by Jan Schalkwijk, CFA

ESG investing is all the rage these days. That is, investing that includes the non-traditional  environmental, social, and governance factors in the investment process.  Its appeal to the broader investment industry is twofold:

1) The writing is on the wall: as wealth is passed down to younger generations who in the aggregate care more about values alignment, the asset management industry does not want to lose the assets and the fees they generate.

2) Thematic investing is popular and ESG is one of the hottest themes. Wall Street is not going to miss out. Much like crypto is too good to pass up.

Not everyone is enamored. Some folks accuse ESG investing of greenwashing, others argue that ESG is progressive politics spilling over into investing, that heretofore was “neutral,” and just concerned with the financial bottom line.

In the spirit of every niche gets an ETF, there now is fund that is unabashedly the anti-ESG fund: the American Conservative Values Fund (ACVF). It has $10m in assets under management, so not competing with ESG anytime soon or ever, but what struck me is that its top 10 holdings have a 50% overlap with the top 10 holdings of iShares MSCI KLD 400 Social (DSI), which tracks the broadest and longest-running US SRI/ESG index.

If the ESG flagship benchmark, and the anti-ESG fund agree on 5 of their 10 biggest holdings, then that begs the question: what is ESG anyway?

Jan Schalkwijk, CFA is the founder and Chief Investment Manager of JPS Global Investments, an investment firm specializing in green investing on a global basis.

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by Tom Konrad Ph.D., CFA

The most popular way we have to save for our children’s future education is destroying their future.

A 529 savings plan is a tax-advantaged savings plan designed to help pay for education. There are also prepaid tuition plans set up under the section 529 tax rules, but this article is focused on 529 savings plans, and will be what I mean by “529 plans” for the rest of the article.

The money in 529 plans can be used for college as well as K-12 education, apprenticeship programs, and paying off some student debt.   Savings plans grow tax-deferred, and withdrawals are tax-free if they’re used for qualified education expenses.  Each state (and DC) has its own 529 plan, but you don’t have to live in a state to participate.  Many states offer additional tax benefits to local residents.

The problem with most 529 plans is, like 401(k)’s, the plan sponsor chooses the investment provider and the investments available within the plan.  This is a good thing in that a limited number of well curated investment choices can help unsophisticated investors make investment choices that are appropriate for college savings goals.  For example, New York’s plan offers both age based options and individual portfolios color coded by risk and potential reward. These portfolios are built from Vanguard’s low cost index mutual funds, which are also a good choice for unsophisticated investors interested solely in maximizing their investment returns.

Paved With Good Intentions

In short, New York’s 529 plan, and most of the other plans I have looked at, are well-designed to help parents and grandparents save and grow their money for a child’s future education. They also help destroy the future planet that child has to live on by investing in fossil fuel companies.

Fortunately, the ability to choose between 51 different plans means that no matter where you live in the US, you do have a few environmentally responsible options.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESA) are similar to 529 plans in that they grow tax-free and the money can be withdrawn tax-free for qualified education expenses, but these can be set up as brokerage accounts, and so can be invested in any fossil free mutual fund or stocks that you choose.  Unfortunately, you can only contribute $2,000 a year to these accounts, which may not be nearly enough to pay for four years of college (and possibly high school or K-12 education) at today’s prices, even if you start saving the year the child is born.

For investors well-versed at choosing their own investments, however, it’s probably worth putting that $2,000 a year in an ESA, with any additional money you can save for the child’s education going into a 529 Plan.

529 Plans With Sustainable Investing Options

I just opened two 529 Plan accounts for my grandchildren, and in researching plans with sustainable options, I found this article by Brian Boswell, CFP®, helpful.  He lists the following state plans with more sustainable options:

• Pennsylvania, which offers Vanguard’s FTSE Social Index Fund (VFTNX) which the plan calls its “Social Index Portfolio.”
• Virginia, which offers the Parnassus Core Equity Fund (PRBLX), which it calls its “Socially Targeted Investment Portfolio.”   
• Illinois, which offers the Calvert Equity Fund (CEYIX), which it calls the “Calvert Equity 529 Portfolio.”  This plan is only available through investment advisors.
• California, Connecticut, Oregon & Wisconsin, which offer the TIAA Social Choice Equity Fund (TNWCX).

Note that all of these funds are equity funds, and so may be too risky for some college savers if used alone.

The only 529 plan with a full range of fossil fuel free investing choices used to be Washington DC’s, which used the fossil fuel free investment shop Calvert for its investment manager until recently, when it dropped Calvert in favor of decidedly fossil fuel full JP Morgan Chase in an effort to lower costs.  Penny wise, world foolish.

Choosing a Sustainable 529 Plan

If you live in Connecticut, Oregon, Pennsylvania, Virginia, or Wisconsin, then your choice is easy.  Your state offers a relatively sustainable choice in its 529 plan, and offers state tax benefits for using the plan.  California also has a more sustainable option, but does not offer state tax benefits to residents.

For residents of the other 44 states and California who can get only federal tax benefits it makes sense to choose a fund based on the quality of its offering.  The table below compares the available funds based on four measures.  Fossil Fuel exposure data is from FossilFreeFunds.org, and Deforestation risk is from DeforestationFreeFunds.org.  Both sites are maintained by the nonprofit As You Sow.

As you can see from the chart, there is no good reason to select the TIAA Social Choice Equity Fund (TNWCX) unless you live in Connecticut, Oregon, and Wisconsin and want to take advantage of the state tax benefits.  

