Your Questions / Our Answers
Webinar: Opportunities and Risks of Fossil Free Investing
May 5, 2020
Andrew Behar, CEO of As You Sow
Mark Campanale, Founder & Executive Chairman of Carbon Tracker
Kathy Hipple, Financial Analyst of Institute for Energy Economics and Financial Analysis
Bob Litterman, Partner at Kepos Capital
If "Energy" is only 2.6% of the S&P 500, why is the S&P still prone to crashing when the oil price drops?
There are many reasons that the S&P was crashing—most likely because it appeared the economic slowdown related to COVID-19 would be massive. The S&P price changes are not necessarily related to oil prices because, as your question indicates, the fossil energy sector is only 2.65% of the broader market. There are much larger forces at play.
Any sense of the magnitude of reduction in emissions due to the COVID-19 crisis?
Most recent estimates are about 5.5%. I think it could be revised upward if the rebound of the economy is slower than currently expected.
Surely most of those reductions are from the transport sector. Cleaner air around the world makes it most visible and would think citizens would take note.... Your thoughts?
Yes, most are from the transport sector. I think there will be permanent impacts, such as more working from home and more use of video communications, but not nearly a big enough impact to solve the climate crisis. Clearly, responding to a pandemic through social distancing is not a good way to reduce emissions, and most of the reductions in emissions are likely to be reversed when the pandemic is under control.
How do you factor in or monetize the human population costs from what you have been presenting?
The policies that I have been advocating are designed to reduce climate damages to human populations. These policies will likely stimulate the economy but certainly will create the incentives that will balance the short-term costs of emissions reductions appropriately against the benefits to current and future generations.
How can we invest in the alternative economy that offers jobs to those who have lost them in the fossil fuel industry?
Federal fiscal policies can be designed to create job skills and to support jobs for those negatively impacted by incentives to reduce emissions.
Can you speak to why you still think there is hesitation to fully adopt an ESG investment approach? What are the barriers to entry?
There is common misperception that adopting ESG into the investment approach means sacrificing financial returns. The opposite is true. In addition, many pension funds pay large fees to outside managers. Asking them to incorporate ESG factors is an additional layer of work, and inertia and sheer laziness cannot be ruled out. Pension fund managers must insist that their outside managers present fossil free options.
What do you think about the Energy Innovation and Carbon Dividend Act, which has already been introduced?
See below for the answer to the question about H.R.763.
Some of us have some monies unavoidably invested in Energy via an S&P 500 index fund in 401(k), IRA, etc., for decades. How do we remove ourselves from these locked-in investments without incurring loss equivalent or exceeding if we stay invested and let the fund managers exit out?
See below for some ideas of using ETFs to reduce exposure to stranded assets.
Are there particular platforms that you recommend for investing in fossil-free stocks, such as those featured on As You Sow? Which ones and why?
There are numerous ETFs and low-fee mutual funds that claim to be low-carbon, carbon-free, or even fossil-free. We cannot give investment advice. But, if you want to make sure that the funds are, in fact, fossil-free, meaning reserves, coal, fossil-fired utilities, pipelines, and oil field services, the fossilfreefunds.org tool on the As You Sow site is excellent.
How do I get my deferred comp portfolios with AIG divested of fossil fuels and invested in renewable sources? My advisor tells me they don’t have ESG accounts.
Keep pressing and document your attempts in writing. Continue to send written requests for investment vehicles that meet your requirements.
This has been really interesting, and I am excited to be armed with all this framing. I am looking for a 101, tactical, how-to for shifting your personal investments. Looking for recommendations.
There are numerous ETFs and low-fee mutual funds that claim to be low-carbon, carbon-free, or even fossil-free. We cannot give investment advice. But if you want to make sure that the funds are, in fact, fossil free, the fossilfreefunds.org tool on the As You Sow site is excellent.
How would divestment help the climate crisis?
Divestment is important tool for delegitimizing the oil and gas sector, which is an industry that has, in large part, created the climate crisis by denying the climate-related impacts of its principal products. Once an industry is no longer legitimate, many of its costs rise, and it becomes more difficult for these firms. For example, the top chemical engineers are less likely to work for an industry that is widely perceived to be illegitimate. Finally, if large investors actually divest of, and not just engage with, companies that are unwilling to address the climate risks, this will send a signal to other investors, and, ultimately, to each and every company in the energy sector.
When you say legislation will be introduced on a bipartisan basis, are there any (and how many) Republicans on board with a strong pricing bill?
Yes, there is Republican support in both the House and the Senate. The critical issue is the Senate, and Senator Mitt Romney is the leading advocate for a carbon dividend approach, but there are many who have supported the idea of carbon pricing and would support it if given the chance.
Question for Mr. Litterman: As You Sow has been successful in encouraging banks to measure their financed emissions with the goal of disclosing that data and using it for aligning their portfolios with science-based targets. How important from a risk perspective is it to understand the exposure to emissions (scope 3 emissions) in lending and investment portfolios and to be able to have globally reliable standards and data for measuring that exposure?
