The Rockefeller Brothers Fund, the University of California and the World Council of Churches are among about 460 faith-based groups, pension funds, colleges and nonprofits that have pledged to divest some or all of their fossil fuel holdings.
They can do so with the help of consultants who will advise them on how to minimize their financial risk. High net worth individuals, with assets of $1m or more, can access such sustainable investment managers as Generation Investment Management, the London-based firm led by Al Gore, which has done very well for its investors, according to this deep look in The Atlantic.
But what about people who lack this same kind of wealth and want to divest? Few have the knowledge, time or assets to construct their own diversified portfolios. So-called green mutual funds may not be an answer, either, because many own shares in fossil fuel companies, particularly natural gas.
Divestment products
On 28 October, the US Securities and Exchange Commission approved a new product designed to capitalize on the divestment movement. It’s an exchange-traded fund (ETF) called the Etho Climate Leadership Index (ECLI) that excludes fossil fuels and favors companies identified as “climate leaders”. An ETF is a collection of holdings that trades on stock exchanges and thus is accessible to all investors.
ECLI is one of just a handful of mutual funds and ETFs that offer retail investors broad exposure to investing in US or global public companies while excluding the 200 coal, oil and gas companies that are part of the Carbon Underground, a list used as a guidepost by divestment advocates.
“Divestment, while spreading wildly, isn’t mainstream – yet,” says Leslie Samuelrich, the president of Green Century Capital Management and a divestment advocate.
Green Century, which was started in 1991 by environmental groups, offers two diversified mutual funds, the Green Century Equity Fund and the Green Century Balanced Fund, that have sold all of their coal, oil and gas holdings.
Another fossil-free option is an ETF known as Give, which was launched in 2012 by partners including Philippe Cousteau, the grandson of the late ocean explorer Jacques-Yves Cousteau. “I wanted to create something that everyone could participate in, not just wealthy accredited investors,” Cousteau told Green Money Journal.
And that’s about it, experts say. Other mutual funds and ETFs are, in effect, fossil-free because they concentrate on a single sector, like wind, solar, water or the internet. But investing in a single industry is risky, so those funds could be volatile. They aren’t suitable as core holdings – that is, the kinds of investments that are recommended to those saving for college, a home or retirement.
Can you make good returns?
The impact of divestment on portfolio returns remains a matter of debate. Increasingly, there’s evidence that well-constructed fossil-free portfolios can match or even outperform those that include coal, oil and gas companies.
An analysis by MSCI, which manages global indexes, found that a global fossil fuel-free index earned an average return of 13% a year since 2010, better than the 11.8% annual return earned by a conventional index. Of course, past performance is no assurance of future returns; a period of rising energy prices could propel fossil fuels ahead of the overall market.
Here’s a look at several fossil-free investment options, designed as core holdings for individuals.
Etho Climate Leadership Index (ECLI) ETF
ECLI comes from a small company called Etho Capital. “Etho’s goal is to mainstream impact investment,” says Conor Platt, the company’s co-founder and CEO and a former Morgan Stanley analyst. “We hope to prove that a divestment-compliant, broad-based portfolio can match or exceed the traditional approach.”
Using data provided by Trucost, which analyzes the environmental impact of about 5,000 global companies, Etho includes in the index only those businesses whose carbon emissions are at least 50% below industry averages.
In the restaurant sector, for example, the fund includes Chipotle Mexican Grill and Starbucks, which are more carbon-efficient than their peers, and excludes Yum Brands – major names like KFC, Taco Bell and Pizza Hut – as well as Wendy’s, Brinker International, Cracker Barrel and Darden, which underperform.
McDonald’s does well on the carbon metric – slightly better than Starbucks, in fact – but the hamburger giant is excluded because of “the social impacts of obesity, labor disputes” and other issues raised by nonprofit experts who advise Etho.
Aside from its low-carbon focus, ECLI takes a broader view of sustainability, including some subjective judgements. It excludes tobacco, firearms and gambling companies, as well as businesses that it deems laggards when it comes to corporate responsibility. Monsanto, for instance, is out because of “concerns about the toxicity of Roundup and issues around genetically modified crops,” says Ian Monroe, Etho’s co-founder, president and chief sustainability officer.
The thesis behind ECLI, Monroe says, is that climate efficiency is a proxy for overall corporate efficiency and good management. ECLI hasn’t released the fees it charges, called the expense ratio; it is expected be available the week ending 13 November on the New York Stock Exchange.
Global Echo (Give) ETF
Give invests in a mix of stocks and bonds of companies with “a proactive and meaningful sustainability mandate”. Its top equity holdings include Novozymes, a Danish biotech company; Tomra Systems, a Norwegian sensor company; FiServe, which provides technology to the financial services industry; Apple; and CVS Health.
Give has three investment managers, including Adam Seitchik, the chief investment officer of Arjuna Capital, which is the sustainability arm of Baldwin Brothers. Seitchik, who oversees asset allocation and the US equities for Give, says the managers ask: “‘Who are going to be the winners in the new economy?’ When sustainability investing is done right, there’s a tailwind of superior, long-term performance that should be there.”
In 2012-2013, its first year, Give underperformed, leaving it with a two-star rating from Morningstar, which rates mutual funds and ETFs. It has performed better returns since then, Seitchik says. Its expense ratio, which refers to a fee that covers the annual cost of operating a fund and is based on the average of the fund’s assets, is 1.50%.
Green Century’s Balanced Fund and Equity Fund
A Boston-based company, Green Century has become closely identified with the divestment movement. Its homepage says, “Invest Fossil Free”, and it joined with 350.org and Trillium Asset Management to publish a 28-page guide called Extracting Fossil Fuels From Your Portfolio. In the foreward, activist Bill McKibben makes a moral argument for divestment, saying: “If it’s wrong to wreck the climate, then it’s wrong to profit from that wreckage.”
Besides the ethical rationale, Samuelrich says there are financial reasons to go fossil-free. “Study after study has shown that divestment doesn’t negatively affect returns” if it’s done right, she says. Over time, she says, fossil-free investments should outperform conventional ones, particularly if governments take action to curb the burning of fossil fuels, and oil and coal companies are left with so-called stranded assets.
Green Century’s Balanced Fund is an actively managed mix of stocks and bonds that seeks environmentally responsible companies and screens out “factory farming, genetically modified organisms (GMOS), nuclear energy and tobacco” along with fossil fuels. Its key holdings have included Cigna, Google, Apple, United Natural Foods and Shire, a UK biopharmaceutical company.
Green Century’s Equity Fund is an all-stock index fund with the same exclusions as the Balanced Fund; its biggest holdings include Microsoft, Procter & Gamble, Google and Verizon.
The Balanced Fund gets a four-star rating from Morningstar and has a 1.48% expense ratio; the Equity Fund gets three stars and its expense ratio is 1.25%.
