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CROWDSOURCING SUSTAINABILITY

Why Sustainable Investing is a No-Brainer. And How to do it.

I’ve written about the fossil fuel divestment trendhow you can personally divest, the story of a brilliant sustainable investor, and how the future of the economy is sustainable.

Along the way, I’ve also been asked by some of you to share what I personally have invested in and why. This newsletter is my response.

Broadly speaking, my values guide my investments. And I expect the returns will actually beat the market in the long run because the future of the economy is sustainable.

*As you know, I am a sustainability nerd. And although I studied economics, I am not a financial professional and don’t provide investment advice. In this article, I am simply sharing my personal thoughts, strategy, and rationale when it comes to investing, given the reality of climate change and emerging trends. Please do your own homework and follow your own best judgment 🙂

Divest from fossil fuels. Reinvest in the sustainable future.

There are a ton of really good reasons to do this. I can think of 7.7 billion off the top of my head.

But I’m just going to talk about the Benjamins today. Divesting from fossil fuels and reinvesting in climate-ready companies is now the smartest thing to do if you want to have more money in your wallet.

In this article I’ll explain:

  • Why divesting from fossil fuels and reinvesting in sustainability is financially wise.
  • How to do it.
  • Where I personally invested my savings.

The death of the fossil fuel industry has ALWAYS been inevitable.

First, let’s be clear that it has always been a matter of when, not if, the fossil fuel industry would die. There is only so much of the stuff underground.

The father of electric light, Thomas Edison, understood this from the beginning:

“We are like tenant farmers chopping down the fence around our house for fuel when we should be using nature’s inexhaustible sources of energy — sun, wind, and tide.”

“I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.”

 

The math is simple. Most of the fossil fuel industry’s assets will be stranded.

The science says we can only burn 800 more gigatons of CO2 if we want to give ourselves at least a 67% chance of staying under 2ºC.

But the coal mines and oil and gas wells currently in operation worldwide contain 942 gigatons worth of CO2.

942 > 800

“What we found is that if you burn up all the carbon that’s in the currently operating fields and mines, you’re already above two degrees,” – Stephen Kretzmann, Executive Director OCI

Carbon Budget vs Developed Fossil Fuel Reserves

(Please note: The numbers above are from 2016 and have thus changed slightly, but the underlying point remains the same.)

It’s worth pointing out that the 942 gigatons of CO2 in the chart above only includes the wells and mines that are already in operation (“Developed Reserves”). This means that all of the untapped reserves that these companies plan to sell must remain underground, unburned.

There’s about 3 times as much CO2 in these untapped reserves as there is in the operating oil wells and coal mines…and even more “Resources” not included in the untapped reserves.

All the untapped reserves must stay underground.

As I was writing this, a brand new report came that was put together by 50 researchers, including the UN.

It says the world is on track to, “produce about 50% more fossil fuels by 2030 than would be consistent with limiting warming to 2°C and 120% more than would be consistent with limiting warming to 1.5°C.”

The Production Gap

“The vast majority of reserves are unburnable.” – Mark Carney, Governor of the Bank of England

Why this math matters.

Reminder: The IPCC’s 2018 report translated this math to tell us that we have to cut our greenhouse gas emissions in half by 2030 and eliminate them by 2050 for a 67% chance of limiting warming to 1.5ºC (which is still a devastating amount of warming for society).

To put it bluntly, this matters because the climate crisis threatens the supply of our most basic resources – food, water, and safe shelter. Nobody is immune to the impacts. We will have between 25 million and 1 billion climate migrants by 2050 (UN). Millions of people will die starting in the 2030s (WHO).

There is a vast difference between the best and worse case scenarios. Where we end up depends on what we do now.

“This is literally a math test, and it’s not being graded on a curve. It only has one correct answer. And if we don’t get it right, then all of us—along with our 10,000-year-old experiment in human civilization—will fail.” – Bill McKibben

…I’d hazard a guess that there will be no recognizable economy to speak of if we ignore the math.

What does this math mean for investments?

It means these fossil fuel companies are massively overvalued.

The pressure to stop global warming will completely change what we see as valuable.

As Alex Steffen wrote,

“Fuels that can’t be burned aren’t worth much. In turn, the companies whose major assets are those coal mines, oil fields and gas wells, pipelines and refineries are worth much less money than their stock prices would indicate.

The difference between the valuations of fossil fuel companies and their true worth is so large that national banks, financial industry associations and esteemed investors around the world are warning that it represents a bubble potentially as large as the 2007 Subprime Crisis.

The bank Barclays, for instance, estimates that limiting emissions to 2ºC drops the future revenue of the oil, coal and gas industries $33 trillion over the next 25 years. Citigroup estimates that the total value of stranded high-carbon assets ‘could be over $100 trillion.’

…The Bank of England published a new white paper in January 2017, in which it shared findings that the bursting of the Carbon Bubble was ‘likely to be abrupt’ and ‘likely to pose risks to financial stability.'”

(For more on the carbon bubble, I briefly covered it in June.)

Insurance companies, financial institutions, and investors are starting to wake up to this reality. “Without bank loans, insurance and investments — the fossil fuel industry hits a wall.” – Fossil Free Report

A coalition of 34 central banks released a report in April 2019 recommending actions to avoid a “climate-driven sudden collapse in asset prices”.

