Invest Like a Climate Activist

Summary: Fossil Fuels Out of Investments

Description

There is power in the ways we use our money and without much effort we can align our investments to further our goals. Investing is about our vision of the future and how we can shape that future by which companies we choose to support. In a sense we are using our money to vote for our beliefs. Our money can maintain coal and oil or it could promote wind and solar power, it's our choice. But not only do our investments affect the future, the reverse is also true, the nature of our common future determines which investments will ultimately be the most financially rewarding. If the long-term future is going to be kinder to renewable energy than it is to fossil fuels, then it is likely investing in renewables will provide greater yields.

Many of us would like to divest ourselves from fossil fuels and other investments antithetical to a healthy climate. Others may wish to direct their investments toward companies that are directly furthering a cleaner future. And some may believe the future will be green and that there are opportunities to expand one’s wealth by betting on that future. Below are some steps you can take to have your investments better  reflect your particular vision, circumstances and goals.  

Disclaimer: (Community) and MassEnergize are not investment advisers nor do we provide financial planning, legal, or tax advice. Nothing in our communications or materials shall constitute or be construed as investment advice or investment recommendations.

Deep Dive

What is ESG (Environmental, Social, and Governance) investing?

A system to measure investment in three categories: Environmental, Social, and Governance. ESG is also referred to as socially responsible (SR) investing, sustainable investing, or impact investing. 

An investment company that adopts this approach will offer funds that weigh more than financial gain as a selection criteria. Some investors now believe that ESG criteria have a practical purpose beyond any ethical concerns. The more critical attention paid to company practices and policies can alert fund managers to certain risk factors such as the financial fallout from BP's 2010 oil spill and Volkswagen's emissions scandal.  A thorough explanation can be found at ESG for beginners.

Be aware that many ESG funds include fossil fuel companies because they believe their governance to be good or their environmental problems are less bad than others in the industry. You can look at the S&P ESG  ratings to see how this works. For instance, the two largest EV makers have lower scores than all the large oil companies.  It is worth looking at what companies are actually in the ESG fund to avoid greenwashing.

What are ETF (Exchange-Traded Fund)?

A basket of several to dozens of stocks, similar to a mutual fund  with more flexibility in trading. These are often themed or linked to various indices allowing you to invest in a whole sector.

What is a Green Bond?

A type of sustainable fixed income investment that provides funds for climate and environmental projects undertaken by governments, utilities, or others. You get paid interest during the life of the bond and get your original investment returned at the end. You can also buy ETFs that invest in green bonds such as BGRN

What Tools are available to help evaluate funds?

There are on-line tools that one can use to evaluate funds such as fossilfreefunds.org that will give a fund a score to inform choices. Counterintuitively, these tools often give poor scores to funds that contain solar, wind, battery or electric vehicle stocks. This is because the tool is negatively scoring the carbon footprints of the mining, manufacture and transportation of the product and not factoring in its ultimate effect on climate change. Another complication is that utilities that use clean energy often also have a component of non-renewable energy, which can give them a low score or omit them entirely from a fund. Nuclear energy can also be a bête noire and is excluded from many funds. Besides a score, the tool also provides a ranking in five different categories for each fund (e.g. utilities).  You can decide how much weight to give to the funds holdings in each category.

They also have a Fossil Free Action Toolkit that can guide your choices.

There are a few companies that specialize in green funds including Green Century and Trillium Investments

Like all financial investments, sustainable investments come with risks and are not guaranteed as bank accounts are (to the limits of FDIC provisions). It is important to research climate-friendly investing options (read each prospectus, weigh the risks, evaluate fees) before investing. Any decisions to buy or sell funds or individual stocks are yours alone to make while considering your own circumstances. You should talk to a qualified  investment advisor before making decisions. It should be noted that performance is affected by many factors (interest rates, management quality, funding and credit resources, government policies, key person risk, pandemics, wars, etc.) and even companies/funds that appear to be on the right side of climate investment can do poorly for reasons totally unrelated to their investment thesis.

Steps to Take

Step 1. Divest from fossil fuels.

Straightforward enough if you own an oil stock, but what if you own index funds or ETFs with dozens or  hundreds of stocks. How do you find what stocks are in them and how do you purge the ones you don’t want? For instance the Standard and Poors 500 index SPY includes Exxon-Mobile, Chevron, ConocoPhillips and 12 other companies with fossil fuel reserves. 

A simple web search should  show you your fund’s portfolio or you can look it up on the Morningstar site. Next, you can search for a fossil-free alternative fund. In our example SPYX has all the Standard and Poors 500  stocks minus the 15 fossil fuel companies.

There are also broad index funds that are explicitly designed to be carbon free such as CRBN, NZAC and ETHO. Funds may also use other criteria, such as eliminating companies with large carbon footprints or only including those that follow ESG principles (see the Deep Dive below).

Step 2. Buy Green Sector Funds or Bonds

There can be more to climate investing than simply the divestment of problematic holdings. Technologies and companies that will promote a greener future can be invested in as well. There are many funds that reflect a green technology, industry or theme that will contain dozens of stocks. These allow for targeted investments such as solar, wind, or North American renewables. Because they contain multiple  stocks the risks (and gains) average out and they can be a lower risk investment than individual stocks.  Dozens of these funds can be found by a simple search, some examples being TAN (solar), FAN (wind), NLR (nuclear),  ICLN (renewable), ETEC (clean technologies)