Why Fossil-Free Investing is Better for Your Portfolio

November 11, 2021
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WHAT ARE FOSSIL-FREE INVESTMENTS?

Fossil-free investing means avoiding giving your money to the biggest polluters in the world: companies whose main lines of business are in extracting, processing or burning fossil fuels like coal, oil and gas. These companies aren’t just contributing to climate change and polluting our natural world, but they also plan to continue. Exxon, the United States’ biggest fossil fuel producer, has only pledged to cut CO2 emissions by 15-20% by 2025, which is far below what is needed to limit global warming to 1.5°C. 

By refusing to invest in these companies, we’re sending them a message: stop lobbying against climate legislation that keeps us safe and start participating in the conversation about what a world that does not exceed 1.5°C of warming looks like.

HOW DO I KNOW IF MY 401(K) IS INVESTED IN FOSSIL FUELS?

You may be thinking - surely I don’t have any money invested in these companies? 

But you likely do, through your 401(k) or other retirement plan. Often, 401(k)’s are made up of stocks from a wide range of companies. Retirement investment advisors usually recommend not to concentrate retirement savings in a small number of stocks, as these can change value rapidly, which is bad for long-term investing like retirement savings. But diversifying investments does mean you likely have your retirement savings invested, at least partially, in fossil fuel companies. 

The best way to find out whether your 401(k) is invested in fossil fuel companies is to use a free online tool like https://fossilfreefunds.org/.

A screenshot of fossilfreefunds.org

On Fossil Free Funds, you can look up the specific fund that your 401(k) is invested in by ticker or name, or you can look at the most popular index funds or target date funds. Each fund is given a rating from A to F based on what % of their portfolio is invested into fossil fuel companies. The average fund is about 5% invested in fossil fuel companies, and this tool gives a C to funds that fall in that range.

A D rating from fossilfreeunds.org

Let’s look at one of the most popular 401(k) funds, the Vanguard Target Retirement 2050 Fund.

While its title would not flag it as being especially invested in fossil fuel companies, it actually has more than the average investment in them, at over 6%, resulting in it getting a D rating. The fund has investments in Exxon Mobil, Chevron and Berkshire Hathaway (which plans to keep at least 14 coal fired power stations running after 2030). 

If 6% doesn’t sound like a lot to you, this represents $1.4 Billion that could be going towards companies that aren’t actively fighting against saving our planet.   

HOW WILL SPHERE’S PERFORMANCE COMPARE TO MY EXISTING FUND?

Sometimes, ‘impact’ investments in environmental or social companies can get a bad reputation for having worse performance or being more expensive than ‘normal’ investments. Sphere has been specifically designed to be as low cost as possible, saving you money on fees that could detract from your total retirement savings.

And while no one can predict the future of the stock market, divesting from fossil fuel companies has been a smart financial decision over the last 10 years. The Sphere 500 Fossil-Free Index (SPFFXI) contains the top 500 companies in the US, excluding ~40 fossil fuel companies. The below chart shows that returns over its 10-year back-test period are 46% higher than the returns of the SPDR S&P 500 ETF.


SPFFXI 10 year back test
Note: Indexes are not investable and do not have fees or trading costs.


There are plenty of reasons for this. The value of shares in fossil fuel companies has dropped about 20% since 2012 and cut back on new big projects by 34% in 2020. With more people getting their money out of fossil fuels, we want these companies to soon realize that they have no other option than to change their operations.


IS THIS ESG INVESTING?

“ESG”, or “Environmental, Social, and Governance” is a general set of criteria that is used to evaluate how much positive or negative impact a company has. Impact investors can use these standards to pick which companies to invest more heavily in, or ‘screen out,’ of their investments. Generally, ESG Investing, Sustainable Investing, Socially Responsible Investing (SRI) and Impact Investing are terms that are used fairly interchangeably.

SPFFXI does not use broad-based ESG criteria in its investment strategy. Instead, it uses one piece of simple criteria to screen out roughly 40 fossil fuel companies from our index. We keep this simple because we have a simple mission: to convince these companies to help create global, binding legislation that limits warming to 1.5°C (450 ppm of CO2 equivalent).

The index is still exposed to carbon-intensive industries (such as airlines, shipping and logistics) because their business models are not necessarily dependent on fossil fuels and with technology innovation they could change their practices to be less carbon intensive. This is different than the ESG funds that underweight companies that pollute more and overweight companies that pollute less.