Considering all the above factors, the best fund is Illinois’ Calvert Equity Fund (CEYIX).  While it has a higher annual fee than Pennsylvania’s Vanguard’s FTSE Social Index Fund, it has still produced a comparable five year annual return after fees, owns no fossil fuel companies, and engages with companies on deforestation issues.  Unfortunately, this fund can only be accessed through an advisor who offers the Illinois 529 plan.

This leaves Pennsylvania’s Vanguard’s FTSE Social Index Fund and Virginia’s Parnassus Core Equity Fund.  Between these two, we are confronted with a trade-off between our environmental values and cost/historical performance.

While Vanguard’s FTSE Social Index Fund is not completely fossil fuel free, it’s much better than the typical equity portfolio in a 529 plan.  For example, the Vanguard Total Stock Market Index Fund (VTSAX) has a 6% exposure to fossil fuel companies, including both fossil fuel producers and utilities.  It also scores an F on deforestation.  The Social Index Portfolio only has an eighth as much ownership of fossil fuel utilities, and no exposure to fossil fuel producers at all.  While the Vanguard Social Index Fund is not perfect, it is low cost and nearly fossil fuel free.

On the other hand, the Parnassus Core Equity Fund (PRBLX) is truly fossil fuel free, and Parnassus is a dedicated socially and environmentally conscious investment shop.  Investing responsibly is core to what they do.  Further, past performance is no guarantee of future results, so historical performance should always be considered skeptically. You do pay a little more for Parnassus’ environmental expertise, but you are also getting something for that.

My Own Choice

I’m setting up 529 plans for my two grandsons.  I had trouble choosing between the Virginia and Pennsylvania plans for the reasons outlined above.  Fortunately, money can be transferred between siblings’s 529 plans without any tax consequences, so one grandson got the Virginia Plan, and the other got the Pennsylvania plan.  I plan to balance out any future differences in performance by transferring money from one plan to the other.

Calling Tom DiNapoli

Since I’m a New York resident, I’m also planning on working to get a sustainable option added to the New York plan.  The State Comptroller, Tom DiNapoil, recently announced that the New York state pension plan would divest from fossil fuels over the coming years. New York’s 529 plan uses Vanguard as its investment provider, so adding the Vanguard FTSE Social Index Fund as an investment option should be as easy for DiNapoli as just asking for it.

Don’t New York’s college savers deserve the option to avoid fossil fuel risks in their portfolios as much as its pensioners?  I’d say they deserve it even more, since most students are going to be living with climate change much longer than the average pensioner.

DISCLOSURE: VTSAX and PRBLX through my grandsons’ 529 plans .  

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.

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by Tom Konrad Ph.D., CFA

A large and growing number of individual investors are showing an interest in divesting from fossil fuels.  Where in the past I have been asked to give a talk on divestment once every year or two, I’ve spoken on the subject three times so far in 2020.  (Here is a recording of a presentation I did for my college alumni association.)

The response to these talks has been overwhelmingly positive, but I’m left with the impression that a lot of the less financially sophisticated attendees are still not sure where to start.  For most of these attendees, the right approach will be to find an investment advisor who has a focus on environmentally sensitive portfolios, or to build their own portfolio using mutual funds.  I think I give most attendees what they need to find a good investment advisor, but I usually don’t have the time to go through the steps of building an appropriate mutual fund portfolio from scratch.

So here it is, step by step.

Step 1: Pay down debt and defossilize your life.

If you have investable assets (beyond a six-month emergency fund) held outside a tax advantaged account such as a 401(k) or an IRA, and you also have debt, you can save on investment fees and lower your overall risk by taking enough money out of your mutual funds to pay off your debt (car loan, credit cards, and even a mortgage.)  If those mutual funds are invested in fossil fuel companies, this also has the advantage of starting you on your way to divestment.   

The benefits of paying down debt are so great that even the mortgage interest tax deduction is not worth it.  If you can pay down or pay off your mortgage using investment money, do so! By reducing your monthly expenses, you will free up more money to invest in the future, and the amount of money you save is more reliable and likely to be significantly more than the money you would earn with mutual funds.

If you own a home, you can next consider upgrades like having your home weatherized (insulation and air sealing), upgrading your heating and cooling system to heat pumps (air source or geothermal), installing a heat pump water heater, making your next car an electric or plug-in electric vehicle, an electric induction stove, and installing solar on your home.  Check your local utility to see if they have rebate programs for measures like these.  There is now also battery electric yard equipment that is as powerful as gas for a similar price.  Defossilizing your whole life is not only a great way to get off fossil fuels, but it often pencils out as a very attractive investment.

Step 2: Determine your target asset allocation

The mix of stock mutual funds and bond mutual funds you need depends on your risk tolerance, level of assets, and financial goals.  You can determine an appropriate asset allocation for yourself using an online asset allocation calculator, such as this one. 

The asset allocation calculator will give you a percentage allocation to stocks, bonds, and cash.   All you have to do then is to put your money into appropriate mutual funds or other investments in each of these categories.  

Step 3: Cash Investments

In a brokerage or mutual fund account, most people generally keep their cash investments in a money market mutual fund.  In general, the default is for cash not invested in other funds to be “swept” into a default mutual fund.

Funds from money market mutual funds are generally lent to banks and other companies as very short term loans.  Because most large banks in turn invest in fossil fuels, these money market mutual funds are not fossil fuel free.  

For a fossil free cash investment, one of the simplest options is to open a savings account at a local credit union.  Credit unions lend money to local individuals and small companies, and so their investments are almost always fossil fuel free.  In addition you are covered by NCUA insurance against the insolvency of the credit union.  

