With increasing awareness of climate change and environmental issues, there is a growing demand for fossil fuel free investing strategies. Fossil fuel free investing, also known as sustainable investing, aims to build investment portfolios that avoid companies involved in extracting, processing and distributing fossil fuels like coal, oil and natural gas. This article will provide insights on how to build the best fossil fuel free investment portfolios.
Understand the rationale behind fossil fuel free investing
The key rationale behind fossil fuel free investing is to mitigate climate change risks and promote sustainability. Burning of fossil fuels is a major contributor to global warming and environmental issues. Hence investors are divesting from fossil fuels on moral and ethical grounds. Studies have also shown that fossil fuel stocks tend to underperform the broader market. Fossil fuel free portfolios have lower volatility and risks. For instance, the MSCI World ex Fossil Fuels Index has outperformed the standard MSCI World Index over 10 years.
Familiarize with exclusions and negative screening
The most common strategy in fossil fuel free investing is applying exclusions and negative screening. This involves specifically excluding companies involved in exploring, extracting, refining, transporting and selling fossil fuels. Top mutual funds like Parnassus Endeavor exclude fossil fuel companies like Exxon Mobil, Chevron, BP and Royal Dutch Shell. Checking fund prospectuses to understand exclusions is important.
Focus on environmental, social and governance factors
Fossil fuel free investors should focus on environmental, social and governance (ESG) factors while screening investments. Companies with high ESG standards and commitments to renewable energy are preferred. For example, tech giants like Apple and Google have pledged to switch to 100% renewable energy for operations.
Consider fossil fuel free index funds and ETFs
Index funds and ETFs that track fossil fuel free benchmarks can provide diversified exposure. Major examples include iShares MSCI ACWI Low Carbon Target ETF (CRBN), SPDR MSCI ACWI Low Carbon Target ETF (LOWC) and UBS MSCI ACWI ex U.S. Low Carbon Index Fund (LUCAT). These funds exclude companies based on carbon emission levels.
Fossil fuel free investing is gaining popularity among sustainable and values based investors. Applying exclusions, negative screens, ESG analysis and investing in specialized ETFs can help construct optimal fossil fuel free portfolios.