Katerina Swanson
Investing in fossil fuels is a tricky business. Fossil fuel investments carry financial risks, and the sector has underperformed compared to the market as a whole in recent years. With growing concerns about climate change, the world economy is moving towards a lower-carbon future, and demand for oil and gas is expected to decline. As a result, investors are re-evaluating the place of fossil fuels in their portfolios and divesting from the sector. While some argue that shareholders can influence companies to uphold better environmental practices, the reality is that individual shareholders often do not have a significant enough stake to make a difference. With the availability of fossil-free equity indices and the growth of the renewable energy sector, investing in fossil fuels is becoming less attractive.
| Characteristics | Values |
|---|---|
| Financial risk | Fossil fuel investments carry real financial risks. |
| Climate risk | Fossil fuel divestment is a way to take a stand on climate change. |
| Performance | Green investors haven't had to sacrifice performance. |
| Returns | Funds that excluded fossil fuel companies returned 8.36% compared to 8.24% for similar funds that included fossil fuel companies. |
| Accessibility | Fossil Free Funds is a search platform that informs and empowers everyday investors. |
| Clean energy | Clean energy funds focus on investing in smaller, local sustainable businesses. |
| Sustainable investing tools | Tools like Fossil Free Funds and Weapon Free Funds help investors identify climate-conscious investment options. |
| Voting | Voting out legislators who pass backwards legislation subsidizing fossil fuel companies is a way to protest fossil fuel investments. |
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What You'll Learn
Fossil fuels carry financial risks
Fossil fuels carry significant financial risks, and investors are increasingly aware of these risks and are divesting from fossil fuels. Fossil fuel companies are overvalued by as much as 40-60%, according to studies by the London School of Economics, Aperio Group, HSBC, and Impact Asset Management. This overvaluation is referred to as the "carbon bubble" by financial analysts, and it could lead to financial instability similar to that of the 2007 "housing bubble". As governments adopt policies to limit carbon pollution, the assets of fossil fuel companies will become liabilities. Therefore, divesting from fossil fuels and reinvesting in clean energy is a smart financial decision that protects assets and contributes to a sustainable future.
The impact of climate change, driven largely by fossil fuel emissions, is becoming increasingly apparent. Extreme weather events are causing significant financial strain on insurance companies, and the performance of investments tied to fossil fuels is at risk. As a result, investors are turning to "`green`" funds offered by major brokerage firms that exclude fossil fuel companies. However, it is important to carefully review the full list of companies included in these funds, as some may still have indirect connections to the fossil fuel industry.
Additionally, individuals may unknowingly invest in fossil fuels through their bank accounts, as some banks are ranked as the worst for the climate due to their financing of fossil fuels. Credit unions and community development banks offer a more sustainable alternative, as they focus on investing in small, local businesses and communities instead of fossil fuels. By assessing their existing portfolios and seeking out sustainable investment options, individuals can ensure their investments align with their values and contribute to a cleaner future.
Furthermore, institutional investors, such as pension funds, universities, and city governments, are also joining the divestment movement. They recognize the financial and ethical risks of investing in an industry that contributes to climate change and threatens the planet's future. By divesting from fossil fuels, these institutions are taking a stand against the political power of the fossil fuel industry and its negative impact on the planet. As more individuals and institutions join the divestment movement, the financial risks of investing in fossil fuels become more pronounced, and the transition to cleaner energy sources becomes more urgent and inevitable.
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Climate change threatens survival
Climate change is a clear and present danger to human survival. Naturalist David Attenborough has called climate change "the biggest threat to security that modern humans have ever faced". The evidence is overwhelming: from rising global temperatures to shrinking glaciers and sea ice loss, the effects of human-caused climate change are already being felt.
The burning of fossil fuels has significantly contributed to this crisis. Since the industrial revolution, the level of atmospheric carbon dioxide has increased by more than a third, with carbon dioxide, methane, and nitrous oxide increasing the greenhouse effect and causing the Earth's surface temperature to rise. As the temperature rises, more water evaporates from the oceans, further increasing temperatures. This vicious cycle has already led to irreversible changes in our global climate, with some regions experiencing longer periods of drought and more frequent and intense wildfires, while others face increased precipitation and flooding.
The impact of climate change on human survival is already evident. Extreme heat, for example, causes more deaths than other weather-related hazards in the United States, with an annual heat-related death toll of approximately 1500. The 2003 heatwave in Paris, France, killed nearly 15,000 people, and since 2015, between 500 and 3500 excess deaths from extreme heat have been reported each summer in France. Climate-related emergencies also cause major disruptions in access to health services, loss of livelihoods, displacement, and increased risks of gender-based violence.
Small island developing states are particularly vulnerable to the impacts of climate change, with some islands at risk of disappearing entirely. These nations have consistently sounded the alarm, calling for urgent global action to address the loss and damage that climate change is causing. The poorest and most vulnerable populations are suffering the most, and their future, safety, and well-being are at stake.