If you want your money to be actively helping the clean energy transition, a good option is Clean Energy Credit Union.

Step 4: Bond Investments

Most fossil fuel free mutual funds focus on stocks (aka equities) rather than bonds.  

Interest rates are very low right now, and the few fossil fuel free bond funds out there pay very little interest.  For example, the Calvert Bond Fund (CSBCX) currently pays only a 0.90% yield.  At this interest rate, most people are better off turning to their credit union (see step 3) and building a CD ladder (see link for a how-to or your credit union can help you with it).

A five-year CD ladder at my local credit union is currently paying about 2% annual interest, far better than the bond fund above.  Plus, you also get the benefit of NCUA insurance, mentioned above.

Step 5: Equity Investments

To keep this simple, and low cost, we will use a fossil fuel free index ETF, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) for 80% of your equity allocation.  Hence if your target asset allocation is 60% equities, 80% of that or 48% (0.48 = 0.60 x 0.80) should be allocated to SPYX.  You can buy SPYX in almost any online investment account.

We want to allocate the remainder of your equity allocation to small and medium capitalization companies, since SPYX contains only large capitalization firms.  To find one of these, I took the top rated fund in the “small blend” (which means a blend of growth and income stocks with small capitalization) category on FossilFreeFunds.org.  This was the Aperture Discover Equity Fund (ADISX). 

Including SPYX and ADISX in this example is not intended as an endorsement of these particular funds, but rather of the general strategy of using an index fund for most of your equity allocation, combined with a more specialized fund or funds to fill in the gaps in equity allocation that the index fund might be missing.  

The options for fossil fuel free index funds are limited.  SPYX was simply the only broad market fossil free index fund I found.  In contrast, there are many small and medium capitalization fossil free funds which I could have used.  ADISX stands out because of its sustainability mandate and because it is a concentrated, actively managed fund holding just a few stocks.  While most actively managed funds fail to outperform the market, research has found that concentrated actively managed funds can and often do.  If we are going to pay higher fees for active management, we should at least invest in a fund that has a good chance of outperforming the market.

Step 6: Rebalance

Every year, one of the CDs in your CD ladder will mature.  This is a great opportunity to rebalance your portfolio.  To do this, use the asset allocation calculator again.  The allocation may change slightly as you age, and as your income requirements and market outlook change over time.   The value of your equity mutual funds will have changed as well with fluctuations in the stock market.

If your mutual fund investments have grown beyond your target equity allocation, sell some of one or both of the mutual funds to bring them back to a 80:20 ratio between them, and to bring your overall equity allocation back in line with your target.  Allocate the cash from your maturing CD into a new 5 year CD and your savings account to bring your cash and CD ladder in line with your new bond and cash allocation targets.

Then, keep saving but otherwise ignore your investments until your next CD matures in a year.

Example

Suppose a 55 year old on October 28th, 2019 has $120,000 of investable assets after paying off her mortgage and investing in her home.  She has a moderate risk tolerance, but is worried about the economic outlook, so the asset allocation calculator tells us that she should have 51% ($61,200) in equities, 25% ($40,000) in bonds, and 24% ($28,800) in cash.

She puts $28,800 in a local credit union savings account, and, in addition, buys 5 CDs for $8,000 each.  She splits the $61,200 into $48,960 which she invests in SPYX and $12,240 which she invests in ADISX.  

The amount invested in SPYX may need to be slightly more or less in order to buy an even number of shares, although some brokers allow you to buy fractional shares of some stocks and ETFs.  Do not be concerned about this type of adjustment; asset allocation is far from an exact science.

A year later, on October 28th, 2020, the savings account earned $144 in interest, the CDs have earned $800 in interest.  She has saved another $15,000 to add to her investments.  SPYX has returned 13.8% in combined capital gains and dividends.  ADISX did not exist before January first this year, but it has gained 29.7% since then, so we will use that gain in our example.

We will assume the woman’s target allocation has changed to 50% equities, 26% bonds, and 24% cash when she puts in her new age and outlook into the allocation calculator.

After the first year, her assets are:

Since ADISX is above its target, she sells $242 of that.  SPYX is below its target, so she buys $6,818 of that.  Finally, she reinvests $8,647 of the maturing CD and cash in a new 5 year CD and keeps the rest as cash in her credit union savings account.  A Google spreadsheet with these calculations can be found here.

For the next year, she does not think about her investments (except for putting whatever she can spare in her savings account every month) until the next CD matures.  Then she repeats the rebalancing process.

Conclusion

The above is intended as a simple guide to get an fossil fuel free portfolio for most small investors.  There are numerous possible refinements or variations that could be equally appropriate, including using more or different mutual funds, and including allocations to other asset classes such as international stocks and bonds or real estate. 

I did not cover any of these variations in the interest of putting together something that is simple and actionable.  Few small investors currently have portfolios that are really right for them.  For most such investors, this framework will help them create a low cost fossil fuel free portfolio that suits their needs as well or better than what they currently have.

The post Step By Step Fossil Fuel Divesting With Mutual Funds appeared first on Alternative Energy Stocks.

Thanks an email from a diligent reader, I have just updated our lists of Clean and Alternative Energy Mutual Funds and Clean and Alternative ETFs and Other Exchange Traded Funds.  Please follow the links to the updated lists.

Thanks to him and all the readers who help me keep AltEnergyStocks.com stock lists up to date with your comments and emails.

The post Updates to Clean Energy Mutual Fund and ETF Lists appeared first on Alternative Energy Stocks.

