I am not looking for an ESG fund - I would like to avoid fossil fuel investments because they have historically decreased returns or had no impact on returns over five, ten, and forty year time frames, and I expect them to hurt returns between now and when I retire. Large investors such as the Harvard endowment ($50B), State of New York pension fund ($200B), and University of California system endowment ($30B) and pension fund ($90B), have decided to divest from fossil fuels for these reasons. The University of California defined contribution plan also offers a fossil-free option to employees, and outlined its thoughts on fiduciary duty here. Our plan participants should have the option to do the same.

Thank you for this detail- it is very helpful. Can you please help me submit a request to the investment committee for the plan to add a climate-friendly and specifically fossil-free option to everyone’s lineup? I want a climate-friendly investment option that is similar to the S&P 500 in risk and return profile, that does not charge high fees. Given that over 80% of Americans are worried about climate change, it is likely that a number of other employees using this plan would like the same thing.

Consider sending a message directly to Guideline support. Below is an example:

"Dear Guideline support,

As a climate tech startup, we are committed to offer our employees investment options that align with their mission. Would you consider incorporating SPFFX into your investment options?

Best,

[Your name here]"

It is common to receive a canned response pointing you to their current fund lineup or their published policy on how they choose funds as a 3(38) investment manager. You can then reply with something like the following:

"Thank you for sharing - I understand your process for choosing funds as a 3(38) investment manager. Can you please recommend a fund on behalf of your client by submitting the fund to the Investment Committee via an Investment (INV) ticket? The Investment Committee can then decide to put the fund up for review during their quarterly due diligence meeting. Please recommend SPFFX - I believe it is the least expensive fossil free option available on the market."

ESG stands for Environmental, Social, and Governance, and is a method for measuring the environmental and social impact of a company. There is no consensus on the definition of an ESG approach - some would consider any index that uses an environment, social, or governance lens in choosing investments falls into the category. On the other hand, many ESG funds invest in companies that rank highly in all three respects, using their own methodologies to decide how to rank companies. This index includes a broad range of companies and does not rank companies based on broad ESG measurements, because retirement savings should be invested in a diverse portfolio of stocks that represents the market at large, to minimize risk. We believe that removing fossil fuel companies can have a bigger impact than weighting investments across a more broad range of factors. Our singular focus on the issue of climate change makes us able to maximize our impact sooner rather than later.

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SOURCES

Evans, J. L., & Archer, S. H. (1968). Diversification and the Reduction of Dispersion: An empirical analysis. Journal Of Finance, 23(5), 761-767.

CFA Institute. (Retrieved from website October 5, 2020.) https://www.cfainstitute.org/en/research/esg-investing 

Yes. Our next offerings will enable diversified low-cost investments across all the asset classes typically offered in 401(k) plans: mid- and low-cap US companies, international stocks, and bonds.

No. The Sphere index contains a diverse set of assets that are not weighted towards clean technology companies or any other type of company. Research has shown that the most effective way to reduce the risk associated with investing in the stock market is to invest in a diverse selection of companies and industries. At Sphere we believe that when you make the decision to stop investing in fossil fuel companies, you should not have to take an increased risk by investing heavily in one industry.

Climate-friendly funds oftentimes change higher fees than index funds because they are actively managed. Most funds that track the S&P 500 charge an Expense Ratio under 0.1%. At Sphere we are committed to not charging a premium just to let investors avoid fossil fuel investments. Here’s why: let’s say one fund manager takes a 2% fee on the returns your fund makes, and another takes 1%. That means your average annual return after fees is about 8% with the first and about 9% with the second. Now because compound interest (the idea of multiplying an annual interest rate each year over and over again, leading to an increasingly magnified impact over time) results in exponential growth, the difference between these two scenarios is more than you may expect. For example, if you invest $1,000 up-front, 10 years later you’ll have $2,220 with the first fund manager and $2,451 with the second. Project out the same two scenarios 30 years and make the up-front investment $100k instead of $1k, and you have $1,093,573 vs. $1,473,058. The ~$400k difference explains why it is so important to choose a fund manager that charges low fees. With SPFFX we are offering a product that many fund managers would offer at a hefty premium, without that hefty premium.

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SOURCES

Evans, J. L., & Archer, S. H. (1968). Diversification and the Reduction of Dispersion: An empirical analysis. Journal Of Finance, 23(5), 761-767.

Plantinga, Auke and Bert Scholtens. (August 17, 2020.) “The Financial Impact of Fossil Fuel Divestment,” Climate Policy, 1-13. https://www.tandfonline.com/doi/full/10.1080/14693062.2020.1806020

‍Collinson, Patrick. (April 10, 2015). “Fossil fuel-free funds outperformed conventional ones, analysis shows,” The Guardian. https://www.theguardian.com/environment/2015/apr/10/fossil-fuel-free-funds-out-performed-conventional-ones-analysis-shows

Willis, John and Paul Spence. (2015). “The Risks and Returns of Fossil Fuel Free Investing”, The Journal of Environmental Investing, 6, no. 1. https://senate.ucsd.edu/media/206122/the-risks-and-returns-of-fossil-fuel-free-investing-jei.pdf

Mooney, Attracta and Patrick Temple-West. (July 25, 2020). “Climate change: asset managers join forces with the eco-warriors,” Financial Times. https://www.ft.com/content/78167e0b-fdc5-461b-9d95-d8e068971364

