Thomson Reuters and Future Super have launched two indexes that exclude the financial services giants, as well as miners and other companies with more direct stakes in fossil-fuel industries.

The big four – Commonwealth, Westpac, NAB and ANZ – are excluded because they lend to the fossil-fuel industry. QBE Insurance is also excluded as it is a major underwriter to the fossil-fuel industry.

The exclusions are partly based on a  database kept by Thomson Reuters, as well as from Thomson Reuters corporate responsibility ratings; company annual reports, sustainability reports, public statements and other sources.

A paper authored by Simon Sheikh, the former national director of GetUp! and former Greens candidate and now the managing director of Future Super, a fossil-free super fund, underlines the financial risks associated with investing in fossil fuel industries.

Outperforming as demand grows

Using almost five years of back testing, the new "Thomson Reuters – Future Super Australia Fossil Free Index" has produced an average annual return of 9.65 per cent.

The Thomson Reuters Australia Index, which tracks the broader Australian sharemarket, returned 7.71 per cent.

The higher return for the new index was also achieved with lower risk.

The paper's authors say that: "As the global transition away from dirty energy sources picks up steam, we are beginning to see the financial case for the immediate screening out of fossil fuels."

Sheikh said he expects to see demand for fossil fuel-free investing to increase in the next 12 months.

A "consistent stream of research" is now highlighting recent poor performance of fossil-fuel exposed companies, he says.

There are a couple of small, specialist, ethical super funds. While most of the large super funds offer socially responsible investment options they tend to have only very light screens.

Often, the list of top 10 companies held in the option is very nearly, if not, the same as those held in their mainstream offerings.

Gathering pace

Momentum for divestment of fossil fuels appears to be gathering pace. A couple of larger superannuation funds are taking a more strident stance on fossil fuels across all of their investment options, not just their specialist socially responsible options.

Local Government Super excludes companies with a material exposure to "high carbon-sensitive" activities as well as coal-fired electricity generators.

HESTA, the industry fund covering health and community services sectors, restricts new investments in thermal coal right across its investment options.

UniSuper, which covers workers in the higher education and research sectors, has started excluding companies involved in fossil fuels from its sustainable investment options.

The ACT government has said it will start to divest from companies with fossil-fuel risks.

Australian National University's decision last year to divest from some fossil-fuel companies provoked strong criticism from the federal government, some of the fossil-fuel companies excluded and sections of the business media.

ANU's decision to divest from oil and gas player Santos came in for particularly strong criticism. But when ANU sold its Santos shares they were worth more than $12. They are now trading for a little more than $5.

Financial risk

Recognition appears to be increasing that climate change is a financial risk to members of superannuation funds that must be managed.

Trustees of super funds have a responsibility to maximise the financial returns for their members.

Sheikh points to a recent report by The Economist Intelligence Unit: "The cost of inaction: recognising the value at risk from climate change" for a well-argued basis for action on the risk of climate change.

The report found each additional degree of warming could cause trillions of dollars to be stripped from the value of global asset manager portfolios over the coming decades.

The report also found that if global warming can be kept under 2 degrees, the average projected losses would be cut in half. However, keeping global warming under 2 degrees requires fossil-fuel assets to become "stranded assets".

A substantial portion of known coal, oil and gas reserves would probably remain unburned if climate change is to be limited – a scenario not now priced into valuations of these assets, the report says.

Future Super has already attracted about $80 million and 3000 members in the year since the fund was launched.

Sheikh said he will launch a fund for "non-super money in a couple of weeks" that will invest in line with the second index launched on Tuesday– the Thomson Reuters/Future Super Australia Sustainable Leaders Index.

@jcollett_money