Gates Foundation would be $1.9bn better off if it had divested from fossil fuels

Analysis of the Bill and Melinda Gates Foundation health charity, and 13 other major funds, reveals moving investments out of coal, oil and gas and into green companies would have generated billions in higher returns

The Bill and Melinda Gates Foundation would have had $1.9bn (£1.3bn) more to spend on its lifesaving health projects if it had divested from fossil fuels and instead invested in greener companies, according to a new analysis

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The Canadian research company Corporate Knights examined the stock holdings of 14 funds, worth a combined $1tn, and calculated how they would have performed if they had dumped shares in oil, coal and gas companies three years ago.

Overall, the funds would have been $23bn better off with fossil fuel divestment. The Wellcome Trust, which is the world’s biggest health charity after the Gates Foundation, would have been $353m better off. The huge Dutch pension fund ABP would have had $9bn in higher returns, while Canada’s CPP would have had $7bn more.

“There are billions of dollars potentially being left on the table by these large funds as a result of hanging on to fossil fuel stocks and being underexposed to the $3tn [environmental] sector,” said Toby Heaps, chief executive of Corporate Knights. Separately, a fossil free index from one of the world’s largest providers of financial indexes,MSCI, has just completed its first year with returns 60% greater than its parent index.

The Gates Foundation and Wellcome Trust are widely recognised for their important work and have been the focus of a Guardian campaign asking them to divest their large endowments from fossil fuels.

Climate change poses the greatest threat to health in the 21st century, according to doctors, and to avoid catastrophic impacts, most known fossil fuel reserves must be kept in the ground. If the world’s governments keep their word and halt global warming, those reserves could become worthless, meaning there are both financial and moral arguments for divestment. Investors managing over $2.6tn of assets have already committed to divestment, including Norway’s sovereign wealth fund, the world’s largest. The Bank of England has also warned of potentially huge losses.

“The number one complaint about divestment we’ve heard from fund managers is that it would cost them too much money,” said Jamie Henn, communications director at 350.org, the climate campaign that commissioned the new research. “As it turns out, they are dead wrong. The energy industry of the 21st century is going to look nothing like the fossil fuel industry of the 20th. Institutions that don’t change with the times stand to lose big and, as this new analysis shows, they already are.” 350.org .

The Corporate Knights research examined how 14 large investment funds would have performed if they had divested from fossil fuels in October 2012. The fossil fuel firms excluded were the top 100 coal companies and top 100 oil and gas companies, ranked by the size of their reserves by Fossil Free Indices, plus utilities generating more than 30% of their power by burning coal, as ranked by South Pole Group.

In the analysis, the excluded investments were replaced by increased investments in green companies already held by the funds. Green companies were those getting more than 20% of their revenue from environmental solutions as verified by FTSE Environmental Markets or Bloomberg New Energy Finance, a pool of 1,600 companies with a combined market capitalisation of $3tn.

The analysis found the New York City Employee Retirement scheme would have been $1.6bn better off with divestment, as would Australia’s Future Fund.

“The period of analysis coincides with a tough market for oil and commodities in general,” said Heaps. “Over the next few years, many oil stocks – if not coal utilities – could jump back, but in the long term, I don’t think a lot of prudent market watchers are betting that the carbon intensive sectors are going to outperform the market in general.” A crunch UN climate summit begins in Parisin two weeks, at which governments are expected to agree a deal to significantly cut future carbon emissions.

The Bill and Melinda Gates Foundation Trust does not comment on its investment holdings and decisions. Bill Gates has called fossil fuel divestment a“false solution” and in June announced he would invest $2bn of his own fortune in innovative renewable energy projects over five years.

A spokeswoman for the Wellcome Trust said: “The Trust’s long-term investment strategy has led to a total return of over £9bn since September 2008, while returns over both 10 and 20 years up to September 2014 have averaged above 10% per year in nominal terms.” This would allow charitable spending of £1bn a year for the next five years, she said. The director of the Wellcome Trust, Jeremy Farrar, said on Sunday that the impacts of climate change on health “affect us today, never mind affecting our children or our grandchildren. This is not some abstract threat; it is immediate and it is personal.”

The MSCI fossil fuel free index replicates its broad All Country World Index (ACWI), but without 124 companies identified as having large reserves of coal, oil and gas. In its first year, to October 2015, the fossil free index produced gross returns of 6.5% compared to 4.1% for the ACWI.

The significant outperformance of the fossil free index reflected the troubled year suffered by energy companies, said Tom Kuh, head of ESG indexes for MSCI: “The challenge for investors is to figure out whether what is going on with energy is cyclical or structural.”

Kuh noted the upcoming UN climate summit, the coal industry’s troubles of the last five years and recent legal investigations in the US into ExxonMobil and said: “There seems to be more pressure coming from regulators and policymakers on fossil fuel companies because of the role fossil fuels play in climate change.”

He said demand for fossil free and low carbon indexes was growing and that the fossil fuel divestment campaign had brought the issue to prominence in the last two years. MSCI will also be providing carbon footprints for all 160,000 of its indexes in 2016. “Carbon is increasingly becoming a factor that investors are looking at in understanding risk in their portfolios,