How to invest – avoiding fossil fuel companies
Now there are multiple reasons for avoiding fossil fuel companies- it maybe that you think that the world has moved on and fossil fuels haven’t. You could be directly affected- or part of the environment you really care about is being destroyed by them. You might love electric cars and support them- rather than give flaying support to petrol/diesel cars that really should have stopped years ago. Whatever your personal reasons for avoid fossil fuels- this article will hopefully show you how you could go about this.
Personally I think that fossil fuels are over, sure- they helped us over the 100 years, giving us personal transportation that probably wouldn’t have happened so quickly. However, they did this at great cost to the environment- and affected our health too. Living near a major road increases your risk of diseases like asthma by 9x in children. Wait, every time I drive my car- I cause other people illnesses?
If you invest in passive index funds– and you really should, you should hopefully be aware that they invest in fossil fuel companies. And because they are so huge- this isn’t a tiny amount! In fact, out of the top 10 companies in the FSTE100- 5 are fossil fuel based companies:
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So- what does that mean for you?
Well- if you really want to make sure that not a single penny of your money goes to fossil fuel companies- you are going to have to avoid any standard index that includes them. I’m afraid that’s going to include any of the big indexes, FTSE100, FSTE250. So, what do you do? Well, there are a few options:
Fossil free indexes. These are pretty new- (well, last 5 years- which is investment terms is pretty short). You have funds like SPDR S&P 500 Fossil Fuel Reserves Free ETF which aim to replicate the S&P 500 index, but without the fossil fuel companies. It must be noted that because its not the full index- it’s obviously not going to be exactly the same index return, so you need to know this before you go and invest.
Other indexes. Again, another option is to avoid the “standard” indexes themselves entirely- so, not investing in FSTE100/250, S&P500 etc etc. These tend to use methods like Environmental, social and corporate governance (ESG) or Socially Responsible Indexes (SRI) to give them a score. Then, only if a company gets a certain score can it be included in the index (or the average score of the companies within the index is considered). Now, you do need to be careful- because you are relying on the providers criteria here- some I really don’t like the look of.
A good example of an SRI fund is offered by Vanguard, SRI Global Stock Fund – Accumulation. On the face of it- it looks good- “Match the risk factor exposures of the Index by investing in a representative sample of the securities that make up the Index, excluding any securities which do not meet socially responsible investing criteria. The criteria take into consideration environmental, social and ethical factors as determined by the Index provider and exclude stocks that violate United Nations Global Compact principles”. However, it’s only when you look closer that they include holdings such in oil & gas! You can see that here: https://www.vanguardinvestor.co.uk/rs/gre/gls/1.3.0/documents/13589/gb plain as day, 3.6% in oil & gas. Not helpful if you are trying to avoid investments such as this!
So, what should I do?
Well, with the knowledge you have now, you might decide that an ESG/SRI fund that only has 3% odd in oil/gas is ok. If that’s the case, off you go and invest in that. If you don’t like that, you could still go-ahead with the ESG/SRI fund with some of your investment (say 90%)- and then invest the other 10% directly in green companies.
You could search for other ESG/SRI indexes that don’t include any of these fossil fuel investments. I’m not aware of any that would track a large index like the FSTE100/250- apart from the ones I mentioned above (and even then, they aren’t really index trackers if they exclude some of the index!)
There are other indexes that you could look at as well (you may have realised I like indexes, and you should too). The Nasdaq actually has quite a few that might be reviewing-
If you have decided that Indexes aren’t for you, then there also isn’t anything stopping you from buying shares in green energy companies themselves. Just a couple of examples of this:
- Foresight Solar Fund Limited
- Greencoat UK Wind
- Impax Environmental Markets plc
- Jupiter Green Investment Trust
- Menhaden
Do note- that as with any investment- take proper professional advice, do your research and don’t just listen to some random person on the internet!.
My thoughts:
This is a continually changing area- it used to be only private equity could invest in green energy. That’s all changed, and continues to change. It’s a whole new world out there. I really like investing in renewables- as it tends to provide a steady income- which will be perfect as I get closer and closer to FIRE (and in fact when I get there). This tends to be because these companies sell power (or other services), and usually, in the case of wind/solar, have government subsidies “baked in” as well. These are usually for 10+ years to enable the construction costs to be spread over the term of the renewable. It’s probably not going to set records (like Amazon/Google), but as sustained growth- for our planet, it’s a pretty good deal.
Thoughts/Questions?
Please comment below!
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