The Many, Many Dilemmas of the Climate Conscious Investor

This is part one of a two-part series on climate-friendly investing. Part two can be found here.

In January of 2020, the world’s largest manager or other people’s retirement money made a long-awaited proclamation in big, bold lettering: Climate Risk Is Investment Risk. It was a reality that many climate-wise investors had been acting on for a while, but that BlackRock, inc. was just now (publicly) proclaiming. The world’s largest asset holder, manager of pension funds, creator of ETFs, and holder of retirement accounts finally realized that it’s control over nearly $7 trillion dollars could be harnessed to make a difference on climate. That is, were it all to push in one, climate-smart direction.

For decades, climate activists have been working to convince hedge funds and investment banks that not only can their financial clout be used to reign in problematic actors, but that their own financial support of fossil fuels incurs monetary risks that are not being considered. As governments move to regulate fossil fuels and ever more severe storms threaten extraction infrastructure, holding stock in fossil fuel companies begins to look increasingly risky. That’s without even mentioning the ethics of knowingly bankrolling a crisis that extracts its toll in lives.

            Green investing is of interest to a rapidly growing number of individuals, and there are an increasing number of climate friendly investment vehicles out there to match. This interest is part of a larger movement to push for a better world through the careful placement of investment dollars. More and more people are taking into consideration environmental, social, and corporate governance, or ESG, records of companies when selecting investment vehicles. We don’t all have $7 Trillion in assets to invest, but many of us have 401ks, IRAs, and taxable brokerage accounts that we can leverage for good causes and receive more ethical returns from.

Meet the ETF

If you’re in the market for a relatively simple way to keep your money from touching businesses acting irresponsibly in the era of climate chaos, allow me to introduce you to the exchange traded fund (ETF). In case you don’t speak Wall Street fluently, an ETF is like owning a piece of a large basket of stocks that typically have a various theme. The first, and still the best known, was $SPY. Introduced in 1993, the fund that lets you buy a stake in all 500 companies in S&P’s famous market metric with a single trade. Since then, ETFs have become incredibly popular with everyday investors as they enable you to spread your money across many companies that are pre-selected for a certain reason. This shields you from the volatility of a single stock but still lets you focus your investments. ETFs are advantageous because they can do this while offering the trading ease of a single stock purchase and avoiding some of the fees and negative tax implications that come with their cousin, the mutual fund.

Because of these flexibilities, there is no shortage of themed ETFs to suit your investing whim. Want to invest in 3000 companies at once? The Russell 3000 ETF ($IWV; run by Black Rock) has you covered. Only interested in companies that have recently started trading on the Street? The Renaissance IPO ETF ($IPO; appropriately) has you there. One ETF lets you put a stake on 89 video game related companies ($GAMR, appropriately again). Some ETFs are even just bundles of other ETFs!

Meet the Green ETF

Ok, fine. That’s all well and good, but what does this mean for your average worker who just wants to avoid having their nest egg support fossil fuel companies? When you combine the flexibility and ease of ETFs with growing interest in sustainable investing, you get a veritable explosion in the number of available environmental and climate themed ETFs.

Just some of the green themed ETFs out there include $SPYX; the fund that invests in all the S&P 500 companies except for those holding large fossil fuel reserves. ETFs like iShares Clean Energy ($ICLN) focus just on companies in clean energy businesses like wind and solar. There’s one that tracks the solar industry ($TAN, hilariously enough) and one for the wind industry ($FAN, never say fund managers aren’t clever). If you’d prefer to take a bet on grid level energy storage, $GRID has you covered.

There are even a couple ETFs that look to create a broad, low-volatility index fund (similar to the S&P 500 funds) that exclude not just companies that extract fossil fuels, but only explicitly include those that are climate leaders through their corporate behavior. In this category you’ll find the 264 company $ETHO (which tracks the Etho Climate Leadership Index) and the 1530 company $LOWC fund.

But What About the Returns?

That’s a lot of interesting ticker symbols I just listed off, but what about the actual returns? Having choice is great, but if they don’t leave you in a position to grow your nest egg, what good are they really? At least, in the typical capitalist sense?

As of the end of November 2019, $SPY (the S&P 500 ETF) had returned 23.59% year to date. Considering that the average annual return on broad indexes has historically been 8%, 2019 was, by all accounts, a crazy good year to have money in the stock market. The return on $SPYX, the index fund that is the S&P 500 less fossil fuel producers, returned 24.14% over the same period. Interestingly, eliminating fossil fuels from your holding in 2019 yielded a (slightly) higher return across the broad market. And $ETHO; the fund comprised of companies that are climate leaders in their sector? It returned 28.52%; a whopping 5 points better than the general market in a year of already gargantuan returns.

Far from being a burden or drag on investors, climate conscious investing outpaced traditional investment vehicles in 2019. A few other highlights: $ICLN, the clean energy fund, returned 30.5% by December; a full 6.91% better than the broad spectrum $SPY. $PZD, a clean tech ETF, retuned 27.37%, still beating the S&P 500. Not to be outdone, $PBW, a clean energy ETF with 40 holdings, retuned a whopping 43.55%.

Caveat Emptor

Investors do face one pitfall when choosing climate conscious choices: price. The price of an ETF is denoted by what’s called an expense ratio. That is, the proportion of the fund’s assets that are used for administrative activities. To simply the picture, the higher the expense ratio, the higher the “price” of the ETF. For reference, $SPY has an expense ratio of 0.09%. As the average expense ratio of an ETF is 0.5%, $SPY is pretty cheap. But $SPYX, $SPY minus the fossil fuel producers, will cost you 0.2%; still below average but considerably higher considering it’s nearly the same list of companies. $ETHO, the fund of 264 companies that are climate leaders in their sectors, will cost you 0.47%. $PBW, the far and away winner of clean tech ETFs in 2019, will run you an even higher 0.70%.

Higher prices are currently a theme that investors have to take into consideration when they look to divest their personal portfolios from fossil fuels. Which, editorially, is a shame considering that investors should be encouraged to pursue these investment avenues as opposed to disincentivized by higher expense ratios. Still, the obvious incentive of higher yields, should they continue, may be enough of an attractant to overcome this barrier.

Those higher yields on green ETFs, in fact, highlight the reality that fossil fuel investments aren’t sound choices . As high flying a year as 2019 was for the stock market generally, the energy minerals sector of the S&P 500 struggled to make any money at all (see graphs below). This at the same time that clean energy ETFs were reporting year-to-date returns of 25% to 45%. That flat performance came in a year where oil prices weren’t exactly stiflingly low. Now, after the economic turmoil and crash in oil prices that accompanied the COVID-19 pandemic, it’s looking increasingly unlikely that fossil fuel stocks are a good place to park your money.

It’s become so apparent that fossil fuels are a bad investment that Jim Cramer, the former hedge fund manager turned colorful television personally, actually announced live on air that he’s “done with fossil fuels.” A former fund manager interested primarily in profit went on TV and stated that “the world’s changed” and that “we’re in the death knell phase” of fossil fuels; “You can tell that the world has turned on them.”

Investing Green vs. Investing at All: The Environmental Ethics of Markets

I’ve always found the ethics of investing when you care about environmental issues to be… interesting. There isn’t a lot of clarity out there about what a “green” investment actually is. In some sense, it may simply be avoiding a handful of companies that are the worst offenders of environmental laws and norms. On the other end, it can be called into question whether investing at all, and by extension supporting an economic system proven detrimental to the sustainability of our planet, can ever really be “green.” That’s the issue under the microscope for the second and final part of this series. Don’t touch that dial.

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