Divesting of fossil fuel-related opportunities is hogwash

Read my column in the Winter 2015 Business Pulse Magazine.

An environmental movement that is gaining traction suggests divesting large-investment portfolios from owning fossil fuel-related companies. Across the nation, especially many universities and their boards watching over foundations (such as WWU’s right here in Bellingham) and endowment funds have experienced pressure to make this change.

The pressure comes from self-styled, environmentally-conscious student associations and other national organizations. Locally, the Western Washington University Foundation was asked to divest its portfolio holdings from any fossil fuel related companies (* see reference below *), but choose not to participate in this ill-informed initiative.

The idea of filling the world’s energy needs without the use of fossil fuels could be considered a well-intended, perhaps noble endeavor. But oil, coal, and natural gas are necessary material inputs to nearly everything aspect of our daily lives that cannot be replaced completely by wind and solar power sources.

In the marketplace, we must recognize the benefits of having affordable, available-on-demand energy if we want a vibrant economy. Investment fads often get traction around an emotional appeal to draw you in – and fossil fuel-free investing is an example. Is it even possible to invest in a portfolio free of fossil fuels as the index promoters claim? It’s a strong claim to be free of fossil fuel investment when free by its very definition means zero. If we look at the top 10 constituents that make up this stock free of fossil fuel, index holes begin to form large enough to drive a Mack truck through.

Berkshire Hathaway, for example, is by no means a fossil fuel-free company; it fully owns BNSF Railways, which is a transportation company, and any transportation company needs fuel to move goods.   Investors need to exercise caution before removing entire sectors – in this case, the energy and utility sectors – from their portfolios and look under some layers. Not only because of diversification purposes, but you’ll discover also that these sectors form the backbone that allows every other business sector to exist. Other examples, by taking a deeper look past the seemingly simple concept of fossil-free investing:

  • Service-based companies such as financial institutions and technology firms are not exempt from the needs of fossil fuels. Companies require electricity for heating and air conditioning, as well as computer equipment office furniture and so on, all of which would not be possible without carbon-based fuels.
  • The Nissan Leaf by no means is a zero-emission product. The mining, refining, smelting, manufacturing, and transporting of the raw materials that make up the finished product gobble up considerable amounts carbon-based fuels before becoming a finished product.

With so much of our consumer products made overseas, the paradox out-of-sight and out-of-mind takes root. We cannot be naïve. The supply chain that makes products become reality is reliant on carbon-based fuels, and therefore no matter what the industry or business, everyone has a fingerprint on it – including the food you eat. In order to genuinely say that you’re investing in a fossil fuel-free manner you must go beyond the surface of any product or service and analyze the full supply chain involved. Top 10 Constituents (30-June-2015)

Company Index Weight Sector
JP Morgan Chase & Co 1.27% Financials
Apple Inc 1.27% Information Technology
Wells Fargo & Co 1.26% Financials
Pfizer Inc 1.25% Health Care
Johnson & Johnson 1.25% Health Care
General Electric Co 1.25% Industrials
Procter & Gamble 1.24% Consumer Staples
Berkshire Hathaway B 1.23% Financials
Microsoft Corp 1.22% Information Technology
Verizon Communications Inc 1.17% Telecommunication Services

Source: http://fossilfreeindexes.com/fossil-free-indexes-us/

You, as an investor, can combine profit motive with societal good that meets your beliefs. However, I’d argue that fossil fuel-free investing doesn’t exist.

Consider when you build your portfolio that you avoid restricting yourself to the point where diversification can’t be achieved. Our economy is interconnected in such a way that if one sector struggles, it affects all. Without affordable energy, including oil, coal, and natural gas, the price of just about everything we use today would be out of reach to many or not even possible to produce.   So, while those appealing to the board in charge of stewardship of the Western Washington University Foundation to exercise environmental conscience and divest of companies and sectors that support fossil fuels mean well, they should be careful what they ask for.   It does not benefit the greater good of maintaining a stable economy.

Questions or Comments? Email: Jacob@eracapitalmanagement.com

* (Source at WWU Foundation)