A conference hosted in NYC in early April, 2019 ESG5 SUMMIT showcased the issues of current concern to institutional asset managers.  ESG as a term is a rebranding of SRI (socially responsible investing) and CSR (corporate social responsibility) now under broad headings of Environment Social & Governance, to reflect that it is more than just an investing style, but is concerned with risk management and value creation.   ESG strategies are being pursued by a range of participants, including public and private pension funds, mutual funds and ETFs, family offices and sovereign wealth funds, and advisors and advocacy groups.

The goals are to allocate funds that encourage corporate practices that positively promote environmental stewardship, diversity, human rights, and consumer protection, and steer funds away from corporations with socially harmful business models.   In connection with the Paris climate summit, a group of investment funds with $26 trillion AUM, pledged to pressure the worst 100 companies responsible for 65% of all emissions.  That effort has expanded to become the G20’s Taskforce on Climate-related Financial Disclosure (TCFD) which now includes over 500 firms with market caps of $7.9Tr, including 150 financial institutions managing assets over $100 trillion, including 20 of 30 systemically important banks and 8 of 10 of the largest asset managers.

To support these efforts, metrics, ratings & other resources have been developed for determining materiality, ie., whether the investment can make a material impact, and whether it can generate alpha and can compete with conventional investments. The most prominent data analytics are provided by the Sustainability Accounting Standards Board (SASB), UN Principles for Responsible Investing (PRI),  Sustainalytics & MSCI.  Other entities that have developed their own systems for assessment and reporting, include: CSRHub, Ceres, Edison Electric Institute (EEI), Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP),  Climate Disclosure Standards Board, UN Sustainable Development Goals, Oxfam, World Resources Institute, SSI, & Sustainable Investment Forum (USSIF). 

SASB developed an extensive sustainability framework of environmental & social capital necessary to create long-term value, and a Materiality Map to provide guidance on use of SASB standards in making disclosures, and for conducting materiality assessments of issues that are likely to affect financial condition or operating performance.   For purposes of scoring and ranking, each industry has its own unique sustainability profile, and assessment of the ESG factors as shown below must be adapted for relevance.

A big data approach is necessary to manage the large disclosure datasets from many categories to build key indexes, improve ratings, assess material outcomes and compare alpha outcomes by strategy.  A data-centric quantitative approach starts with                  1) self-reported data from 600-10,000 companies using over 900 indicators, from primary providers including Bloomberg, Thomson, & Factset.                                                      2) This information is filtered into professional ESG opinions using fewer indicators, 16-250, as provided by services such as MSCI, Sustainalytics, ISS, & Vigeo in a smaller company universe of 1500-8000.                                                                                                3) The last step is aggregating these into consensus opinions and narrowing the indicator sets to 12 sub-categories to simplify ESG decisions, as provided by CSRHub.

Concrete outcomes from ESG practices are measured primarily in terms of “materiality” in the sense of effecting changes, solving problems in the real world, but also secondarily in terms of generating alpha, producing financial gains by the corporations or investors.

Addressing the 2^nd issue first, one study, presented by the panelist from CSRHub, analyzed six generic ideas for using ESG approaches to generate alpha:

• Long / short strategies, buying positively rated and selling negatively rated firms.
• Buying category leaders
• Rely on recommendations from high value consensus opinion sources, ie., Sustainalytics & MSCI
• Select highly rated firms that also report frequently
• Stick with a large cap blue chip with good ESG ratings
• Focus on firms with good materiality metrics.

In each approach, empirical factors were found that mitigated the effectiveness of the strategy:

• The ESG ratings of the best & worst rated companies were found to be mean-reverting, the ratings value of the top 20% drop the most, the bottom 20% improve the most. “ESG trend momentum” persisting for more than 6 months occurs for fewer than 5% of companies.
• The “leaders” do not persist, those highest ranked drop substantially by their 5^th year
• Sustainalytics & MSCI scorings don’t match up
• High ESG disclosure scores on the Bloomberg platform correlate only weakly, 25%, with highly rated consensus scoring compiled by CSRHub.
• There seems to be no correlation between a CSRHub rating and market cap or revenue.
• Material metrics are just not well enough covered by analysts, rarely fill in even 50% of ESG indicators in their analyses.

This study suggested that obtaining alpha with ESG-related strategies is difficult to achieve.  This would tend to corroborate a widely accepted assumption that ESG investing plans reduce returns on capital & shareholder value.  However, a Harvard report contends that empirical results show that “companies committed to ESG are finding competitive advantages in product, labor, and capital markets, and portfolios that have integrated “material” ESG metrics have provided average returns to their investors that are superior to those of conventional portfolios, while exhibiting lower risk.”

An example of the 1st strategy, which appears to be succeeding, is an Energy Transition Long-Short strategy offered by advisory service Fossil Free Index, which holds long positions in clean energy, advanced transportation, and smart grid companies, and short positions on reserve-owning fossil fuel companies, and is currently outperforming the S&P.

Gender diversity was also cited as benefiting profitability.  The Thirty Percent Coalition promotes gender diversity on corporate boards and institutional investor boards, and contends there are clear, identifiable results that diversity lead to better performance and governance.   Several participants with affiliations to institutional funds expressed confidence that performance improvements corresponded with improvements in gender diversity on their boards.

ESG ratings are being made available to retail investors as well.   Yahoo Finance includes a tab for Sustainability, that includes scoring for a Total, and separate Environment, Social & Governance for performance, ranked in a percentile against other peer companies, with graphics, and a scoring for controversy level.  It also includes a list indicating involvement in 14 adverse areas:  alcoholic beverages, adult entertainment, gambling, tobacco, animal testing, fur, controversial weapons, small arms, catholic values, GMO, military contracting, pesticides, thermal coal, palm oil.  Fidelity is offering similar tools on its platform as well.

