Difficult to get an investment portfolio without fossil fuels


FILE – This April 2, 2010 file photo shows a Tesoro Corp. refinery, including a gas torch as part of normal plant operations, in Anacortes, Washington. In the 2016 election, voters in Washington state rejected an initiative that would have imposed carbon emissions from fossil fuels such as coal and gasoline. (AP Photo / Ted S. Warren, file)


The Intergovernmental Panel on Climate Change, a United Nations body, released its latest findings last month after reviewing around 14,000 scientific papers assessing climate science from many angles.

The IPCC assessment represents the broadest view to date that the Earth is warming and that human activity is accelerating change in atmospheric and climatic conditions. Being a product of the United Nations, the report had to be endorsed, in its entirety, by nearly 200 national government agencies. At the national level, there is a consensus on global warming and its contribution to climate change.

One of the main drivers of human contribution is the extraction and combustion of fossil fuels. This conclusion is not new, but it is increasingly entering the considerations of investors. Long before this latest report, there was a growing tendency for investors to want to reduce or eliminate their investments in fossil fuel companies. This trend has accelerated recently and seems likely to accelerate.

While investors may wish to pursue a fossil fuel-free investment strategy, this is a difficult endeavor. There’s a reason why many institutional investors (primarily endowments and foundations) who have led the way in disengaging from fossil fuels have chosen to do so over several years. There aren’t many elegant ways to quickly and completely remove investments in oil, coal, and gas companies from your portfolio.

If you own a US stock index fund, such as a replica of the S&P 500, the energy sector now accounts for about 2.4% of your investment. This percentage has dropped considerably. During the 2007-2009 financial crisis, energy stocks represented about 12% of the S&P 500.

There are exchange-traded funds (ETFs) and mutual funds that avoid holdings in fossil fuels, but eliminating Exxon, Chevron and the other 20 publicly traded stocks from the energy sector wouldn’t completely eliminate the energy sector. exposure to fossil fuels in your investment strategy.

Many utilities also have reserves of fossil fuels, expecting to use them as energy sources for years to come. Airlines are another carbon-intensive industry that isn’t expected to change anytime soon. Less intuitively, the financial services sector plays an important role in the extraction and production of fossil fuels. Most of the companies that do this work depend on bank loans to finance their projects. JP Morgan Chase, Citigroup, and Bank of America have been the top three lenders to the fossil fuel industry, collectively lending more than $ 140 billion in 2020. If you’re looking for a banking alternative, GreenAmerica.org has a feature to research to identify green banks and credit unions. that meet certain criteria for not funding fossil fuel projects.

Many investment funds have got their start in recent years with sustainability or low carbon in their name or investment mandate. However, the definition of sustainability or low carbon tends to differ considerably. Investment fund managers and rating agencies that provide ratings related to sustainability and low carbon impact do not use uniform criteria. As Morningstar’s Jon Hale noted in an April 2020 article, of the 303 investment funds identified as having a sustainability mandate in their prospectus, only 16 had no involvement in fossil fuels in their portfolios. .

Morningstar publishes sustainability and low carbon impact ratings for most mutual funds and ETFs. On Morningstar.com, type the ticker or name of a fund in the search bar. On each fund page there is a portfolio tab including these notes.

Another useful resource for seeing how much exposure to fossil fuels you may have in your existing investments is fossilfreefunds.org. The site analyzes mutual funds and ETFs for several types of fossil fuel involvement.

Even if you consider the fossil fuel industry to be on the verge of extinction, that doesn’t mean your returns on your investment are certain to improve just by avoiding investing in this area. In fact, in the one-year period ending September 1, the performance of the US energy sector outperformed the S&P 500 by 41.8% to 30.1%. This mainly represented a rebound from severe oil declines at the start of the COVID era. The energy sector may never return to its peak stock price starting in June 2014. Fluctuating oil prices, consumption patterns and global economic activity will all contribute to returns on investments in the energy sector. ‘energy. Oil companies are going (and have already to some extent) started to migrate part of their activities towards renewable energies. Exxon, Chevron and their peers are likely to evolve rather than disappear.

If you’d rather not support their growth with your investment dollars, there are ways to revise your investments, but it will take some diligence. This research can help you clarify the extent to which you want to express your personal values ​​in your investment decisions.

Gary Brooks is a Chartered Financial Planner and the Chairman of BHJ Wealth Advisors, a registered investment advisor in Gig Harbor.

This story was originally published September 9, 2021 5:00 a.m.

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