This is part two of a two-part series on climate-friendly investing. Part one can be found here.
In a previous post, I talked about how the climate conscious investor might go about divesting their own portfolios from fossil fuel companies and other bad corporate actors who are currently stealing from the future to pay present investors. Namely, there is a booming number of Environmental, Social, and Governance (ESG) Exchange Traded Funds (ETFs) that allow you to fairly easily move your retirement savings and other invested dollars away from the companies that have proven to have a criminal lack of forethought for how their actions today endanger the stability of lives tomorrow.
However, just because an investment product says it’s green and climate friendly, doesn’t turn out to mean a whole lot. In truth, there are a lot of green ETFs that might include companies that you, personally, find disqualifying. So how is your average 401k holder to know if their efforts to divest from fossil fuels is really achieving what they want? Or, to take a more philosophical turn, is investing even a responsible activity at all? Is hitching your future to a freight train fueled by the myth of endless growth at any cost ethical? Is it even practical?
What’s in a (Green) Name?
Potential investors in climate and environmentally friendly ETFs should be warned; a fund manager’s definition of climate friendly investing may not always match your own. There is a bit of consumer obfuscation to work through when searching the growing pile of green ETFs. It may seem perfectly obvious to you that a fund claiming to address climate change would exclude companies that work directly in fossil fuel extraction. The managers of the SPDR MSCI ACWI Low Carbon Target ETF ($LOWC) would disagree, however, as oil field service company Schlumberger and natural gas company Oneok are among their holdings. These are just two of the forty fossil fuel related holdings included in the ETF even though the fund is “designed to address two dimensions of carbon exposure – carbon emissions and fossil fuel reserves.” The fund managers might make the argument that, among fossil fuel companies, these included businesses have the lowest emissions profiles. But their business is still fossil fuels at the end of the day.
So how is a potential investor to know what exactly they are getting their money into? You could go through the work of looking up all the companies that comprise a fund, digging through their disclosure documents, and trying to establish what activities comprise each company’s activities exactly. Doesn’t that sound like a fun weekend? Endlessly pouring over dozens of SEC forms 10-K and looking up arcane accounting terminology to figure out where each of the potentially hundreds of companies accounts for every dollar in and out?
Luckily, the amazing folks over at Fossil Free Funds have already done that for you. They have compiled a data base of hundreds of ETFs with information not only on how much of the holdings are touching fossil fuels, but in how they connect. For example, $ICLN is explicitly designed to be a clean energy ETF but has holdings in two utility companies that utilize fossil fuels to generate electricity. The question, then, is does that fact disqualify $ICLN as a clean energy ETF? Does the amount of renewable energy generated by those utilities counteract the amount of fossil fuels they burn? Does the presence of these two utilities disqualify an ETF that is primarily a collection of companies dedicated solely to clean energy? That’s likely to be a pretty personal question and ripe for debate.
Is This Too Close?
Peeling back the veneer on these climate change ETFs also raises another question: what does it mean to be ‘involved in fossil fuels?’ How close to the well head is too close?
For example, the tech industry has been the darling of Wall Street for the past few years. Companies like Amazon, Google, and Microsoft have seen surging stock prices and most “safe bet” blue chip ETFs will include these technologic titans. $SPYX, for instance, may have dropped companies like Exxon and Shell, but still has some of its largest holdings in Amazon and Google.
This becomes potentially problematic for an environmentally minded fund when Amazon and Google quite intentionally sell tech to the fossil majors for locating new oil fields. Their AI is being marketed as a new exploration tool to increase rates or extraction. In short, big tech sees big business in big oil. After a pressure campaign by Greenpeace in May of 2020, Google seems to have taken a step back from this particular application of their AI, but Microsoft and Amazon have been dragging their feet in doing the same.
So, the question becomes whether an investment in these technology firms is still a “clean” investment; a question with no clean answer. These same AI products that can help find more fossil fuels to add to the problem could also be tooled to create better renewables, better batteries, and more efficient grid systems. Ultimately, it’s a matter of ethics that will differ for each potential investor.
In a way, it’s a modern, financial version of the philosophical heap problem: how many dollars must be touching fossil fuels for an investment to become unethical? After all, the fossil majors have worked tirelessly for the past hundred years to ensure their fuels touch nearly every aspect of our lives. It’s hard to imagine any company that is not, at least in some way, involved with fossil fuels. Even solar and wind companies transport their components on fossil powered trucks.
For the climate conscious, the whole of investing can be seen as varying degrees of market participation that each present new ethical and financial questions. At the most climate disinterested end of the spectrum is broad investing; choosing to not worry about the consequences of your invested dollar.
Then comes the sort of green investing that puts money into green specific funds and investment vehicles. These funds may have money touching some fossil fuel companies, and the individual investor may have to take researching ETFs into their own hands by utilizing tools like Fossil Free Funds. Another step in and an investor may choose to do more research and exclude funds that include companies, like Amazon and Google, who use their business to aid in the extraction of fossil fuels even if it only represents a small portion of their overall business.
Should You Be Invested at All?
That leads us to perhaps the strictest interpretation of climate responsible investing: not investing at all. Investment in the stock market implies some level of trust in the central tenet of capitalism that eternal growth it possible. It is a tenet that has proven to be uncaring toward the people it exploits, the communities it destroys, and the ecosystems it denigrates all in service to the idea that the stock price must never stop climbing. It is both a system that is unsustainable without radical change and one in which many have staked their futures upon with little other option.
The ultimate question becomes is it responsible in an era of climate chaos to participate in this system at all? A system that chiefly concerns itself with this quarter’s earnings? While many companies are announcing sustainability efforts with the trappings of change, few have been willing to sacrifice profitability and market metrics today to achieve the radical transformations capitalism will need to undergo should they be a truly positive force for climate transformation. For all the talk of sustainability being a sincere virtue, it still seems to come in far down the priority list on which reigns the king of ever-expanding profits.
Climate conscious investors, then, are forced to answer as many philosophical and moral questions as they are financial ones. Like many things, the answer falls on a spectrum from radical apathy to an outright refusal to participate. It’s a decision that doesn’t have any clean answers and isn’t the same from person to person. Since many in the working, western world have staked their later-in-life financial futures on the performance of the market, a mass exodus seems unlikely. What choice do we realistically have?
Setting aside philosophical questions about whether or not commodities markets should exist at all, what should a climate conscious investor do? I would argue that any movement toward a less fossil fuel intensive portfolio is real and meaningful progress. Simply moving funds from a general index to an ETF that foregoes fossil fuels holdings helps to punish catastrophically irresponsible companies in a language they understand full well: stock price. Plus, the past few years of returns have shown that it can be both financially rewarding and ethically conscious to do so.
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