Research has shown that there is no correlation between how a given fund has performed in the past and how it will perform in the future. That means that it doesn’t matter who you choose to manage your portfolio or how good they are at picking stocks - your best bet is to diversify your portfolio as much as possible and rely on the growth of the stock market at large for your returns. The US stock market has returned about 7-10% per year on average over the past 100 years. While the actual returns vary from year to year, that average rate compounded over your lifetime can result in some nice returns for you. The key is to consistently invest through the ups and downs of the market and steer away from trying to pick winning stocks (since their past performance is not correlated to future performance) but rather invest in a diverse portfolio of stocks and bonds (because research has shown that the most effective way to reduce the risk associated with investing in the stock market is to invest in a diverse selection of companies and industries.) Fossil fuel companies make up about 5% of the total stock market. In removing them, we increase our investments in the remaining 95% proportionally by market capitalization, resulting in a portfolio that largely follows the swings of the market. Several studies have shown that funds that are not invested in fossil fuel companies perform as well as or, in many cases, better than funds that are invested in fossil fuel companies.   Projecting forward, fossil fuel company stock prices face uncertainty as carbon emissions standards and policies continue to roll out and increasing numbers of endowment and investment fund managers divest (i.e. remove their investments) from fossil fuel companies. The Financial Times wrote in July 2020 “With a growing business case, more than 450 asset managers, with $40tn in assets, have now signed up to an initiative called Climate Action 100+ to force the world’s biggest carbon emitters to tackle global warming. BlackRock joined the group in January.” These trends lead us to believe that past results (showing that fossil free funds have performed as well as or better than funds containing fossil fuels) will likely hold true in the future.

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SOURCES

Invest Your Values Methodology. (Updated monthly.) https://fossilfreefunds.org/how-it-works/

‍Climate Action 100+. (Retrieved October 6, 2020.) “Global Investors Driving Business Transition.” http://www.climateaction100.org/ 

The Climate Reality Project. (March 18, 2019.) “WHY IS 1.5 DEGREES THE DANGER LINE FOR GLOBAL WARMING?” https://www.climaterealityproject.org/blog/why-15-degrees-danger-line-global-warming

‍Carrel, Lawrence. (Feb 15, 2020). “Study Proves Past Results Don’t Predict Future Results,” Forbes. https://www.forbes.com/sites/lcarrel/2020/02/15/study-proves-past-results-dont-predict-future-results/#49f59e01633d

‍Royal, James and Arielle O’Shea. (September 10, 2020.) “What Is the Average Stock Market Return?” Nerdwallet. https://www.nerdwallet.com/blog/investing/average-stock-market-return/

We follow the fossilfreefunds.org definition of fossil fuel companies, published by the non-profit As You Sow, which includes oil, coal, and natural gas exploration, extraction, refining, equipment, services, and distribution companies, as well as primarily coal-, oil-, and natural gas-fired power plant providers. It does not include companies that use fossil fuels, such as airlines or electric utility companies, because other organizations, such as the investor interest group Climate Action 100+, work with investors to encourage companies that are contributors to climate change to transition to clean energy sources. Our reason for keeping those companies in our investment portfolios is that it is possible for companies that use fossil fuels to transition entirely off of fossil fuels while still maintaining their primary business purpose and operations. It is not possible for companies that extract, refine, distribute, or burn fossil fuels as their primary business to transition off of fossil fuels without redefining their business purpose and operations. At Sphere, we are working to bring fossil fuel companies to our side of the negotiation table to push for global regulations that limit fossil fuel emissions to 450 PPM, ensuring our global average temperature does not rise more than 1.5°C above pre-industrial levels. For more information on how As You Sow defines fossil fuel companies, visit https://fossilfreefunds.org/how-it-works.

We are removing our investments from fossil fuel companies to create behavior change, not just to protect our savings from the steady (and sometimes sudden) decline in value of fossil fuel companies (though divesting does do that, and is a smart financial move.) We are sending a message to fossil fuel companies:

• STOP LOBBYING AGAINST CLIMATE LEGISLATION THAT KEEPS US SAFE.
• PARTICIPATE IN THE CONVERSATION ABOUT WHAT A WORLD THAT DOES NOT EXCEED 1.5°C OF WARMING LOOKS LIKE.
• WE NEED YOUR INPUT IF WE ARE GOING TO BE SUCCESSFUL IN CREATING A REALISTIC FRAMEWORK.
• JOIN US ON THE RIGHT SIDE OF HISTORY.
• COME TO THE TABLE.

Once we get global binding legislation passed that limits emissions to 450 PPM of CO2 equivalent and 1.5°C of warming above pre-industrial levels, we will invest in fossil fuel companies again. But we will only invest in the fossil fuel companies that helped us get the legislation passed - not those who lobbied against it.

A few very simple issues were preventing fossil free options from showing up in 401(k) plans: (1) the fact that most fossil free funds are expensive, and employers are oftentimes sued by their employees for having funds that are too expensive in their 401(k) plans, (2) for some reason many of the big 401(k) platforms don’t allow exchange traded funds (ETFs), and (3) Washington has given mixed policy guidance to employers on whether they can put values-aligned investment options in 401(k)s. We set out to address all three issues with our first product. SPFFX is a low-cost fund priced in line with similar funds that track the top 500 US companies (we don’t charge a markup for removing fossil fuel companies). It’s a mutual fund, not an ETF, so it’s allowed on 401(k) platforms. And it has a simple strategy of investing in the top 500 US companies and removing the 40 or so fossil fuel companies in that list. This means that we’re not introducing an inappropriate amount of risk to a fund where, in the retirement space, you really want to avoid risk and diversify your investments. Those 40 fossil fuel companies only make up about 5% of the market capitalization of the top 500 group, and removing them has historically actually improved performance, because the fossil fuel industry has been underperforming the market at large for decades. This is key to getting employers comfortable given the mixed policy guidance on values-aligned funds in 401(k)s over the past few years: they can justify adding this fund to a lineup based on performance alone, without having to lean on values- or ethics-based reasoning.

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