Why you should care
Weatherproofing our investment portfolios is a challenge we’ll all have to face up to.
As a financial planner, Tom Nowak takes a somewhat curious view toward money – a vegan’s view. The founder of his own company just outside of Chicago, he’s written a book that guides vegans, vegetarians and meatless-Monday investors on next money steps. So, little wonder this socially responsible planner has moved on to a new topic: fossil fuel–free investments. He’s fairly certain they will be doing well, eventually — “as the fossil-fuel age comes to a close.”
Talk about weatherproofing your investment portfolio. While it’s easy to dismiss what some might see as fringe ideas, Nowak’s approach looked positively prescient after the Norwegian government recently ordered its gigantic — $784 billion — oil fund to shed investments in coal companies. And that’s just the beginning. Between all the mounting talk about climate change, the Obama administration’s efforts to regulate coal and methane emissions and calls from everyone from the pope to Islamic leaders to move toward halting global warming, many investors big and small now feel they’ve got little choice but to take heed. One recent survey found that 42 percent of over 500 investment pros polled in the U.S. now offer fossil fuel–free portfolios to investors, nearly double the number from 2013, according to data from the investment advisory firm First Affirmative Financial Network.
Still, knowing how to take action isn’t always simple for eco-conscious investors. “People are going to look for an easy button,” says Cary Krosinsky, executive director of the Network for Sustainable Financial Markets, a global group of finance pros. Unfortunately, he says, they won’t find one. It’s not just the lack of suitable investment vehicles, despite the recent growth in options; it’s also the deep uncertainties about what’s likely to happen down the road. The uncertainties affecting companies and investments fall into two big buckets: the rate and character of climate change and the unpredictable impact of what man does to mitigate the effects, from technology to policy changes. And the two, of course, are linked in numerous ways.
Some investment houses have recently begun launching funds that give investors a relatively cheap way to get into this global-warming trend.
There are various scenarios that could play out for investors, and a recent report by consulting firm Mercer tried to sketch out some of these possibilities. It looked at several basic scenarios over the next 35 years, with the assumption that global average temperatures will rise from 2 degrees Celsius (over pre–Industrial Age levels) to over 4 degrees. Coal’s a loser no matter which way you cut it, with the steepest losses in the next 10 years. Renewable energy? Anyone’s guess, but the report says returns could jump as much as 54 percent over the next three decades — or, for the less optimistic, just 6 percent.
Interestingly, a lower temperature rise may still be good for some investors, particularly those whose portfolios favor emerging markets and infrastructure investment. But if there’s a 4-degree lift with warming temps, forget that good news: Emerging markets will likely get slammed, along with holdings tied to agriculture and real estate.
Next steps? For investors, an obvious response would seem to be funneling investment money into clean-energy technologies. Krosinsky points out, however, that just putting money into the sector isn’t likely to work, since it’s filled with many companies that will eventually fail, as in any emerging technology. And picking only a few big winners — like investing in Microsoft or Apple when they were minnows, and sticking with them over the years — is harder than it sounds.
Still, some investment houses have recently begun launching funds that give investors a relatively cheap way to get into this global-warming investment trend, names like State Street Global Advisors and Black Rock among them. For his part, Nowak assembled a basket of up to 30 fossil fuel–free big-company stocks for his clients, while Ron Rhoades, a financial planner and Western Kentucky University prof, has stopped putting his clients into municipal bonds with maturities greater than 15 years for cities at sea level — in anticipation of rising waters that he thinks are underestimated.
Will it work? Certainly it’s just as easy to find opponents as well as proponents. Mary Brooks, a financial planner in Colorado Springs, thinks it’s arrogant for someone to believe they can predict what will happen and that the science is far from settled: “I think it’s risky,” she says. As the owner of a farm in the Midwest, she cites government ethanol rules as an example of a political intervention that pushed up the price of corn for food but hardly helped the environment. “The poor folks are the ones who suffer,” she says.