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Fossil Free

Portfolio Overview

A low fee investment option might be of interest to investors interested in participating in a fossil free divestment campaign for personal reasons, or in support of the global divestment campaign being promoted by organizations such as http://www.350.org, the Sierra Club and http://www.gofossilfree.org. The underlying science of climate change supports the thesis that fossil fuel companies have already identified significantly more resources than can be safely consumed (see the April 2009 paper published in Nature, titled Greenhouse-Gas Emission Targets for Limiting Global Warming to 2 deg C by Malte Meinshausen). If the science is translated into policy, the fossil fuel industry may have an overstated long-term investment value (see http://www.carbontracker.org).

One of the early successes of socially responsible investing was the divestment campaign utilized by institutional investors to address apartheid in South Africa. An individual or organization can use socially responsible investing to execute a divestment campaign. This is often called impact investing.

Most index and actively-managed mutual funds typically include companies that are involved in the production or distribution of fossil fuels. In order to avoid fossil fuel investment, it is important to recognize that there are many options if the primary objective is solely to avoid direct investments in fossil fuel companies. Other objectives may be relevant – investment cost, practicality, and other social purposes. There are existing actively managed mutual funds that do not include fossil fuel stock holdings (http://www.ussif.org).

Objective

The portfolio objective is to present a transparent screening formula that favors investment in corporations with best-in-class behavior in the area of green energy, while still maintaining adherence to good investment practices such as diversification, attention to company financial stability and low investment fees.

It is assumed that investor activism will be of particular interest to those already familiar with socially responsible investing (SRI). The proposed portfolio, therefore, filters out firms that are not included in any of the broad SRI indices.

Investment Criteria

US-listed stocks that are already included on a major social responsibility index.

Exclude stocks of companies identified as fossil fuel providers (e.g. list of 200 companies noted at http://www.gofossilfree.org/companies).

Companies listed in the EPA Green Power Partnership (Fortune 500 Partner's List) represent potential holdings for consideration (http://www.epa.gov/greenpower/).

Consider companies with favorable (e.g. top 40%) financial stability metrics (e.g. Morningstar® rating, S&P credit rating).

Include between 20 and 50 stocks, depending upon the investment platform.

An equally weighted stock allocation may minimize single-stock risk.

Low Fee Implementation Options

Do-it-yourself (DIY) or DIY with some advisor assistance

Depending upon an investor's worldview, and experience and access to portfolio evaluation tools, one option would be to use the suggested investment criteria to construct and test a portfolio of potential holdings. Portfolio back-testing can be helpful in identifying the historical performance characteristics and volatility. Investment platforms such as Folio Investing and Motif Investing have fee structures that make it practical to build a portfolio of individual stocks and invest in fractional shares as needed, for a relatively low fee. Discount brokerage platforms which require whole-number share purchases and have trading costs based on the number of stocks in the portfolio may require that a large initial investment be made to keep the investment cost in alignment with a low fee philosophy.

It is highly recommended that you obtain some professional investment advice in order to establish that your overall portfolio mix is in alignment with your risk capacity, time horizon, tax planning needs, and overall financial objectives. Many hourly, fee-only, advisors would be able to develop and/or evaluate your investment plan and generate a snapshot of the anticipated risk/return profile. While some clean technology portfolios (i.e. highly focused on a particular technology or small companies) can be very volatile, portfolios consisting of large company stocks may more closely follow the general market index. Advisors using the build-your-own tool available from Motif Investing may be able to provide convenient access to an established portfolio inspired by the construction process identified.

Motif Investing

The Motif Investing platform has a ready-made portfolio named “Fossil Free”. It no longer uses the same criteria noted above (e.g. no sustainable investing filter). Note, however, that the “Socially Responsible“ Motif does not currently include any holding of fossil fuel providers.

Disclaimer

This information is not intended to provide specific investment, tax or legal advice. You should consult appropriate professional help for your investing decisions. Tom Nowak may own securities that may or may not be identified using the screening tools noted.

Any references to investment performance are historical in nature. Past performance does not guarantee future results, and all investments entail risk of loss, including the potential for loss of principal. Each investor is unique: factors including his or her investment experience, tax situation, time horizon, tolerance for risk and fluctuations in value should be weighed carefully before making an investment decision.

The views expressed are solely those of Tom Nowak and do not necessarily represent the views of any organization that the author is associated with. Neither Quantum Financial Planning LLC nor Tom Nowak receives any fees for mention of any source of information or service provider.

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