It's been almost three years since I decided to bring my investments more into line with my values and lifestyle. Part of this process has been to divest the portfolio away from fossil fuel companies such as Exxon and Shell and also the big banks which finance their planet-destroying activities. This inevitably involved the sale of my multi-asset global index funds such as Vanguard Lifestrategy.
However, most of the ESG alternatives I looked at initially turned out to be a disappointment due to the level of fossil fuel companies held by them so I was pleased when a reader flagged up this global index fund from iShares last year.
This fund was launched in 2017 but in November 2019 it adopted a new benchmark by moving from the MSCI World SRI Select to the new SRI Select Reduced Fossil Fuel Index (RFF)
This has just 382 holdings compared to 1,560 for the traditional global index fund.
The index has been created for those investors looking for a socially responsible investment benchmark made up of companies showing strong sustainability qualities whilst avoiding a range of sectors which are unethical and, essential for me, excluding fossil fuels. It also screens out companies involved in weapons, tobacco, alcohol, gambling, nuclear power, adult entertainment and GMO.
The companies that make it through are then assigned an ESG rating which indicates a companies ability to deal with ESG risks relative to others in the same sector and excludes those which are below average.
It is coming up to one year since the fund was added to my green portfolio at the price of £4.85. I topped up my holding in February at £5.62 so average price for total holding was £5.24. The current price is £6.08 so a gain of 25% on my initial purchase and 16% overall so far. The fund accounts for 10% of my green portfolio.
The index has returned an average of 16.8% p.a. over the past 5 years to end June 2021 compared to 15.4% for the World Index. This is not really so surprising given the poor performance of the energy sector in recent years.
Here's a short extract from MSCI on their principles of sustainable investing:
"This rapidly changing world also presents investment opportunities on an unprecedented scale. Development of alternative energy sources could lead to transformative new products that cut our dependence on fossil fuels. Advances in technology could help resolve food and water shortages and enable us to grow sustainably within the limits of the planet’s resources. The next phase of the information revolution could lead to quantum improvements in productivity and connectivity in a manner that could enrich the lives of the socially and economically marginalized.
We believe that this convergence of factors (climate change, social attitudes, institutional governance, technological innovation) will significantly impact the pricing of financial assets and the risk and return of investments and lead to a large-scale re-allocation of capital over the next decades. Investors who treat these factors as a fad and continue to operate in a wait-and-see mode could find themselves unprepared for the dramatic repricing of assets that could result".
|Share Price Performance Past 12 Months|
The Covid-19 pandemic has shown how quickly unsustainable sectors can become exposed to a sudden shock to the system. After 18 months, we are slowly starting to get the economy up and running as most people here in the UK have received the double jab. But of course, there will be no vaccine jab to save humanity from the effects of runaway climate change so it will be essential to take radical and urgent measures on a global scale to address the crisis.
The big oil companies are coming under increasing pressure from fund managers and the wider community to reduce their huge carbon emissions and align their business towards the 1.5C limit imposed by the Paris Agreement. Recently Shell was ordered by a Dutch court to reduce it's carbon emissions by 45% by 2030. Here's a recent article. Legal action against other fossil fuel companies will inevitably follow and increase the pressure to decarbonise their operations.
Last year CEO of Blackrock, Larry Fink said "Climate change has become a defining factor in companies' long-term prospects … But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. In the near future — and sooner than most anticipate — there will be a significant reallocation of capital"
It's not hard to conclude that the whole sector is in crisis and that a fundamental shift is taking place as the world starts to take climate change more seriously.
The small DIY investors who prefer low cost passive approach over active can now choose to continue with the traditional index or move to a cleaner index provided by these new fossil-free funds. But to be honest, I'm not sure why anyone would want to continue investing in a carbon-intensive sector where $billions worth of projects, financed by governments and the big banks, are at serious risk of becoming worthless - so called stranded assets.
All investors, large and small, have a choice over where to invest. Many are realising that the smart money is increasingly moving into sectors which offer sustainable and long-term solutions to the climate emergency and away from those companies and sectors which continue to be part of the problem.
As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!