Just this week, the European Union’s bank announced it would stop funding fossil fuel projects in 2021. “What this really means is that we’re setting a standard, perhaps even a global standard, for what it means for a big bank like the EIB to be aligned with the requirements of the Paris climate agreement and ambitious EU energy and climate targets.” – Andrew McDowell, VP EIB

…not to mention that fossil fuels have already been underperforming the market for years

As you can see below, anyone who divested 5 or 10 years ago is up big today. Fossil fuels underperform market

Two (of many) noteworthy examples:

  • “The New York State Common Retirement Fund (NYSCRF) would be an estimated $22.2 billion richer had it decided to divest its fossil fuel stocks ten years ago, according to an analysis performed by Corporate Knights. That works out to more than $19,820 for of each of the fund’s 1,122,626 members and retirees.”
  • The Bill and Melinda Gates Foundation lost nearly $2 billion from just 2012 to 2015 because of fossil fuel investments. They’ve since started divesting.

Bottom line: Fossil fuels are already a sinking ship. Investors managing $11.5 trillion already have or are going to divest. The fossil fuel industry won’t be able to sell what they’re telling their investors they will. There are trillions of dollars in stranded assets not yet reflected in their stock prices.

At this point, calling fossil fuels a risky investment doesn’t seem to do it justice – it’d be more accurate to describe it as throwing your money away.

How to divest from fossil fuels.

“Approximately 8 to 12 percent of the over $4.4 trillion currently invested in 401(k)s is in fossil fuels. That’s $352 billion to $528 billion worth of influence in the hands of employees.” – Vanessa Green

I’ve written about how to divest before, here.

Basically, the average person has about 5% to 8% of their 401k invested in fossil fuels (latest estimate from an expert I spoke with…lower now than the quote above because they’ve underperformed.)

If you want to divest, simply identify your holdings that have exposure to fossil fuel and get out of them.

To discover where the fossil fuels are hiding in your portfolio, use this toolHere’s a roadmap for individuals that want to divest.

If you work for a company and have limited options for what you can invest in, here’s a roadmap for how to change that. If you want help, feel free to reach out to Fossil Free Funds – I’ve talked to them and they’d be happy to help you!

…and don’t be afraid to ask your co-workers to help you make this happen. A 2016 study showed that 74% of people “would like to see more socially responsible investments in [their] retirement plan offering.”

Why investing in sustainability is smart.

The economics are already favorable – and getting better every day. Here’s a look at a few of the most important trends since 2010. Costs are plummeting for sustainable technologies.

Clean Energy Cost Trends

(Source: BloombergNEF)

I’ve written about the powerful sustainability trends a lot, so I’ll be brief:

  • Carbon pricing is ramping up around the world (20% of GHG emissions now have a price on them). As it continues to spread, and the prices rise, companies that are more sustainable or actively solving the problem will excel.
  • Clean energy is already cheaper in 2/3 of the world. Soon enough it’ll be cheaper than continuing to operate existing fossil fuel power plants.
  • Today, investing in renewables to power EVs yields 6 to 7 times more miles at the wheel versus investing in oil to power gas cars.
    • “We think the economics of renewables are now impossible for oil to compete with.” – BNP Paribas
  • People are demanding that climate change be addressed. Government divestment from fossil fuels and reinvestment to eliminate emissions is a matter of when, not if.

Sustainable solutions are a win-win-win. And the financial opportunity for those providing them is massive.

Project Drawdown’s rigorous research estimates the top 80 solutions to reverse global warming would cost $29 trillion over the next 30 years. And save us $74 trillion over that same time period.

The entire economy is about to adjust to save civilization as we know it. The market will help to accelerate this transformation as costs continue to decline and values shift to correct the existing market failure.

Companies that are more sustainable have a competitive advantage on cost, attracting and retaining talent, and keeping all stakeholders happy.

And the companies who actually help make the transformation happen have massive opportunities ahead of them.

My personal investments.

Since I left my job at EnerNOC, I have been wanting to take control of my investment options. Like most company’s investing programs, I didn’t have many options to choose from for my 401k.

I recently transferred the savings in that 401k to a Roth IRA where I have more freedom to choose what to invest in. I’m in the process of cost-base-averaging my way to the target portfolio below.

(There is no perfect portfolio. Different people should do different things. I’m 28 with a long investment horizon so my profile is riskier than most.)

I’m sure this portfolio will change over time as better ETFs are created and I figure out how to invest in other important sustainable solutions. You can see what industries I think will play an important role in the sustainable future here.

Earlier this year, I was fortunate enough to cross paths with James Osborn, a fellow Villanova grad. James founded Envest Asset Management, a registered investment advisor which specializes in helping people bring together their investment strategy with their sustainability and social goals. He was an excellent resource for me as I thought through these big decisions for myself. If you have questions on this topic, he actually is a professional, and I’d recommend reaching out to him or perusing his blog for more ethics-based investing ideas.

More and more people are starting to realize that socially responsible investing can lead to better returns. I found the chart below to be particularly eye-opening.

Top ESG scores have better returns

(Source: Calvert study. ESG = Environmental, Social, and Governance)

“Responsible Investing doesn’t mean giving up on investment returns. Research suggests that companies with high scores for their ESG commitments tend to have better management, higher expected growth and lower cost of capital — which may translate into better financial results for investors.” – Calvert

Key takeaways

  • The fossil fuel industry is overvalued and has an expiration date that is closer than most realize. There will likely be some sort of deflation or carbon bubble once this is more widely accepted.
  • You can invest in accordance with your values and make good or better than average returns.
  • There are tools out there to help you divest. And resources to help you get your company to offer less risky, better-aligned investment options.

 

 

Disclaimer (ugh, sorry): I am not an investment professional or a licensed financial advisor. The contents of this article reflect my personal investing strategy, thoughts, and decisions, which may not be appropriate for other investors. The information in this article does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation. You should consult with an investment professional to determine what may be best for your individual needs. This is not an attorney-client relationship (shocking, I know). I am not responsible or liable for any of your investing decisions or the outcomes of your decisions, including but not limited to those that may result in monetary loss or emotional distress.​

This post originally featured in the What on EARTH?! sustainability newsletter.

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