Robert Schwarz, MBA, MS
Although much has been written lately in the responsible investing (RI) space about divestment from fossil fuels, very little of the content identifies actual market-based capital re-allocation choices for investors who want to adopt a fossil-fuel-free (FFF) investing strategy. Investors may be armed with a basic understanding of the issues, but they lack the full capacity to act and thus are potentially left thinking, OK, now what?
In the interim between any further thought or research and subsequent action, the need to meet one’s obligations and address everyday concerns crowds out even the best of intentions. These largely unavoidable time constraints keep investors from prudently managing their portfolio to the degree they’d likely prefer. This inertia may be manifested in inefficiencies such as volatility, uncompensated risk, and losses. More generally, but no less significantly, this inaction unintentionally signals agreement with business-as-usual practices, thus potentially contributing to the perpetuation of bad corporate behavior.
Insofar as this scenario applies to fossil fuel divestment, the basic argument currently in favor runs as follows. The Carbon Tracker Initiative (CTI) has demonstrated that burning all of the world’s fossil fuel reserves will cause unprecedented changes to Earth’s climate, which will result in what has been coined rolling collapses, that is, “cascades of events, especially food and water stress, that overload the coping abilities of societies at a regional level, triggering wide-spread failure.” Specific examples of such environmental, social, and economic consequences in the United States are described in the recently released Risky Business Report. CTI has also concluded that fossil fuel companies have plotted a course of significant value- (if not self-) destruction by allocating trillions of U.S. dollars to CAPEX for projects that are virtually certain to result in stranded assets and negative return on investment.
Despite the well-supported analysis provided by CTI, fossil fuel companies maintain that their investments in high-risk extraction projects are justified based on future global demand and scientific uncertainty regarding the likelihood and severity of the effects of climate change. The sector’s position on these issues is exemplified by documents issued by Shell and ExxonMobil. The mindset embedded in these reports has led many investors to conclude that engagement is not a viable strategy in seeking to convince fossil fuel executives to re-orient their business strategies toward scaling back oil and gas exploration in favor of a global transition to renewable sources of energy.
This poor outlook for continued long-term gains from investments in fossil fuel companies, combined with the negative environmental and social externalities the industry is infamous for causing, has contributed to much debate about the pros and cons of divestment. Included in the debate is how best to ensure that one’s portfolio continues to perform well after divesting. While the former matter is beyond the scope of this article, the crux of it lies in the latter. That is, just because one has decided to divest from fossil fuels, it does not mean one is ready or willing to sacrifice returns. Although some studies demonstrate that an FFF portfolio will perform just as well as a portfolio that includes investments in fossil fuel companies, there is no universal consensus on these findings. Furthermore, and understandably, the studies do not offer any FFF investment options beyond those offered by the firms that sponsored them.
Further tension between divesting from fossil fuels and maintaining portfolio performance arises when one considers that, taken to its logical conclusion, FFF investing would exclude virtually all companies from one’s potential investment universe. After all, fossil fuels still supply the energy that runs corporate America as well as virtually every material aspect of American life. Given this reality, a taint of hypocrisy is part of living on the grid post-divestment of one’s fossil fuel holdings. Yet, there are income, retirement, and savings goals to meet. Perhaps even more fundamentally, investors are anchored to capital appreciation levels consistent with investments in fossil fuel companies. With these issues in mind, it is plain to see that fossil fuels are deeply woven into the American way of life; thus, there is no easy solution to the quandary of how to quickly disentangle oneself from reliance on them.
Despite the inconsistencies, there are grid-dwelling investors who refuse to profit directly at the expense of intergenerational equity or to support the environmental and social injustices perpetrated by fossil fuel companies. Some have even made a formal pledge in keeping with this ethical concern. In effect, until a critical mass of retail investors commits to FFF investing, such a statement, however well meaning, will not make it to the ears intended to hear it. Nevertheless, if the movement is to gain more traction and momentum, the statement must be made.
