions lack a governance structure or process for addressing social investments.”
The next step is to measure exposure. “We recommend that institutions analyse portfolio holdings for exposures to fossil fuel companies – both at the manager and total portfolio level – as a mechanism for determining the potential structural magnitude of divestment.” It reckons such exposures range from 5-10% of institutional portfolios. The next step is to engage stakeholders – with CA stressing that institutions considering divestment should do so on their own terms.
The comments come in a new 13-page research note entitled The Fossil Fuel Divestment Discussion document is a “framework to help navigate this important discussion within your institution” says the firm’s Chairman and CEO Sandra Urie in a foreword.
The report comes as the number of faith-based and educational institutions opting to divest from fossil fuels continues to grow, though major pension funds prefer to engage with portfolio companies on the issue.
CA goes on to say that while divestment often dominates the conversation, (re)investing in strategies that are more environmentally sustainable and support lower carbon emissions is something to be considered.

However, it warns that the current “opportunity set” of self-identified fossil-free strategies is limited in terms of both size and performance track records, so investors “should patiently evaluate alternatives”.
A key part of the decision about whether to divest is to establish a view on the future performance of companies that produce fossil fuels. A challenge to any transition is the fact that many institutions are limited in their divestment options due to their use of pooled (“commingled”) funds.
But CA highlights that alternatives to traditional natural resources have performed well recently, such as the S&P Global Water Index (13.4% annualised) and the FTSE Environmental Technologies 50 Index (6.9%).