Socially Responsible Investing: A Fossil Free Portfolio?

Socially responsible investors have been concerned for decades about the impact of their investments on the environment. In the past couple of years, Bill McKibbon's 350.org fossil fuel divestiture campaign has taken a strong stand in the debate about the environmental impact of energy investing. These days, sustainably minded investors need to know what this debate is about, and what considerations they should take into account when deciding about investments.

What is the debate about?

Former SEC Commissioner Bevis Longstreth explains the need to hold global temperature rise to 2 degrees Celsius above pre-industrial levels. The majority of scientists agree that the burning of fossil fuels is responsible for climate change, and a temperature rise of greater than 2 percent will result in mass catastrophes on a global scale. (Bill McKibben has an even more ambitious agenda: to reduce CO2 in the atmosphere from 400 ppm (parts per million) to 350 ppm.)

These sustainability figures mean that only about 20 percent of the world’s proven fossil fuel reserves can be consumed. This leaves 80 percent of those reserves as “stranded assets,” a term referring to assets which lose value far sooner than anticipated, due to emerging political, legislative or environmental events.

Bevis Longstreth makes a closely reasoned argument, on purely financial grounds, for divestment of fossil fuel companies from portfolios. He points out these companies might well be overvalued for the following reasons:

  • Increasing levels of government restrictions and grassroots political action are likely to leave those resources “stranded.”
  • There is a worldwide shift toward alternative energy sources, even in China.
  • Fossil fuel companies’ reputations will increasingly suffer, eventually causing their stock to drop in value.

What can investors do?

There’s no single answer to this question; while investors interested in sustainability often wish to make choices with their money that serve to spread the awareness of crucial sustainability issues, they also want to make wise financial decisions. Here are some options we encourage you to consider:

Identify risks in your portfolio

The first step is to evaluate the companies you are currently investing in. How do they integrate the future of carbon into their business model?

Engage in dialog

Without entering into a discussion of morality, investors are in a position to hold corporate managers accountable for wise stewardship of capital. The top 200 fossil fuel companies together spent $674 billion last year alone in finding and developing new reserves, according to Longstreth. He argues that this expenditure of stockholder wealth is so irresponsible that it constitutes an “offense against stockholders,” and he recommends divestment. It is possible, however, that by maintaining a stake in the company’s wellbeing, investors may be able to steer the company in the direction of increased productiveness and away from exploration.

Diversify holdings

Consider which types of companies are positioned to succeed in a low-carbon environment, and invest in them. There are many options for sustainable investing, including alternative energy sources, building materials, innovative vehicle and transportation options, and related businesses such as recycling, sustainable forestry, biodegradable materials and more.

Divest

The financial case for completely divesting from fossil fuels is a solid one, and competent financial advisors (especially those specializing in socially responsible investing strategies) can design and manage investment portfolios that avoid fossil fuel extracting companies while effectively managing diversification and other risks. Other sustainably minded investors will view divestment as a longer-term goal. Many sustainable investment plans suggest divesting as soon as possible from coal, but natural gas can be considered a reasonable transition fuel for the next 10 to 20 years. Some investment managers even make a case for selectively choosing oil companies, focusing on those which exploit the fewest resources in their extraction methods.

 

While there are definite moral imperatives to slowing the progression of climate change, it’s not necessary to use any of those imperatives as reasons for reducing investment in fossil fuels. Straightforward financial wisdom suggests the health of your portfolio is actually congruent with the future health of the planet.