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Economic Column by Steve Rossi June 10

June 13, 2019

S Rossi 2014

Fossil Fuel-Free Investing Made Easy

By Stephen A. Rossi, SVP, Senior Equity Strategist – CNB Wealth Management

Published on June 10, 2019 in the Rochester Business Journal

The idea of environmental, social and governance-friendly (ESG) investing has been around for quite a while now; long enough, in fact, that many financial institutions (including ours) are now offering customized ESG portfolios to their clients. Our standard ESG growth portfolio boasts internal fund expenses of only 0.44%, for an account with 78% stock and 22% bonds/cash, and this particular portfolio has only a 3.71% allocation to energy. But what do you do when a client wants a portfolio with absolutely ZERO energy exposure, because energy is synonymous with fossil fuels and fossil fuels are destroying the planet? You find a solution that meets the client’s needs!

Unbeknownst to me until recently, there’s a website called Fossil Free Funds (fossilfreefunds.org) that sources financial data on equities and mutual funds from Morningstar and provides an easy way to screen such holdings for fossil fuel exposure and, specifically, holders of underground coal/oil/gas reserves, miners of coal, companies involved with the drilling/extraction/production/refining/marketing of oil/gas and related equipment/services, coal-fired power plants, fossil-fired utilities, etc. The site is also adept at ranking stocks and funds by the percentage of their businesses attributed to green revenue, by whether or not they’re considered to be socially responsible as determined by the Forum for Sustainable and Responsible Investment (USSIF), and by, you guessed it, each company/fund’s direct/indirect exposure to fossil fuel.

For those looking to construct a broadly diversified portfolio with an absence of fossil fuel, start by using the screening tool at the fossilfreefunds.org website to isolate such holdings and whittle your investment universe down to a more manageable set of candidates. Continue by looking up each fund’s 1, 3, 5 and 10-year track record of performance relative to its peer group (if available) and try to choose best of breed funds in each of several different investment categories (i.e. U.S. large company, U.S. mid-sized company, U.S. small company, developed international, emerging international, fixed income, etc.). Morningstar.com (a free site) can help with this.

Now that you’ve identified your favorites, find the funds you can actually invest in (i.e. those that aren’t closed to new investors) and those that don’t require an unreasonably large initial investment. Based on this criteria, Morningstar.com can guide you to funds with a wide range of underlying assets and I chose those with underlying assets of between $180 million and $5.2 billion - the more liquidity the better. By following these steps and with a little experimentation, you’ll be able to produce a well diversified portfolio with 75% stock and 25% bond exposure. I modeled a geographic split of 80% domestic and 20% international with a 60/30/10 split of large/mid/small sized companies and a slight value tilt. I also kept tweaking the portfolio until its sector diversification mostly mimicked the S&P 500, with one important difference – ZERO energy exposure (at least in the traditional sense). To boot, the fixed income portion of the portfolio was short to intermediate term in maturity and of very high credit quality, most of it being investment grade debt issued by corporations and/or the U.S. Government.

While I’m not going to reveal the exact funds and percentages I arrived at in this exercise – that would be too easy – I will tell you that portfolios like this can be customized to accommodate your client’s environmental, social and governance-related preferences, so long as you’re willing to roll up your sleeves and do the research. To be fair, the portfolio I came up with wasn’t the cheapest on the street – mine included embedded operating expenses of 1.06% versus the 0.44% I referenced earlier – but cost isn’t always the deciding factor when it comes to one’s investment decisions. Vanguard founder John C. Bogle may beg to differ but, for some, the benefit of putting a smile on the face of mother Earth through a fossil fuel-free approach to investing is worth far more than a few basis points of lost investment return. And just think – the longer that mother Earth’s around, the richer we’ll all be in the long run.

To see his column in the RBJ, click here.