With the world on track for its hottest year in modern history, maybe you’ve decided to invest your money in a way that’s better for the planet.
Fossil fuel emissions are the largest driver of global warming, yet many of us endorse the biggest corporate offenders with a piece of our paycheck, at least indirectly, when saving and investing for retirement.
Once climate-conscious investors realize that, many are ready to banish big oil, gas and coal companies from their investment portfolios.
The good news: There’s a wide array of climate-focused options and many investment funds that exclude companies that profit from mining, drilling and refining. But it may still take a bit of time, patience and persistence to scrub your portfolio, and even then there may be some oily residue that’s hard to remove.
And better still: On the whole, green investors haven’t had to sacrifice performance. Nobody can predict the future, but for the last 10 years both investments with and without fossil fuel companies performed similarly, and the cleaner portfolios did marginally better: U.S. stock funds returned 8.24 percent on average through October, while similar funds that excluded fossil fuel companies returned 8.36 percent, according to Morningstar Direct, an investment research and data company.
Here’s what to know if you’re considering moving to more sustainable investments.
Know what you own
Your first step is to assess what’s in your existing portfolio. Start with the website Fossil Free Funds, which is run by As You Sow, an environmental advocacy group. There, you can look up the specific mutual funds or exchange-traded funds that you’re already invested in (or that may be on your workplace retirement plan menu) to see how they score on different measures.
“The No. 1 thing is to figure out what you own,” said Andrew Behar, the chief executive of As You Sow. “But frankly, Wall Street doesn’t really want you to know. It is very hard to change when you are profiting from the current system.”
Consider the Vanguard Total Stock Market Index Fund, a well-regarded fund that’s widely used for its inexpensive and broad diversification. But it was slapped with a scarlet-red letter D from As You Sow, because 8.13 percent of its holdings are directly or indirectly invested in fossil fuels. That includes 203 stocks from major companies like ExxonMobil, Chevron and utilities that burn fossil fuels.
Keep in mind that some funds that call themselves fossil-fuel free have a loose definition of “free.” For example, the SPDR S&P 500 Fossil Fuel Reserves Free E.T.F. has less exposure, a little over 6 percent of its assets across 46 stocks, and it shuns companies that own fossil fuel reserves. But also earned a grade of D from As You Sow.
Morningstar also tracks and ranks climate-focused investments funds.
Know the alternatives
It’s easy enough to find fossil-free (or freer) alternatives if you’re investing in a regular brokerage account or an individual retirement account. Both of those options provide access to the entire universe of investment funds.
For example, there are fossil-fuel free mutual funds run by professional managers who try to beat the stock market but toss out fossil-fuel companies. They’re sometimes known as E.S.G. funds, an abbreviation for investments that take environmental, social and governance factors into consideration.
And there are lower-cost index funds, which are baskets of investments from across the entire U.S. stock market, and exchange-traded funds, which also often track indexes but trade like stocks. They, too, can eliminate fossil fuels using different screens and criteria.
Alex Wright-Gladstein, chief executive officer of Sphere, introduced the Sphere 500 Climate Fund, an inexpensive index option, three years ago. It starts with the largest 500 U.S. companies but then, using screens from As You Sow, plucks out all fossil fuel-related stocks. (It also rejects deforestation, tobacco, civilian firearm, military weapon and private prison companies.)
Then there’s something called direct indexing, in which investors own stocks part of an index but are able to de-select certain companies or industries.
“Direct indexing is something that has become more accessible and cost-effective recent years,” said Kevin Cheeks, a certified financial planner and the founder of ImpactFI, an investment firm in San Francisco.
Fidelity, for example, has a $5,000 minimum for direct indexing and lets investors eject up to five stocks or two industries. Or, it can apply an “environmental focus” to its large stock index, excluding companies that don’t meet certain criteria.
Know the 401(k) ins and outs
Of course, many people do the majority of their investing through their workplace 401(k) plan. And only 6.4 percent of all 401(k) plans have a socially responsible fund on their investment menu, according to the most recent survey by the Plan Sponsor Council of America, a nonprofit trade association for employers who provide retirement plans.
If you don’t have a good enough option on your plan menu, you may be more likely to gain access through a backdoor known as a brokerage window: Nearly half of large 401(k) plans provide access to a self-directed brokerage account, where participants can access a much broader universe of investments.
President-elect Donald Trump has said he’ll try to ban E.S.G. funds from retirement plan menus. He poured cold water over the sector during his first term, when the Labor Department issued a rule that tried to restrict E.S.G. investments within retirement plans. President Biden later reversed it.
There continues to be a strong economic case to be made for including well-constructed, environmentally responsible funds to your 401(k). And lobbying for one with a group of your colleagues could bolster it even further. (My colleague Ron Lieber wrote a guide to how to do that, and As You Sow has an action plan, too.)
“I know from experience that is one way funds like this get into 401(k) plans,” said Jon Hale, a former head of sustainable investment research at Morningstar. “People ask for them.”
The post How Can I Green Up My Investments? appeared first on New York Times.
