Getting carbon out of your portfolio is tricky
New York • If you are like millions of Americans and own a broad stock index fund, you own parts of Exxon Mobil, Peabody Energy and other companies that earn money selling oil, coal and other fossil fuels.
For some, that's great. Fossil fuels give us light, keep us warm, help grow our food, deliver our products and jet us around the planet. And companies such as Exxon, Chevron and Southern Co. are stable and profitable and offer consistent dividends that pad retirement accounts nicely.
For others, however, profiting from companies that produce or burn fuels that pollute and contribute to climate change and lobby against laws and regulations that would reduce emissions is something they want no part of. Still others fear the share prices of fossil fuel companies are sure to plummet when society decides we can no longer burn the troves of hydrocarbons they own.
But while student groups around the country are calling for college endowments to stop investing in fossil fuel companies, and some religious groups have done already so, it's much trickier for individual investors.
Matt Patsky, chief executive of Trillium Asset Management, an investment adviser in Boston that has long helped endowments, religious organizations and wealthy families invest in socially-responsible ways, says that about a decade ago clients started asking the firm to create investment strategies that left out fossil fuel companies.
The firm, which manages $1.4 billion, now strips out investments in oil and gas companies, coal companies and utilities that generate electricity with mostly fossil fuels for these clients. The firm then adds shares of other companies that attempt to mirror the performance of these traditional energy companies. He says the firm has been able to generate returns as good or better than the broad market, though he says it is not possible to generate dividends quite as high as the total market.
"The fear of there being a huge sacrifice in return has been unfounded," he says. "It is doable and it will not have a meaningful impact on returns over a full market cycle."
But it's much harder for individuals to copy this strategy. There are a limited number of funds available that do this, they are not commonly offered through company retirement plans, and they don't mimic the broad U.S. stock market.
The most prominent index of companies that meet certain social criteria, the MSCI KLD 400 Social Index, includes some fossil fuel companies and excludes nuclear companies, the biggest source of low-carbon electric power. A handful of mutual funds and exchange traded funds are based on this index.
A similar index, called the FTSE4Good US Select index, on which the Vanguard FTSE Social Index Fund is based, contains 20 oil and gas companies.
The Portfolio 21 Global Equity Fund excludes fossil fuel companies, but it is a global fund, so it doesn't closely match the U.S. market. Also, expenses are higher than average, and far higher than most index funds.
The Green Century Balanced fund, which is managed by Trillium Asset Management, also excludes fossil fuel companies. But it is a blended fund that includes stocks and bonds and therefore doesn't closely match U.S. stock performance. Its expenses are relatively high, too.
Investors can, of course, design their own fossil fuel-free portfolio by cobbling together a handful of sector funds while leaving out energy. There are nowadays low-cost exchange traded funds for every sector, such as financial services, retail, health care, consumer goods, technology and industrials.
But, still, that would require individuals to pay much more attention to their retirement accounts than most would like, and expose portfolios to ups and downs most would very much like to avoid.
Things will get easier in the near future, though. Green Century says its Green Century Equity fund, which is based on the KLD 400 Social Index, will strip out fossil fuel companies by April 1.
And Trillium's Patsky knows of at least two other firms that may be developing funds or indexes based on the broad U.S. stock market but excluding fossil fuel companies.
"There will be more options now because there's more awareness of the issue," he says.
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