I believe that transparent disclosure of material risks, including climate-related risks, is important for all publicly traded corporations. It is widely accepted that such disclosure needs to be significantly improved. Emissions are one dimension of that disclosure but not necessarily the most important one in any particular context. For example, two years ago, in probably the largest climate-related bankruptcy to date, PG&E was devastated by a wildfire that was certainly made more likely through the impacts of climate change—but it was a risk unrelated to PG&E’s emissions.
For a retail investor, what do you recommend as an alternative to an ETF, such as VTI or SPY? For example, what ETF tracks the MSCI ACWI ex Fossil Fuels Index?
SPY has a Carbon Underground Reserve free version SPYX
MSCI ACWI ex Fossil Fuels Index is called CRBN
Question for Bob: Do you support H.R.763? Also, do you support the CFD proposal from Citizens Climate Lobby (CCL)?
Bob: I support having appropriate incentives to reduce carbon emissions. With co-authors, I published an academic paper in Proceedings of the National Academy of Sciences last year in which we argued that when you take risk into account, the appropriate incentive is well over $100 per ton today. We also investigated the cost of delay in implementing such a price, and the cost is huge and grows with the square of time.
I am on the board of the Climate Leadership Council (CLC), which has its own Carbon Dividend Plan that differs in some ways from H.R.763, which, in turn, differs from the CCL proposal. The CLC plan starts higher than the others but increases less quickly. I think the most important aspects of any carbon pricing plan is that it start immediately, that it be bipartisan, and that over time the price reacts to new information (about damages, technology, elasticities of demand, fragility of the environment, etc.—all information that may be relevant). The latter principle argues for flexibility, not a formulaic price path. The bottom line is that all of these proposals are much better than no price.
Won't low oil prices make renewables less competitive at least short term?
Yes, but the issue is not the low oil price, but rather the lack of appropriate incentives to reduce emissions. There is plenty of oil but no room for the emissions, and that is what we need to price. When the price of oil is low, it is a great time to impose a carbon tax. Consumers will not feel the impact as much as they would if such a tax were put in place when oil prices were already perceived as being high.
What is the picture for renewable energy and energy efficiency stocks? How well are they doing? Should those who divest of fossil fuels reinvest in renewable energy and energy efficiency?
Renewable energy and energy efficiency stocks have outperformed the broader market over the past two years.
Why do people then still invest in fossil fuels? Is there a trend of investors (private/institutional) divesting?
I suppose some people still invest in fossil fuel companies because they appear to be cheap, at least compared to prices a year or two ago. But, yes, there is a trend both for divesting of and for selling or shorting stranded assets such as coal, tar sands, and oil exploration and production. The trend is clear: Oil and gas companies comprised nearly 29% of the S&P 500 in 1980. At the end of March 2020, they made up only 2.65%. Divestment is taking place.
Are you going to address bond mutual funds? They seem harder to find.
We can add corporate bonds to the Invest Your Values suite of tools at any time. We do not have them now due to lack of funding to license a database to translate bond ISINs to determine which are corporate bonds at which company. We hope to find funding and have visibility into pure bond funds as well as bonds mixed with equity funds.
Are there any initiatives to get companies like Vanguard to go fossil free, or is the best action to move our mutual funds? If the latter, what would the steps be?
Vanguard and Blackrock are developing ESG funds that we have not yet rated as the holdings are not available on Morningstar because they are so new. They do have some “fossil-free” funds that unfortunately hold many fossil fuel companies. For example, ESGV claims to be fossil free but holds 41 fossil fuel companies and 27 fossil-fired utilities. In addition, State Street funds like EFAX, called the “Fossil Fuel Free ETF,” has six fossil fuel companies and 19 fossil-fired utilities.
Does the U.S. have the political will to change enough to avert the climate crisis?
I believe that we will in the near term; I would guess within two years.
In addition to a price on carbon, shouldn't we also focus on what consumers can do without the support of the fossil fuel industry? For instance, what about accelerating progress toward less animal protein? I would love to see an animal protein tracking index.
There are many actions that individuals can take that will help reduce their carbon footprint. However, the scale of the problem is such that we need collective action, which is why a price on carbon is essential.
Was the investment strategy of the WWF the same thing as shorting fossil fuel assets, or was it something different? How could individual investors (and 401(k) groups) do the same?
The basic investment strategy of the WWF was to sell all its exposure to stranded assets through a swap. From an economic perspective, it is exactly a sale of fossil fuel assets and investing the proceeds in the broad market as represented by the S&P 500. The easiest way for an individual to do the same would be to sell ETFs in the fossil fuel industries. Two examples would be XLE (oil) and KOL (coal). If individual investors wanted to avoid being exposed to losses in a rising stock market, they could go long SPY (the S&P 500).
Do you have any plans to launch the fossilfreefunds.org website in the UK?
We had it in the UK a few years ago, as well as in Germany, France, Denmark, and Hong Kong. It is expensive to license the data. It is just a funding issue. We are technically capable of showing every fund in every country in the world.
What do you think about Harvard's recent announcement about divesting of fossil fuel investments?
