Dan Old is the founder of Purposeful Money
Several years ago, we decided that one of the key ways we could help people to ‘do better’ with their money would be to ensure that they were not accidentally supporting the fossil fuel industry.
It is a fact, that most pensions and Stocks and Shares ISAs contain funds which invest in fossil fuel extraction or exploration companies for the simple reason that over time, they have historically provided excellent returns.
It is also a fact that there are a growing number of people who are aware of, and want to fight against, man made climate change.
Winding the clock back only a few years, I could only find one fund which had a clear, checkable policy on excluding fossil fuel stock
I’ve spoken to clients who donate money each month to charities such as Greenpeace, and at the same time hold money (without realising it) through their pensions, in Shell and BP.
Of course, they had not been directly informed of this, and even if they had, what could they have done about it? Pensions are justifiably seen as difficult to deal with and understand, and costly, and the sort of thing which just remains in a folder or drawer and briefly looked at each time a new statement comes in.
Most people know the name of their pension provider, and perhaps which funds the money is held in, but… Ask yourself, would you know which actual stocks and shares make up your pension?
At our end, we’ve been wanting to provide a solution to this problem for some time. The problem for us wasn’t necessarily a lack of time, knowledge or inclination, more a lack of choice.
For example winding the clock back only a few years, I could only find one fund which had a clear, checkable policy on excluding fossil fuel stock. One fund of course is not enough to make a portfolio.
Our aim as wealth managers is to ensure that client money is diversified, can be tweaked according to changes in performance, cost, the emergence of new funds, risk and so forth.
We have been checking the market place continually since that point, and happily for clients and for the world in general, there seems to have been a rather swift change of direction in the market. We’ve seen numerous new funds launch, matched by clearer exclusion policies for existing funds.
Part of our role has been to drill down into these funds to look at their processes and stock selection to establish which are truly ‘ethical’ and which are simply jumping on the latest bandwagon.
We now offer portfolios which are 100 per cent free of fossil fuel extraction and exploration companies to suit every category of investment risk. A divested range of portfolios such as this is something we believe to be unique in our sector and has taken years of ongoing research and gradual improvements to work towards, with continued effort required to maintain and develop the proposition.
There are two main reasons why we believe that fossil fuel investment should be avoided.
Firstly, we consider the overwhelming scientific consensus that man made climate change is real, and is a result of our carbon emissions to be a compelling reason not to support the industry on ethical grounds.
We accept that ‘business as usual’ is harming the infrastructures which support our lives and those of the millions of species we share the planet with.
Climate change is causing problems in a range of areas already, but is perhaps not yet given full blame. A warmer climate is leading to more moisture in the air and more extreme weather events. As well as the humanitarian issues here, we are losing land; trillions of dollars of real estate around the world is on coastlines and directly at risk from a rising sea level.
The insurance industry is facing problems, not simply from vastly increased levels of claims each time there is a more violent storm than their data suggested would happen at the time when the policies were underwritten, but also ‘what to do now’?
As climate change data becomes more and more alarming, we will see the cost of insurance rise in tandem, and un-insurability will become a more common event.
In another area, extreme weather in the form of several years of crop failure in Syria led to food shortages, which exacerbated the internal power struggle which in turn led to the largest displacement of people since WW2. This, in turn has changed the tone of politics in the surrounding area at the worst possible time, when we should be focusing on root problems.
Secondly, and removing any ethical, moral or political arguments, we have the risk of the ‘Carbon Bubble’.
At the recent Paris Climate Agreement (COP21), 195 nations agreed to various measures to ensure that global temperatures did not exceed 1.5 degrees centigrade above pre-industrial temperatures, as it has been accepted that we will experience an environmental catastrophe if we go much beyond this.
We now have a legal obligation to reduce the level of carbon emissions at a national level. This means that significant assets currently making up the balance sheets and therefore the valuations of fossil fuel companies, can never be extracted and turned into money.
This means that right now, many of the worlds largest companies, whose shares are owned by most of the worlds investment and pension funds, are significantly overvalued.
We do not consider this a worthwhile risk to take, especially when you factor in the growth, and potential growth available through their competitor industries in the clean energy generation sectors. Technology and subsidies as well as market sentiment and demand are all swinging towards renewable energy production.