Index & ETF products have proliferated:  MSCI (iShares/Blackrock) has 4 categories with 17 ESG & climate indices, Thomson Reuters has 4,  CleanEdge has 4, FTSE4Good has 7, S&P/DowJones offers a large family of sustainability indices,  ETF.com lists 78 socially responsible ETFs with $7.4B AUM.  ETFdb.com offers a deep resource, with 35 ESG themes, 77 metrics and a screener which identifies 23 assets with ESG scoring in 90^th percentile.   The volume of assets invested in ESG funds are up nearly 60% from the prior year, as reported in the WSG.  ESG funds are being marketed by Wall Street as a “bankable trend,” as private equity & hedge funds report participating in these offerings.   However, it is still early in the overall trend, less than 2.5% of 401(k) plans offer ESG funds as an investment option.

The effectiveness of actively managed ESG portfolios as compared to passive index funds is debated.  However, one strategy in which active management seems to be effective involves ESG “activist” investment.  ESG advisor firms search for underperforming publicly traded firms with low ESG ratings, then begin with a consulting engagement, which then transitions into negotiating an equity position as a long-term value investor, in order to effect a turnaround by implementing ESG policies & practices, to achieve improved productivity & financial outcomes.  Two such firms pursuing this approach were present, Barington Capital Group, & Impactive Capital and reported on their process and positive outcomes.

Returning to the primary issue of materiality, does ESG investing, and implementation of ESG practices, make a material difference in the real world?  How effective is voluntary ESG participation as compared to material effects resulting from compliance with statutory requirements?  One panelist, William Jannace, adjunct professor at Fordham Law school, observed that sustainability policies for corporations are driven by a) an internal reputational desire to contribute, & b) external demand from customers or RFP conditions, but c) contended that more significant outcomes are driven by compliance with regulatory imposition.

At worst ESG participation as a cultural artifact that may be criticized as “greenwash”, bandwagon promotion with no substantial behaviors, and at best can drive only incremental improvements, unable on its own to drive solutions to the largest systemic problems.  Two such examples were considered:

Illicit financial flows (IFF): from kleptocratic capital flight & laundering, human trafficking of migrants & sex slaves, & from black market drugs & arms, facilitated by use of complex entity structuring & tax venue shopping, has been estimated between $21Tr – $32Tr, according to a Tax Justice Network study of data from the BIS, IMF, and several private sector analysts including Gabriel Zucman.   Would the financial services industry on a voluntary basis from a commitment to ethical principles and motivated by the desire to appear supportive of initiatives against human trafficking refuse to handle financial flows found to be associated with such criminal activity?  Clearly a naïve expectation.  Without the compulsion to comply with Anti-money Laundering (AML) statutes, under threat of federal prosecution, the progress achieved to date likely would not have occurred.  But the recalcitrance of the US to legislate & enforce aggressively has led some experts to now rank the United States as the world’s biggest financial secrecy haven.   Corporate social & governance commitments are not trivial, but should be recognized as a social catalyst for coalescing sentiment for triggering cultural shifts.  ESG would be synergistic with legislative reform, where the heavy lifting really occurs.

Climate Change:  expedited reductions in GHG emissions is clearly on everyone’s ESG list but voluntary adoption is not capable of scaling to the same extent as a mandated industrial policy, such as outlined in the Green New Deal, and would likely be unrealized without regulatory enforcement by the EPA and other agencies.   Further, concern for a “carbon bubble” of potentially stranded assets of fossil fuel reserves that cannot be burned, has been recognized in various high-level risk assessments, including the IMF, World Bank & HSBC.  The most alarming analysis came from Mark Carney, governor of the Bank of England, who calculated that one-third of global wealth is invested in oil, gas, coal, and other “carbon-heavy” companies.   Citigroup’s ’17 GPS report concurs with an estimate that the “total value of stranded assets could be over $100 trillion”, which is 5x the size of losses associated with the ‘08 housing bubble.*   A devaluation of those assets could crater the entire global economy, at minimum would adversely affect countless institutional funds.

Large sustainable asset managers such as Ceres and Trillium calling for $1Tr per year in climate change investments, are potent advocates for collective commitment, but even they recognize that transition depends on policy choices to remove the obstacles to clean energy scaling imposed on our political system by entrenched “incumbent” industries.   ESG investing is exerting significant pressure towards reduction of GHGs, but does ESG investing have enough leverage to influence more dramatic policy change?  It could lend weight to “outside the box” policy proposals, such as a proposed fossil fuel nationalization plan, which would be beyond the scope of anything that could be achieved by ESG asset management.   The infographics below illustrate the scope of the entrenchment of incumbent carbon assets, are from Influence Map which is a site that monitors fossil fuel investment, subsidies, influence activity & embedded portfolio climate risk.  Who Owns the Fossil Fuels shows the sheer scale of the fossil fuel ownership & investment chain.

Aside from rampant ambivalence, with 75% of the largest companies neutral about climate change, the fossil fuel influence apparatus is so deep that the prospect of counter-influence from ESG practices succeeding at scale seems remote, except insofar as ESG investing is coupled with ESG lobbying to also pursue major enforceable policy shifts.

Other resources at InfluenceMap provides detailed rankings of companies on the A-list of climate policy engagement, that participate both in ESG activities and participating against fossil fuel lobbying.

