Tom Konrad CFA
For many, the decision to get out of fossil fuels is an easy
one.
It may be because it's the
right thing to do, or because we see
the risks
of
investing in businesses built around an unsustainable
economic
paradigm. This article is not
about that
decision; it's about what to do next.
The Green Portfolio:
What And Why
To a lesser extent, it also depends on what
we mean when we say "green." For simplicity, this
article will focus on making your portfolio Fossil Fuel Free
(FFF),
meaning that the portfolio should contain no companies involved in
the extraction, refining, or power generation from coal, oil,
natural
gas, and (usually) nuclear power.
Many investment
professionals with the strongest green credentials consider FFF
investing less than ideal. Rafael Coven, Managing Director
of
The Cleantech Group, states that investing in the efficient use of
fossil fuels is usually the most cost-effective way to reduce our
reliance on them. Yet the FFF movement is not just about the most
effective way to reduce fossil fuel use. It also seeks to send a
message that our reliance on fossil fuels and their influence on
our
political system is unacceptable.
Whatever a green portfolio
means to you, make sure that the person implementing your strategy
understands. Jan Schalkwijk, CFA, a portfolio manager at JPS
Global
Investments in Portland, Oregon, says that if your advisor tries
to
talk you out of your chosen strategy, it is time to find a new
advisor. One frequent argument is that it will increase risk or
lower returns. Schalkwijk cites research
demonstrating this need not be true.
The Green Portfolio:
How
There are three ways to implement a green portfolio: Selecting
individual stocks, selecting mutual funds or ETFs, or paying an
advisor to select them for you. Financial resources enable
us
to pay for advice, while time helps us find good advice or make
good
investment decisions on our own.
Your financial resource is your whole portfolio, not just the
portion currently invested in fossil fuels. Mutual fund and
advisor
fees are based on the size of your account, and determine how much
advice you can buy.
Investing Efficiently
Taking energy use as a
metaphor, buying stocks and bonds is like buying wind turbines and
solar panels, except in investing, we pay taxes on our gains
instead
of receiving subsidies. As with energy use, it's almost always
best
to reduce our expenditure (costs) before we increase production
(invest.)
The easiest way to reduce expenditure is pay
down
debt such as mortgage, car loans,
and
credit cards. Upgrading our homes for efficiency and (sometimes)
solar can also help. There are few better investments for taxable
savings (as opposed to retirement accounts like IRAs.)
Allocation
Building a portfolio starts with asset allocation. An
advisor will do this for you, or you can use an online asset
allocation
calculator like this one to find out
how you should allocate you money between stocks, fixed income,
and
cash.
Funds
There are many green mutual funds
available, but few are completely fossil free; I focus on the
latter
simply to save space. Exchange traded funds (ETFs) are
usually
a cheaper option, but broad-based fossil free ETFs are not yet
available.
According to Garvin Jabusch, Founder and Chief Investment Officer
of Green Alpha Advisors in Boulder Colorado, the only truly fossil
free broad-based mutual funds he has been aware of are Shelton
Green
Alpha (NEXTX) and Portfolio 21 (PORTX). Recently, PAX World and Green Century
have begun dropping fossil fuel holdings from some of their funds
as
well. Most other green funds claiming to be fossil free simply
avoid
the 200
largest fossil fuel companies. This
leaves
thousands of smaller companies equally committed to fossil
fuels.
NRDC and Blackrock recently announced new global equity indexes
which
will exclude fossil fuel companies, but we do not yet have
details.
Unfortunately, few of these supply any allocation to
fixed income. The exception is the Green Century Balanced
Fund (GCBLX),
which provides a 19% allocation to fixed income. The PAX
World
High Yield Bond (PAXHX) is a higher yielding but riskier fixed
income
option. Schalkwijk says a fossil free fixed income allocation
could
be met with a number of yield-focused equities (see
below.)
Advisors
Many advisors will help you
create a green portfolio, but most will do so using mutual funds.
If
they do, you will pay two layers of fees: One to the advisor, and
one
to the funds. The double layer of fees may be hidden with
commission-based advisors who are paid by the funds, but it's
still
there. If you're willing to do the work, you will probably be
better
off creating your own mutual fund portfolio as I describe above. I
know of three green investment advisors who create portfolios of
individual securities for clients, avoiding this double layer of
fees. Of these, only Tom Moser of High
Impact Investments in Tuscon
normally takes
clients with less than $50,000 to invest. The others are
Schalkwijk's
JPS
Global Investments and Jabusch's Green
Alpha Advisors.
The level of
customization these advisors are willing to offer depends on how
much
you are willing to invest, but if you and your advisor are in tune
as
to what you mean by “green,” they may not consider it
customization at all. When choosing advisors, it is also important
to
understand what your costs will be (both in terms of the advisor's
fees and the costs of the investments they select), and the
services
they provide. Each of the three above has a unique
perspective
on green. If any one is not right for you, he will likely help you
find someone who is.
Stocks
For those with the
time, inclination, and aptitude, a stock portfolio may be the
lowest
cost option. An often overlooked but very useful resource is the
holdings
of
the fossil
free
mutual funds mentioned above. Other resources
include my own writings
and subscription services such as the Roen
Financial Report.
On the income side of the picture, the Roen Report has just
published a free report on green dividend investing. I am managing
a
fossil free equity income strategy with the income increased and
risk
reduced by option selling with Green Alpha Advisors. We're
currently only able to offer it in separate accounts of at least
$100,000, but I frequently write about many of the holdings.
Your best investment options
How much you have to invest
Time you can spend
Less than $50,000
$50,000 to $100,000
Over $100,000
As little as possible
Funds
Funds
Advisor
A good chunk now, not much ongoing
Funds
Advisor
Advisor
A lot; I like thinking about this
Stocks
Advisor, Stocks
Advisor, Stocks
Summary
The easiest way to build a green portfolio is to work with an
advisor who understands your goals and invests directly in green
securities. A number of green mutual funds are also available to
the
small investor, but more risk-averse investors who need income
have
fewer options. Real world energy efficiency investments and paying
down debt are the best green income investments.
DISCLOSURE:
I receive compensation from both JPS Global Investments and
Green
Alpha Advisors for stock research and portfolio management
services.
DISCLAIMER:
Past performance is not a guarantee or a reliable indicator of
future
results. This article contains the current opinions of the
author and such opinions are subject to change without
notice.
This article has been distributed for informational purposes
only.
Forecasts, estimates, and certain information contained herein
should
not be considered as investment advice or a recommendation of
any
particular security, strategy or investment product.
Information contained herein has been obtained from sources
believed
to be reliable, but not guaranteed.