Institutions ranging from universities to public pension funds are under increasing pressure to consider divestment from fossil fuel companies whose activities are leading contributors to climate change. While much of the attention has been focused on whether to divest, the discussion is evolving to include ways to manage a multifaceted investment challenge. The traditional belief of many investors has been that fossil fuel stocks are essential to generating portfolio returns. However, it is our contention that the sources of return that fossil fuel stocks have been relied upon to deliver can be replaced by investment in other vital resource solution providers. And when adequate consideration is given to the significant risk from carbon exposure that fossil fuel stocks pose, investment solutions can be created that are in the best interest of both institutions and our global society.
At a most basic level, investors expect fossil fuel stocks to be a significant source of returns, providing access to a number of long-term growth themes including resource scarcity, infrastructure investment and emerging market growth that are expected to drive investment returns for decades. We believe investors can access these secular drivers of growth in other ways. Energy demand will need to be met, but we believe investment in cleaner, more efficient energy solutions have better long-term prospects given the need to meet demand while reducing greenhouse gas emissions. While the demand for energy is one key example of resource scarcity, water and food are even more essential resources, and their demand is also expected to accelerate through midcentury. Most of this growth in demand across all three vital resources is being driven by population growth and changing demographics in emerging market countries as they industrialize and grow. Essential infrastructure investment to meet the increase in demand and more efficiently manage resource provisions will need to be made across water, food and energy in both the developed and emerging markets.
To date, most institutional portfolios have been underinvested in stocks providing solutions to the need for low-carbon energy, food and water. Instead of investing in fossil fuel stocks, companies providing renewable energy, energy efficiency, water and agribusiness can be viewed as replacements for the drivers of growth expected from traditional energy stocks. We believe that when the risks and rewards are fully considered, the opportunity for investment across these four areas is stronger than investment in conventional energy stocks.