Although one impression is that ESG adds value almost entirely by limiting risks & excluding exposures to negative factors, in reality companies with high ESG scores have  experienced increases in operating efficiencies, & lower risks with lower costs of capital.   In early 2018, the US Dept of Labor, had issued ERISA guidance that “managers cannot sacrifice shareholder return for ESG considerations”, which imposed a conflict of interest for for institutional investors’ fiduciary duty, and for portfolio companies investors were seeking to influence toward greater implementation of ESG policies.  But because ESG factors have been increasingly shown to have positive correlations with corporate financial performance and value, ERISA reversed its earlier instructions.

In the broader corporate culture, this implied conflict of interest has been used opportunistically by CEOs, under an economic theory of “shareholder primacy” as advocated by Milton Friedman, to justify policies that benefit C-suite interests at the expense of workers and environment, aggravating wealth & income inequality. “Shareholder supremacism” is being targeted for reform under the Accountable Capitalism Act, S. 3348, which would impose obligations on the largest 1000 corporations, under newly issued charters, to consider broader stakeholder interests, include labor on the board of directors, and require 75% board approval for political expenditures, enforced by risk of revocation of charter.

ESG activism as a response to the groundswell of changing public sentiment is catalyzing some very significant outcomes, against the monumental resistance of the fossil fuel industry, on the battlefield of  shareholder resolutions.   Exxon & Chevron, both of which have stated in analyst meetings that they plan to increase extraction, have recently prevailed against resolutions that would have required the companies to disclose targets for reducing GHG emissions.  However, the SEC has sided with shareholders on two other requests, a) to create new board committees to address climate change and b) to fully disclose political contributions to tax-exempt “dark money” 501(c)(4) organizations.   Exxon & Chevron have made huge dark money contributions to Main Street Investors Coalition launched by NAM, which has executives on the board from Exxon, Shell, Devon Energy, Southern Co & a Koch subsidiary, to combat the threat of these resolutions, according to governance consultant Nell Minow at ValueEdge Advisors.

However, BP & Shell have been more responsive to shareholder resolutions that call for disclosures and for alignment of business plans with Paris goals.  Shell has joined with Climate Action 100+, an institutional investor initiative, and announced plans to reduce the carbon footprint from its energy products, which release 10x more emissions than from direct operations, and further, agreed to link the targets to executive pay.

Both ESG activism and lobbying for policy changes for ESG goals are necessary components of a strategy for change.

*[These large numbers have been disputed – even comparing to the “ownership“ diagram above showing total assets of $185Tr, if the assets at risk for being stranded are estimated at $100Tr, which correlates to the estimated one-third of wealth or economic activity, then implied total assets would be $300Tr.  Other mitigating factors would be a) that the at-risk reserves would be less if some were considered chemical feedstocks rather than fuels to be burned; & b) some critic contend equity share value is derived less from assets and is based more on free cashflow, hence would discounting reserves would not depress equity value to such an extent.]

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Fossil Fuel Free Claims

If you are reading this, you’ve probably also seen advertisements for Aspriation’s “Fee-free and fossil fuel free” banking services. Like the advertisements the company’s product page encourages visitors to “Earn high interest on what you save with an account that is fee-free and fossil fuel free.“

As a professional green money manager, I know that “fossil fuel free” is in the eye of the beholder. For many mutual funds, “fossil fuel free” simply means avoiding the 200 largest fossil fuel companies, but investing in the 201^st largest fossil fuel company, even if its primary business is mining coal is just fine. Other mutual funds won’t invest in any company that has any exposure to fossil fuel production or transportation, even if that business accounts for less than 1% of revenues. Other money managers cover the entire spectrum in between. The criterion I use for my 10 Clean Energy Stocks model portfolio and private Green Global Equity Income Portfolio, is that any company in either must improve the environment as it grows because it has lower environmental impact than the activities it displaces.

Fossil fuel free banking products are hard to find, and I was encouraged by the fact that Aspirtation is a B-Corporation, a designation that the business meets the “highest standard of verified social and environmental performance.” In the evolving green investment space, even “verified standards” vary, so I sent three inquiries asking for details to Aspiration’s press office over the last two months. I am still awaiting a response.

The lack of disclosure aroused my suspicions. If Aspiration had something to brag about, wouldn’t they be bragging?

Where Those Deposits Go

With my suspicions aroused, I started reading the fine print. It says

After the close of business each business day, the cash balances in the Aspiration Spend and Save Accounts are swept to an account at one or more federally insured depository institutions (each a “Bank”). …. Aspiration Spend is a non-interest bearing account with electronic transaction functionality. Aspiration Save is an interest-bearing account. Full disclosure about Aspiration Spend and Aspiration Save is available in the Spend & Save Supplement to the Customer Account Agreement.

The “Spend & Save” supplement does not contain any more information about how these banks are selected. I specifically asked how these banks were selected in the emails to Aspiration. The question remained unanswered.

With no response from Aspiration’s press office, I called the company’s customer service line, and asked what banks they use to hold the deposit. The answer was remarkably simple: The money is deposited with Coastal Community Bank, based in the Puget Sound region north of Seattle..

