There has recently been a spark in the going clean and fossil-fuel-free or divesting from faucet fuels awareness campaigns. So much so, that it has become more of a movement. The notion centers on the impact of carbon fuel emissions on the environment and climate.
Financial advisers from all around the world are now advising and acknowledging the importance of responsible investing.
However, such is easy for the big firms with a vast portfolio, but what about the individual investor?
An individual with not as high a net worth is bound to be concerned about his investment’s return, risk, and future.
So here, we will see the impact of clean investing and the right way to do it.
Are Institutions Actually Divesting from Fossil Fuels?
While our banks, fund management companies, and other NBFIs (Non-Banking Financing Institutions) all claim to be following CSR policies and ensuring green investing, it is still their money that is stirring trouble at the back.
As shocking as it sounds, sixty of the largest banks have invested over $3.8 trillion into fossil fuels, and that was between 2016 and 2020.
Therefore, despite the efforts, coal too still gets all the funding it needs from all over the globe.
Interestingly, the knowledge about fossil fuels and their impact on the climate was observed way before the 2000s. Svante Arrhenius first acknowledged the issue and told the world about it in 1896.
Today we see rising concerns of so many individuals and organizations about using alternative energy sources and saving the planet.
Why Alternative Energy Sources?
While we may have concerns about the effectiveness of these alternative sources, there is no doubt that these are better than fossil fuels. These:
Have lower emission
Do not impact the climate or cause global warming like fossil fuels
Safe for the ozone and environment.
Have low fuel prices
Alternative Energy Sources
Here are some of the most promising alternative sources of energy that offer more benefits and have a good futuristic outlook too.
Therefore, the sooner you decide to invest at the right place, the better for your future. In fact, the better it is for our children and their children.
Where to Invest?
So now, where do we keep all the money we have taken out of fossil fuel funding?
As an individual investor, you can start with your bank account by choosing a socially responsible bank. But, whether you have a current account, savings account, or even if there are any certificates of deposit (CDs), with you knowing or not, these may be fueling the source of destruction of the planet.
Even the most renowned banks with great repute like JPMorgan, Citi, and Bank of America have been declared the worst banks for the climate. This ranking is based on banks from all over the world, all due to their financing of fossil fuel. (Banking on Climate Chaos, 2021)
Despite their claims to be moving away from coal projects due to the impacts on the climate, they still have a long way to go.
Therefore, a great alternative for you can be the community development banks and credit unions. These are solely focused on helping the community and small, medium enterprises. So unlike the corporate giants, your investment here is a lot safer – for the planet.
Some – though very few – companies have wide-ranged mutual fund categories. As per the policy, some of these funds do not have any sort of investment in a ‘dirty’ or fossil fuel company.
For instance, exchange-traded funds, community development mutual funds, and other mutual funds do not invest in fossil fuels and are tailored to help small businesses.
You can even invest in clean energy for your home. There’s, in fact, great news for those who have a PhotoVoltaic (PV) system installed at home; their property value drastically increases as compared to those who do not.
As people are learning the importance and value of solar energy, home prices are on the rise. In fact, in many areas, governments offer tax incentives for bettering your home and the community with solar power.
Therefore, if you cannot afford a home or a PV system for your home, you can join hands with your community to get solar-powered projects for the area.
Like the bank accounts, make sure to look at your credit card holding company! Even the smaller banks and those with a clean investment record offer products like credit or debit cards. Therefore, you can ditch the ‘dirty one’ and get a clean one instead; that too will get the job done for you.
Finally, your support here is most important. The faster it gets to the community level, the higher the chances the government officials will listen to the concern.
It is very important to divest, starting on an individual level. Start from home, and then take it to the institutional level.
How to Build a Clean Portfolio?
Now, let us narrow down the investment to the financial instruments or products you can purchase. Knowledge of these is important if you genuinely want a cleaner, more responsible investment.
ECLI – Etho Climate Leadership Index
This one is by Etho Capital. The company focuses on giving its customers a broad portfolio, fully divestment based that offers the same – and even better – returns as a conventional investment. Only those companies and businesses are included here whose carbon spending is 50% or less than the industry.
Further, it downsizes the company portfolio based on CSR and some subjective judgments too. Like casinos, tobacco, genetically modified crops, and ammunition companies are also excluded from the portfolio.
Global Echo (Give) ETF
‘Give’ here has a blend of bonds and stocks in companies with sound sustainability. The holdings are clean and free from carbon.
Plus, since it invests in huge corporates like Apple, FiServe, etc., it has a better sustainability ratio as compared to the others.
Another great alternative, the Balanced Fund, by the Green Century, is a blend of stocks and bonds that are all shortlisted from the CSR and fossil-fuel-free companies.
It, too, has its major shares in Apple, Google, and Cigna.
The fund steers clear of tobacco and nuclear energy. It also has an Equity Fund with major holdings in P&G, Microsoft, and Google.
Steps for Divesting
So if you wish to divest away from companies known to be investing in fossil fuel, there are certain ways to do that.
The first step is to identify all such stocks or investments that are invested either directly in funding fossil fuels or in companies who have invested in fossil fuels.
Then what you can do, depends on the kind of product you have. Like if there are stocks, you can:
Donate it to an NGO or nonprofit organization
If you have mutual funds, for instance, you can:
Reinvest them in the fossil-free investments
Make an entirely new portfolio – from scratch – and invest them there, etc.
Returns on the Fossil-Free Investment
It is quite natural to be concerned about the return on this greener mode of investment. However, the investment performance and risks of those portfolios with responsible investing are not significantly different from the other broader portfolios.
Therefore, there is no significant increase in risks or any way that your investment could be hurt by filtering out the fossil fuel funding companies, as long as your portfolio is well thought out.
Many advisers argue such portfolios even do better financially and outperform those that include carbon, coal, oil, and gas companies.
This can be proved from the fact that the global fossil-free index managed a 13% return a year since 2010 compared to the conventional index, which stayed at 13%.
As the people and governments become more aware of the harms of fossil fuels, the alternatives will gain more attention. The benefits of these outweigh the pros of fossil fuels, and further investment in this sector will also take them a level up.
The environmental impact, too, would be on a whole new level once we all join hands to support the cause. The combined effect of all the alternatives will surely bring about a positive change in the climate by minimizing carbon emissions, damage to the ozone, and global warming.
Over the last year, the US-installed 80% of new electricity, which all came from renewable sources.
Investing right can have a huge impact on your portfolio. The investment in fossil fuel may seem to be lucrative right now, but it will have a downfall over the long run. Typically, once the governments realize its impact on the environment, climate changes, etc.
The drastic steps they will take then are sure to make these carbon resources a liability instead. Even today, we have a ‘carbon bubble,’ i.e., the fossil fuel companies are overvalued by 40-60% at least.
So take a step now to secure your future investments.
Kyle is the founder of The Impact Investor, a website focused on helping others invest sustainably without sacrificing financial returns. We all want products sourced by sustainable and ethical means, why should investing be any different? Follow my investing journey on my Facebook, YouTube, or Twitter accounts.