Putting pure logic aside in favor of practicality, there is still no standard definition of FFF investing. The assurances given by the mutual funds listed below, however, range from portfolios that have “no direct exposure to fossil fuels” to those that “avoid investing in companies engaged in the extraction, exploration, production, manufacturing or refining of fossil fuels.” In recognition of this uncertainty, the folks at As You Sow are engaged in an effort to work out a FFF investing standard. Another gray area in the pursuit of a FFF strategy is investing in a fund that happens to be FFF but is not explicitly so. That is to say, investors have no guarantee that the fund will remain FFF as it engages in new investments and experiences turnover.
Market-Based Mutual Funds
A variety of FFF market-based mutual funds are available to retail investors who wish to divest. Whether their intention is to: (1) re-channel capital previously invested in fossil fuels into renewables in order to support an energy transition; (2) avoid risk and to apply commonsense in keeping with the aforementioned fossil-fuel industry outlook; (3) align their values with sustainability and investing objectives; or (4) pursue any combination thereof. The following funds are advertised as explicitly FFF and are committed to this strategy. [N.B.: The author is wholly unaffiliated with and otherwise uncompensated by any of the listed firms.]
- Green Century Funds: Balanced
- Green Century Funds: Equity
- Parnassus: Endeavor
- Trillium Asset Management: Sustainable Opportunities & Fossil Fuel Free Core
- Portfolio 21: Global Equity
- Pax World Investments: Global Environmental Markets
- Horizon Investment Services: Enhanced SRI Fossil Fuel Free
- Shelton Capital Management: Shelton Green Alpha Fund
- Jantz Management: 350 and Fossil Free Portfolios
Caveat emptor: While researching to ascertain whether the list of funds are indeed FFF and committed to remaining that way, I learned that some otherwise RI-focused funds made it clear that in favor of active engagement strategies, they do not support an FFF strategy (for instance, Domini Social Investments and Calvert Investments). Similarly, among the firms I spoke to that are not so committed, attempts were invariably made to sway me from transitioning to a strictly FFF portfolio to one that favors the particular RI strategy employed by the firm, such as Best in Class or ESG Integration. So, if one’s goal is FFF, one must be sure to make that requirement clear from the outset of any personal research.
An option that enables one to retain concentrated exposure to the energy sector yet remain FFF is to invest in renewable energy mutual funds. Although these funds have not consistently beaten their benchmark, they hold the promise of delivering potentially outsized market returns over the long term, especially if tougher fossil fuel energy regulations are enacted. They also offer investors pursuing a FFF strategy the peace of mind that comes with knowing that their capital will be working toward an energy transition. For the more sophisticated FFF investor who is comfortable with taking on some additional risk, a few well-placed direct bets on renewable energy companies could also prove enriching.
Although there are a multitude of single sector and alternative asset-class options that are implicitly devoid of fossil fuel holdings and will remain FFF, for example REITs, Community Investing, and Impact Investing, water mutual funds may also hold appeal for fossil fuel divestors. Specifically, they offer the opportunity to realize competitive returns while keeping one’s values aligned with one’s investing strategy. Five such funds that have performed well historically are offered for further consideration:
- Water Asset Management
- Allianz Global Investors Global Water Fund
- Invesco PowerShares Water Resources Portfolio
- Guggenheim Investments S&P Global Water Index ETF
Responsible Investment Advisors
For those investors who have investable capital of USD two million or more and are interested in pursuing a FFF investing strategy, an appropriate first step is to consult with a wealth advisor about exposure to the industry. In the case that this party is not fully apprised of FFF market development, all of the market-based mutual fund firms listed above offer individual account services. Several independent RI advisory firms are also available for consultation, including the following:
As anyone who has been following the divestment debate can attest, the issue tends to raise participants’ animal spirits. In recognition of the irrationality so added to an already complex dilemma, I have sought to provide an overview of the facts and a variety of options for investors committed to mitigating portfolio risks associated with climate change.
Robert Schwarz, MBA, MS, is a responsible investing professional. His work involves enabling institutional investors to simultaneously meet fiduciary responsibilities and improve corporate environmental and social outcomes through the integration of environmental, social, and governance key performance indicators into investment decisions. Robert can be reached at mailto:firstname.lastname@example.org.