Mar 18, 2013

Launch a Personal Fossil Fuel Divestment Campaign

Author: Tom Nowak

The case for not investing in the stocks of fossil fuel companies could not be clearer. The growing consensus is that fossil fuel corporations have 5 times more known reserves than scientists have calculated to be safe for use. In other words, 80% of these fuels need to remain untapped to avoid accelerating the rate of environmental damage. Why would a long term-investor want to own a company that is spending a lot of money looking for more product sources that can never be used? Would a pharmaceutical company invest in developing a drug that has no chance of ever being approved for use? 

Environmental organizations such as, the Sierra Club,
and Fossil Free along with interfaith groups, have mobilized a worldwide divestment campaign aimed at the fossil fuel industry. Individuals are being asked to urge the trustees of large pension funds to remove the stocks of fossil fuel companies from their portfolios. The stocks of about 200 companies have been identified. If it is appropriate to ask institutions to purge their investment portfolios from holding fossil fuel companies, shouldn’t individual investors do likewise? Especially those doing the asking? 

Many individuals either do not have savings available for investment or do not have the option for targeted or impact investing available to them in their retirement savings program. Retirement plan participants can ask their service providers to add an appropriate fossil-free mutual fund option. For investors who do have savings that can be self-directed, there is an opportunity to immediately be part of the solution they seek. 

Many individuals utilize index funds to achieve the benefits of low cost and reasonable assurance of market (i.e. benchmark) investment performance. Institutional investors do the same, as there is an abundance of research to support the benefits. Increasingly, however, both individuals and institutions have additional objectives for their investment dollars. Socially responsible - or in this case, more specifically - impact investing is used. 

When approached to respond to a divestment request, trustees of large funds may be reluctant to comply, citing a variety of concerns: less diversification, impact on performance and higher investment fees. Whether it is a large pension fund or a modest retirement savings account, these concerns can be minimized and seen as insignificant when compared with failing to achieve the impact goal at hand. In some cases, the impact investment may even exceed performance expectations. As with all areas of investment, there are uncertainties to be recognized for what they are. 

Common benchmarks such as the S&P 500 clearly define diversification by taking hundreds of companies into consideration. Other benchmarks contain more components, others fewer. How many holdings are required for diversification? How many holdings are necessary to achieve results that are somewhat representative of what the general economy is providing to the typical investor? Perhaps a clue to the answer might be to perform a search of what Warren Buffet’s portfolio has recently looked like. Third-quarter 2012 data indicates he held 38 stocks in the portfolio with a total value of about 75 billion dollars. Of course, there are a number of factors to consider. The point is that the amount of individual holdings doesn’t need to be as large as you might think to achieve an acceptable level of risk and be in a position to track market performance. 

Investment performance and fee concerns are linked. Vanguard’s founder, Jack Bogle, often points out that low fees help performance - less for the investment advisor, more for the investor. Of course, if a significant amount of research is needed to construct the portfolio, someone should be paid for the work. Institutional investors have the benefits of scale. They can pay for a fair amount of research to identify an appropriate portfolio and have the investment cost divided by a relatively large number. Individual investors, interested in social or impact investing, have traditionally used mutual funds to meet their needs. Cost-sensitive individual investors can take advantage of discount brokerage platforms such as Folio Investing or Motif Investing to own a portfolio of individual stocks without many of the expenses associated with mutual funds. By pooling their need with other investors, they can keep their costs very low by using a combination of professionally-designed, pre-built portfolios that are in alignment with their worldview. In this case, it would involve looking at the holdings versus published lists of fossil fuel companies and making the appropriate adjustments. 

If you are motivated to ask large pension funds to divest their holdings, surely you have the energy to make sure your own personal investments are in alignment with your worldview. Asset management is moving towards being a low-cost commodity. The financial planning and investment advisory communities, like all service providers, responds to consumer demand. Investors should insist on paying only for the services needed (e.g. some hourly advice or a moderate, flat fee for service). Chances are you do not need a lot of assistance in order to establish an investment portfolio that you can take pride in. Impact investors endeavor to change the world via their investment choices. In this case, you can help keep the world from changing. 

About the Author
Tom Nowak, CFP®, is the author of “Low Fee Socially Responsible Investing: Investing in your worldview on your terms”. Tom is founder and Principal of Quantum Financial Planning LLC, a Fee-Only financial planning and Registered Investment Advisory firm located near Grayslake, Illinois. As an hourly Fee-Only planner, Tom works solely for his clients and does not receive commissions from the sale of any financial products. Tom resides just outside of Grayslake, Illinois, in unincorporated Libertyville Township, with his wife, Julie, and has two daughters. Tom’s outside interests include traveling and gardening, with an emphasis on the use of native plants. 

No comments:

Post a Comment