Many of us have grown increasingly concerned about the changing climate and its effect on our personal investments. Fossil fuels are a major contributor to the climate crisis and we feel strongly about protecting the environment. Fossil fuel-free funds are really important to us here at District Capital.
You may be asking why would I want to go fossil fuel-free with my 401(k) and IRA? Will I make more or less money if I do it? And how can I go about creating a fossil-fuel-free investment portfolio? We answer these common questions about fossil-fuel-free funds below.
What are fossil fuel free funds?
Fossil fuel-free funds are investments that exclude companies that produce, transport, and refine fossil fuels. By investing in fossil fuel-free funds, you can feel good knowing that you are doing your part to slow down climate change. If you are looking to make a greener choice with your money, then fossil fuel-free funds are a great way to start.
Why would you want to go fossil fuel free?
1. To help the environment
There are very obvious signs of climate change happening around the world. If you believe that our planet is worth protecting, and you want to personally do something to help with this climate crisis, then fossil fuel free funds are one way that you can help. Divesting from fossil fuel companies is a long-term commitment towards a more sustainable and resilient economy. You can choose to make a positive impact on society and the environment with your investments. It is how you can vote with your capital, make a difference, and not sacrifice your returns.
We have found that many of our clients who want to go fossil fuel-free desire to eliminate coal, oil, and gas companies from their portfolio completely. However, not all fossil fuel-free funds are created equal. It’s important that you review the prospectus. This is a legal document that provides details about the fund’s objectives, investment strategies, risks, and performance. This will help you understand if the company is truly fossil fuel-free or if they are just using it as a marketing tactic. Moving your funds to a fossil fuel-free investment fund means that you can ensure that your savings aren’t contributing to the climate crisis.
2. For Financial Reasons
The second reason why you may want to make fossil fuel-free investments is financial. Research has shown that changing your investments to fossil fuel-free funds doesn’t lower your investment results. In fact, If you’ve successfully avoided oil, gas, and coal companies for the past couple of years, then you probably would have been better off financially speaking. For example, an S&P 500 fossil-fuel-free ETF actually outperformed the General S&P 500 ETF for the past few years (data as of April 29, 2020).
When you look at your 401(k), IRA, or brokerage account portfolios, they are probably not going to be fossil fuel-free. The popular US stock market index fund actually holds $65 billion in oil, gas, and coal companies. That’s close to around 8% of the fund. So why do people hesitate if protecting the environment and addressing the climate crisis is important for them? The main reason probably is, individual investors don’t really know that it’s even possible and they don’t know about it.
So, will we actually make less money or can we make more money if we change to fossil fuel-free investments?
A study done by the Harvard Business School and the London Business School has shown that companies with higher sustainability scores actually perform better. Now, if you just look at the actual returns for the past 10 years, the S&P energy sector gained a measly 1% for the past decade, compared to the broad S&P 500 index, which gained more than 200%. So, it looks like there actually might be a financial advantage in going fossil fuel-free.
What is fossil fuel divestment?
Divestment is the opposite of investment. It means getting rid of stocks or investment funds that are unethical. Fossil fuel companies are responsible for a lot of climate change. Research has shown that fossil fuel divestment has a negative impact on fossil fuel companies. This will hopefully push them to look at cleaner and more sustainable practices in the future.
How to get started and find fossil fuel-free funds
1. Research:
The first thing you may want to do is find out how much exposure you actually have to fossil fuels. Go to https://fossilfreefunds.org/. Type in the name of one of the funds in your 401(k) or the ticker symbol. It will then show you how much oil, gas, and oil companies that particular fund that you own contains.
The website awards 5 fossil-free ‘badges’. They are:
- Free of the Filthy 15
- Free of the Carbon Underground 200
- Free of all Coal Industry
- Free of all Oil/Gas Industry
- Free of Fossil-Fired utilities.
The more popular sustainable funds are Parnassus, Pax, and Calvert. They were early in the field of sustainable investing. More recently, the mainstream financial institutions have also produced a lower-cost ETF that would either do sustainable investing or fossil fuel-free investing.
2. Divest and reinvest:
If you find any fossil funds in your portfolio then you may want to make a plan for divestment and reinvestment. You may be able to seek fossil fuel-free alternatives of the funds that you already own or you may want to look elsewhere completely. It may take you some time to research the fossil-free funds that you want to invest in. This is where a financial advisor can help create a fossil fuel-free strategy for you.
For your 401(k) it might be slightly more difficult to implement this fossil-fuel-free investment strategy because you’re going to be limited by the investment options that are chosen by your company. If you feel strongly about this, then you might want to talk to your HR or your company CFO and tell them why you think it should be an option.
If you have some savings in your IRA or brokerage accounts then it’s going to be much easier to implement this because you can buy any ETF or mutual fund out there that you think is the best in terms of implementing a fossil-fuel-free investment strategy.
What are fossil fuel free indexes?
Due to the increasing popularity of fossil fuel free investing, you can now find indices that advertise as fossil fuel free. S&P, MSCI, and BMO now have fossil fuel free indices, and typically exclude companies that own oil, gas and/or coal reserves. This makes it easier for ETF or mutual fund companies to create a fossil fuel free ETF or mutual fund.
A word of caution
In 2021, Bloomberg released a scathing article on ESG investing. (ESG stands for environment, social and governance). Apparently, MSCI (who publishes a popular ESG index) questionably upgraded the ESG rating of several companies like McDonald’s (emits carbon emissions as much as Portugal) and JP Morgan (biggest funder of fossil fuel projects).
So make sure you read the fine print before investing in a fossil fuel free ETF or mutual fund. Understand how they are including or excluding companies.
Align your investments with your personal values
There are many compelling reasons to invest in fossil-fuel-free funds. It’s never too early or too late to start investing based on your own principles. We believe climate change is an important topic and it’s something that we love to speak to our clients about. We can help you create a portfolio of investments that align with your values. If you have any questions about fossil fuel-free divestment, feel free to schedule a complimentary discovery call today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.