Coastal Community Bank is owned by the financial holding company, Coastal Financial Corporation (NASD: CCB), which IPO’d in July 2018 to raise capital for expansion and to improve Coastal Community Bank’s capitalization*.  According to the S-1 filing,

On May 17, 2018, we entered into an agreement with Aspiration Financial, LLC, or Aspiration, an online investment platform that offers socially-conscious and sustainable banking and investing, pursuant to which we will provide certain banking services for Aspiration’s new cash management account program that Aspiration intends to launch in the third quarter of 2018. As part of our services to Aspiration, we will serve as the issuing bank for debit cards issued to Aspiration’s customers and we will establish one or more settlement accounts for the purpose of settling customer transactions in the Aspiration cash management account program. Substantially all of the Aspiration customer cash balances will be distributed to accounts at other depository institutions through a sweep network. We will retain a small portion of Aspiration customer cash balances for the purpose of facilitating settlement of payments and transfers. The agreement with Aspiration has an initial term of three years from the later of July 1, 2018 or the date on which Aspiration begins enrolling customers, and is subject to two automatic renewals for successive 12-month terms. Pursuant to the agreement with Aspiration, we will receive a quarterly fee based on the total deposits in the Aspiration cash management account program (and we must pay interest to Aspiration on the deposits we retain) and Aspiration will reimburse us for certain expenses.

This is a profitable business for CCB, which is now earning a fifth of its non-interest income and a tenth of its total income from “wholesale banking service fees” which are a new category for CCB and comprised of the services it provides to Aspiration.  In addition, deposits from Aspiration can will provide additional capital to fuel CCB’s loan growth.

The bulk of Coastal Community’s lending is to small and medium businesses and individuals in Washington state, most of it real estate lending. According to the S-1 IPO filing, CCB’s loans are “12.8% commercial and industrial, or C&I, loans, 24.9% owner-occupied commercial real estate, or CRE, loans, 32.8% non-owner-occupied [commercial real estate] loans and 13.4% one- to four-family residential loans at March 31, 2018.” While some of the commercial or industrial loans might be to fossil fuel related businesses, it seems unlikely that any of these loans are to big oil and gas or coal companies. At worst, there may be a few loans to gas stations or propane delivery companies.

Like many banks, Coastal Community also has funds deposited with other banks. According to CCB’s third quarter report, deposits with other banks amounted to approximately $100 million, compared to $750 million worth of loans. These banks are unlikely to themselves be fossil fuel free, but, again, such deposits are only about 12% of financial assets, most of which will not be invested by these other banks in fossil fuel projects. Again, the fossil fuel exposure here is minor.

Overall, I think it is fair to say that Coastal Community Bank’s deposits and Aspriation’s Spend and Save accounts are fossil fuel free by all but the most strict definitions of the term.

Mutual Funds

In addition to its Spend and Save accounts, Aspiration offers two mutual funds: The Redwood Fund (REDWX) and the Flagship Fund (ASPFX.)

The Redwood Fund seems to be a relatively generic mutual fund that avoids investing in fossil fuel oriented companies. Its top holdings are Amazon (AMZN), AGCO Corp (AGCO), UnitedHealth (UNH), Royal Caribbean (RCL), Johnson & Johnson (JNJ), Simon Property Group (SPG), American Express (AXP), Delta Air Lines (DAL), Prudential (PRU), and US Bancorp (USB). The fund avoids investing in fossil fuels by completely avoiding companies in the Energy and Utility sectors, as opposed to finding good actors like renewable energy companies in those sectors.

While the Redwood Fund is far from my top choice of a green mutual fund, I’m confident that it would meet most people’s definitions of fossil fuel free.  But investors and do much better with mutual fund which seek out companies working to help the environment as opposed to just avoiding the worst actors.

Mutual fund investors who are looking for fossil fuel free investing options should read my very quick guide to a green portfolio and clean energy mutual funds and ETFs.

The Flagship Fund is another matter. This fund invests in a number of ETFs (exchange traded funds) with the goal of managing risk. None of these ETFs have any policies about avoiding fossil fuel investments. Most follow highly quantitative hedge fund style strategies that try to manage risk. While that’s not a bad thing, investors can be assured that any such strategy will have some investments in fossil fuels. The only way to avoid fossil fuel investments is to actively work to avoid them.

Investing in an ETF that makes no attempt to avoid fossil fuel invests is simply a way to avoid direct responsibility for those investments, not a way to avoid investing in fossil fuels.

Conclusion

Aspriation’s Spend and Save accounts and their Redwood fund can be described as fossil fuel free by all but the strictest definitions.

The 2% interest paid on Spend and Save account balances, along with the tools they offer to help customers direct their spending towards more responsible businesses make Aspiration a compelling option for people looking for environmentally responsible banking services.

Aspiration’s are the best green banking services I am aware of. Their green mutual fund offerings are acceptable (Redwood Fund) to not green at all (Flagship Fund.)

Whoever is responsible to responding to email sent to their press email address is abysmal. They should be called into their boss’s office to explain why they should not be fired.

Disclosure: The author and his clients have no positions in any of the securities discussed, and has received no compensation from any of the companies discussed in this article. After the initial publication of this article, the author signed up for Spend and Save accounts with Aspiration, and added a referral link which will earn him a referral fee if readers use it to sign up. 

*Note: This article has been corrected to clarify the relationship between Coastal Community Bank and Aspiration.

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by Vic Patel

There are over a dozen major Clean Energy ETFs available to investors. But which one is the best one to put your hard earned money into? Best can mean different things to different people based on their investment preferences and risk profile.

In this article, I will provide a more empirical based reason behind why I believe that PZD is the most attractive Clean Energy ETF at the moment. I have based on my analysis of 4  primary factors: liquidity, diversification, recent price action, and last but not least expense ratio.

