27 September 2023

Sustainable release: How not to invest in planet-killing companies

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Alicia Adamczyk* says increasing numbers of investors consider it a moral imperative not to invest in companies that are actively contributing to climate change.

Photo: Zbynek Burival

Unless humans transform the economy in such a way that has “no documented historic precedent”, the earth will experience “worsening food shortages and wildfires, and a mass die-off of coral reefs as soon as 2040,” according to a report published last week by the United Nation’s Intergovernmental Panel on Climate Change.

And with many governments hostile to climate change initiatives, individuals are wondering what they can possibly do to help the planet.

To be clear: changing the course of our planet’s climate is not something that can be done on an individual level — governments across the world along with energy, agriculture and manufacturing companies need to make the biggest changes.

But some investors may consider it a moral imperative not to invest in companies that are actively spurring climate change.

If you want to move your investments towards companies at least trying to do the right thing, then you can try sustainable investing.

To summarise, Socially Responsible Investing (SRI) is, according to Morningstar, a movement comprising people who want to invest only in companies that meet a set of standards in regards to “lowering their carbon footprint, improving energy and natural-resource use efficiency, treating their workers well, protecting their customers’ privacy, making safe and useful products, respecting the communities in which they operate, and governing themselves ethically”.

Environmental sustainability and clean energy are big components of the movement.

Divesting is a way to hold companies accountable, in theory, and to live out your values.

If it’s at the centre of a movement, it can start a conversation about important issues (see any divestment campaign on a university campus).

But individuals divesting from a certain company won’t hurt its bottom line or affect the stock price.

On a broader level, here’s how that works, explained by Vox’s Matthew Yglesias back in 2014: “When a non-profit endowment sells shares in ExxonMobil, ExxonMobil isn’t involved in the transaction at all.”

“The shares are sold to some third-party investor who does want to own ExxonMobil shares and the company continues onward as if nothing has happened at all.”

This applies to individual shareholders as well.

Further, Yglesias writes: “Corporate executives don’t care who owns their stock, but they very much do care about share prices.”

“When investor sentiment turns against a given sector and everyone starts selling their stock, prices decline and executives worry.”

“Divestment imitates this process but doesn’t really achieve the same thing.”

“As long as other funds and money managers aren’t divesting, all that happens is that a momentary opportunity exists to pick up shares at a bargain price.”

“Now if an enormous supermajority of investors all decided to divest, that really could push prices down.”

“But long before you reached that level of social consensus you would have the political clout necessary to accomplish whatever it is you wanted.”

So, now that we’re clear on that, if you want to invest sustainably — an admirable goal — there are ways to do so.

Fossil-free ETFs

There’s no single fund that’s going to be full of amazing, 100 per cent environmentally friendly companies, because those just don’t exist, and if they did they likely wouldn’t be available to the average retail investor (that’s you).

But there are a few dozen fossil-free mutual funds and exchange traded funds (ETFs) out there that have launched in recent years as investor appetite has grown.

You can use Fossil Free Funds, an online tool, which uses Morningstar data along with the Carbon Underground 200, a list of the world’s biggest oil, gas and coal companies, to produce reports on stocks and funds.

You type in a fund, and it will detail what portion of the fund’s assets coincide with the Carbon Underground 200.

The lower the overlap, in this case, the better.

One thing to keep in mind: “Even ETFs marketed specifically for their avoidance of companies involved in fossil-fuel–related activities, such as the SPDR S&P 500 Fossil Fuel Reserves Free ETF [SPYX], still hold companies in oil, coal and natural gas,” reports ETF.com.

“SPYX, for example, holds 5.72 per cent of its portfolio in oilfield services firms and coal-fired utilities.”

That happens for a number of reasons, but, as ETF.com explains, one is that big oil and gas companies have made moves into green energy spaces: “Oil producers like Chevron, Royal Dutch Shell and BP have invested billions into corn-based ethanol biofuels and hydrogen fuel cells.”

“Utilities like NextEra Energy are transitioning from coal- and natural-gas-fired plants to solar and wind to constrain costs.”

“Oil giant Exxon Mobil even makes lubricants for wind turbines.”

And pure renewable energy companies aren’t large enough to be in “many broad-based ESG ETFs, which are large cap funds specifically designed to provide marketlike exposure.”

You’re more likely to find them in small cap funds.

Remember that these funds are actively managed and tend to have higher fees associated with them than your standard low-cost index fund.

Of course, investing in line with your morals is worth the cost of admission for many people.

* Alicia Adamczyk writes about money for Life Hacker. She tweets at @AliciaAdamczyk. Her website is tinyletter.com/moneymoves.

This article first appeared at www.lifehacker.com.au.

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