It’s not entirely clear what Harvard’s announcement means, but to the extent that it represents a commitment to position the endowment to do well in the context of a rapid transition to a low-carbon economy, which will be required to achieve net-zero carbon emissions by 2050, that makes perfect sense. Divestment is a blunt approach—how do you choose where to draw the line? What does it accomplish?
I use fossil-free funds frequently. Are you considering adding stocks to provide ratings?
We will stay focused on mutual funds as the screened companies are listed in the “How it Works” page on each themed site. We have added a downloadable CSV file to make it easier for people to run their own queries.
Bob: Is carbon price enough? Do we not need carbon price together with regulations?
An appropriate incentive to reduce emissions is a central, and an essential, component of federal climate policy, but by no means the only one. Certain GHGs (for example, methane emissions) may be better reduced through regulation, and of course there are other roles for the federal government, such as funding research, innovation, and the infrastructure of a low-carbon economy.
How can regular (non-institutional) investors access a stranded asset total return swap? Are there examples of ticker symbols?
While a swap will require a brokerage account and agreements with counterparties that are beyond the reach of most regular investors, they can create basically the same economic exposure through ETFs such as by shorting XLE (oil) and KOL (coal), and going long SPY (the S&P 500).
Why are there no airline companies on the Climate Leadership Council?
We are not sure why there are no airlines among the CLC Founding Members, but because fuel is a large component of the cost of air travel, airlines have tried to become more fuel efficient ever since the CLC’s inception. As a result, airlines have few cost-effective options left to reduce emissions and, as such, there will be significant beneficiaries if a carbon tax causes low-cost emitters to stop wasting the atmosphere’s limited capacity to safely absorb emissions. Thus, there is a very good reason for airlines to support a carbon tax.
Will oil and gas users happily pay the tax and not reduce their consumption very much to avoid costs of retooling?
What we can say for sure is that if emissions are priced appropriately, then not only oil and gas users, but all economic agents, will have the right incentives to reduce emissions and will be led by those incentives to make appropriate decisions.
When appropriate, I need a review of the swap concept. As a novice, I need a brief step-by-step guide to making my Roth IRA fossil free and productive.
See the above answer about regular investors using ETFs.
How can I convince my employer (a major tech company) to include an ESG in our core offerings for 401(k)? We tried last year and were told they were afraid it would be a breach of fiduciary duty to do so; this seems ironic, considering how poorly performing the energy sector has been.
Keep trying. The more HR and senior management hears that it is important to employees, especially employees who want their investments to align with their values, the more they’ll take the necessary steps to add fossil-free alternatives—ideally making these investments the default options. Regarding the fiduciary portion of your question about fiduciary duty, that is, in my view, a misreading of the obligations of fiduciary duty. I’m not sure if your employer or the service provider of the 401(k) made that comment, but it is incorrect. There is a case that your employer is failing in its fiduciary duty, which includes the duty to be impartial. If there are employees, particularly young employees who will need retirement funds for several decades, an employer who only offers retirement funds with fossil fuels may, in fact, be in breach of its fiduciary duty—
Can you speak to the role of plastics as a market for oil companies and what that means for emissions?
Plastics, or petrochemicals, are often viewed as ways for oil and gas companies to earn profits when oil/gas prices are too low for them to earn profits from their traditional upstream (exploration and production) divisions. Petrochemical margins have declined sharply over the past few years, and it appears this year will be no exception. The oil and gas markets are over-supplied, and the competition in the plastics industry is fierce.
When will markets decorrelate from the price of oil?
They already have.
Kathy: Where does nuclear energy fit in this picture?
The cost of building new nuclear is not economic. The reality is that the Levelized Cost of Energy (LCOE) illustrates that renewables are generally the cheapest option for the electricity grid.
What is the cash flow likely to be for 2020 with fracking companies?
Strongly negative. Again, this is following a 10-year period in which fracking companies, in aggregate, have been negative each and every year.
What do you think of data from Sustainalytics now being used on Morningstar?
Sustainalytics, Bloomberg-ESG, MSCI, Truvalue, and other ESG ratings companies are doing an amazing job at aggregating and analyzing a very thin data set. As companies disclose more information to differentiate themselves from competitors, the correlations between these ratings will improve over time. When people are critical of these rating diverging, they are not taking into account the lack of transparency and reporting standards by companies.
I would love any specific examples of investments that are A-graded on fossil fuels that can be accessed by retail investors who use Robinhood or Square/Cash App. Or, even how can stranded asset total return swaps be accessed through a Robinhood, Cash App, Fidelity, or other retail investing platform?
See above on the use of ETFs.
Andy: This is a great tool. What is the total number of funds in the database? What funds are not covered?
We cover the 3,000 most held funds in US 401(k) plans. It is just a budget issue to show every fund in the world.
What does capex mean?
Capital expenditures.
On carbon pricing, is cap and trade part of the mix or a strategy we should no longer support?Any approach that creates incentives to reduce emissions should be supported. That certainly includes various cap and trade approaches. Properly designed, a cap and trade approach and a carbon tax are both viable options for policy.