Given the urgency and severity of the climate crisis, it is imperative that individuals, institutions, and governments take action to reduce their fossil fuel investments and emissions. Fossil fuel investments carry financial risks, and a growing divestment movement is recognizing the need to align investments with values. "Green" funds offered by major brokerage firms provide options for those seeking to reduce their fossil fuel investments. Additionally, voting for legislation that supports fossil fuel companies and their subsidies must end. By taking these steps, we can work towards mitigating the worst effects of climate change and ensuring human survival for future generations.
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Fossil-free funds are available
There are also "green" funds offered by major brokerage firms that exclude big fossil fuel companies from their portfolios. However, it's important to note that some funds may have a loose definition of "green," and it's advisable to review the full list of companies included in a fund. For example, some "green" funds may include fossil fuel companies that are attempting to break into renewables while still holding oil assets.
Investors can also choose clean-energy mutual funds, which primarily focus on clean-energy companies, although they may not guarantee that all holdings are 100% fossil-free. An example is The New Alternatives Fund, which has significant investments in solar, wind, hydropower, and geothermal, but also includes some natural gas distribution. Another option is Calvert's Global Alternative Energy Fund, which commits to investing 80% of its holdings in clean energy, while the remaining 20% currently excludes fossil fuel companies.
Additionally, investors can build their own fossil-free portfolios by working with asset managers or financial planners who are committed to excluding the top fossil-fuel companies from their investments. For instance, Natural Investments, a socially responsible investment management firm, launched a Fossil-Fuel-Free Portfolio in 2013 for investors seeking conservative to moderately aggressive portfolios.
By utilizing these fossil-free fund options, investors can align their investments with their values, reduce their financial risks, and contribute to a more sustainable future.
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Fossil fuel divestment is growing
Fossil fuel divestment is a growing movement, with more and more people choosing to remove their financial support from the fossil fuel industry. This trend is driven by a desire to take a stand against climate change and to distance oneself from an industry that is increasingly seen as unethical and unsustainable.
The movement includes both individual and institutional investors, with universities, churches, city governments, pension funds, and even cemeteries joining in. People are divesting from fossil fuels by removing their investments from mutual funds and exchange-traded funds (ETFs) that include fossil fuel companies and by choosing to bank with institutions that do not finance fossil fuel projects.
There is also a growing number of "green" funds offered by major brokerage firms that exclude fossil fuel companies. These funds may focus on clean energy or invest in a broad range of businesses while avoiding those that profit from fossil fuels. However, it is important to carefully review the full list of companies included in these funds, as some may have loose definitions of "green" and still include businesses indirectly tied to fossil fuels.
Fossil fuel divestment is not just a moral decision but also a financially prudent one. Studies have shown that fossil fuel companies may be overvalued by 40-60%, creating a carbon bubble that could burst and cause significant financial losses. By divesting now and reinvesting in the clean energy future, individuals can protect their assets while also supporting the transition to a more sustainable economy.
As more people join the fossil fuel divestment movement, the industry's political power will be further undermined, and the transition to cleaner energy sources can be accelerated.
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Clean energy is a good investment
The clean energy sector offers a wide range of investment opportunities, from pure players focusing on clean technology to companies involved in renewables, utilities, and the green industry. Clean energy companies using renewable sources are particularly attractive investments, as they are more resilient to economic downturns and have strong growth prospects. These companies are likely to benefit from the increasing demand for clean energy and the need for energy independence.
Some specific clean energy companies that have been highlighted as good investments include Brookfield Renewable, which generates clean energy from wind, solar, and hydro sources, and NextEra Energy, a global leader in producing power from wind and solar. These companies have strong financial profiles and stable cash flows, making them attractive investment opportunities.
Additionally, investing in clean energy aligns with ethical values and contributes to a more sustainable future. Individuals and institutional investors are increasingly seeking climate-conscious investment options, and companies like Fossil Free Funds provide tools to help investors identify greener options and reduce their fossil fuel investments.
However, investing in clean energy does come with challenges. The sector has experienced a boom and bust cycle, with excessive optimism driving high valuations followed by a sharp decline. The clean energy sector is also sensitive to interest rates and government policies, and some renewable energy companies have underperformed in the stock market. Nevertheless, the overall outlook for clean energy investments remains positive, with experts forecasting sustained growth.
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Frequently asked questions
Fossil fuel emissions are the largest driver of global warming. Investing in fossil fuels means you are endorsing the biggest corporate offenders who are contributing to irreversible climate change.
There are a growing number of "green" funds offered by major brokerage firms that you can opt into. You can also look into exchange-traded funds that focus on clean energy, mutual funds that focus on clean energy, and community development banks that invest in small, local businesses.
You can use websites like Fossil Free Funds to look up the specific mutual funds or exchange-traded funds that you are invested in and see how they score on different measures, including their exposure to fossil fuel companies.