Liquidity has to be a major consideration in the selection of any financial asset. The lack of sufficient liquidity can lead to wider bid ask pricing, and difficulty in efficient trade execution

Top 5 Most Liquid Clean Energy ETFs (based on 3 month Avg. Daily Volume)

TAN –   135,000
PZD –    7,512
ICLN –   79,979
PBW –   13,373
QCLN –   15,318

Since I always want to reduce risk through diversification. ETFs with a larger numbers of holding and a lesser concentration in the top 10 are the most  diversified. So, next, I  analyzed the number of holdings within each ETF and the concentration of its’ top 10 holdings. You will find the results of that below.

Number of holdings

PZD                 51          (31% concentration in top 10 holdings)
PBW                 40         (36% concentration in top 10 holdings)
ICLN                31         (55% concentration in top 10 holdings)
QCLN               39         (57% concentration in top 10 holdings)

Clear Winner:  PZD

From here, I took a look at the price chart of each ETF on our list. What I primarily wanted to see for each was where the current price was trading in relation its 200 period moving average. The 200 period moving average is a widely watched metric by technical traders, in particular retail trend traders. When price is above the 200 period moving average, this group tends to stay on the long side of the market, and when price is below the 200 period moving average they opt to stay flat or on the short side of the market.

This can sometimes bolster prices or place additional pressure on the price of the ETF depending on the where price is trading in relation to this 200 MA. As such, we want to align our position with that order flow whenever possible. So, when prices are trading above it, it is considered a bullish sign. And contrary to that, when prices are trading below the 200 period moving average, it is considered a bearish sign. Essentially, I wanted to filter out any of these ETFs that were trading below their 200 period moving average.

PZD, PBW, and QCLN made the cut, as each was trading above its 200 period moving average. ICLN and TAN however needed to be filtered out due to their trading below its 200 period moving average.

So now we are down to three. The final piece of analysis involved comparing each of the remaining three ETFs to see how their Expense Ratios measured up. The results are below:

Expense Ratio Comparison

PZD     .68
PBW     .70
QCLN   .60

The expense ratios seem to be relatively similar for all three, so there is no clear winner or loser there.

Conclusion

So here what PZD (Invesco Cleantech ETF) has going for it and the reason I believe it is the best Clean Energy ETF to buy:

• PZD is a relatively liquid ETF.
• PZD has the largest number of holdings and the least concentration in the top 10% of its holdings.
• PZD is trading above the 200 period moving average.
• PZD has a reasonable expense ratio based on its peer class.

This market analysis was done by Vic Patel, He is an experienced trader with over 20+ year in the markets. He also runs a popular trading blog at Forex Training Group.

**Data Source – ETFDB.com

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Alternative energy and clean energy mutual funds are open-ended funds that invest primarily (at least 50% of the portfolio) in the securities of clean energy and alternative energy companies.  Closed-end funds are included in the list of alternative energy and clean energy ETFs.

This list was last updated on 2/20/2021.

If you know of any mutual fund that is not listed here and should be, please let us know by leaving a comment. Also for stocks in the list that you think should be removed.

The post List of Clean Energy and Alternative Energy Mutual Funds appeared first on Alternative Energy Stocks.

This list was last updated on 4/27/2022.

ETFs are Exchange-listed funds which pool investor’s money for the purpose of making Alternative Energy investments. Exchange Traded Funds (ETFs) track a specified Alternative Energy index. This list also includes closed-end mutual funds and other pooled investments which trade on exchanges.

ALPS Clean Energy ETF (ACES)
ASN Groenprojectenfonds (ASNGF.AS)
Bluefield Solar Income Fund (BSIF.L)
Defiance Next Gen H2 ETF (HDRO)
Evolve Funds Automobile Innovation Index ETF (CARS.TO)
First Trust Global Wind Energy Index (FAN)
First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID)
First Trust NASDAQ Clean Edge Green Energy Index Fund  (QCLN)
Foresight Solar Fund Limited (FSFL.L)
Global X Lithium ETF (LIT)
Global X Uranium ETF (URA)
Global X Renewable Energy Producers ETF (RNRG), (formerly YLCO)
Greencoat Renewables Fund (GRP.IR)
Greencoat UK Wind PLC (UKW.L)
Harvest Clean Energy ETF (HCLN.TO)
Invesco Global Clean Energy ETF (PBD)
Invesco MSCI Global Timber ETF (CUT)
Invesco Solar ETF (TAN)
Invesco Wilderhill Clean Energy (PBW)
iShares Global Timber & Forestry Index Fund (WOOD)
iShares Self-Driving EV and Tech ETF (IDRV)
iShares S&P Global Clean Energy Index ETF (ICLN)
iShares S&P Global Nuclear Energy Index (NUCL)
KraneShares Electric Vehicles and Future Mobility Index ETF (KARS)
KraneShares Global Carbon ETF (KRBN)
NextEnergy Solar Ord (NESF.L)
Pickens Morningstar® Renewable Energy Response ETF (RENW)
SPDR Kensho Clean Power ETF (XKCP)
The Renewables Infrastructure Group Limited (TRIG.L)
Triodos Groenfonds NV (TRIGF.AS)
VanEck Vectors Low Carbon Energy ETF (SMOG)
Van Eck Nuclear Energy ETF (NLR)
Van Eck Rare Earth/Strategic Metals ETF (REMX)

If you know of any alternative energy ETF or ETP that is not listed here, but which should be, please let us know in the comments.  Also for funds in the list that you think should be removed.

Thanks to Peter Smit for his extensive suggestions for updates to this list.

The post List of Alternative Energy and Clean Energy ETFs appeared first on Alternative Energy Stocks.

Garvin Jabusch

You probably know that index funds have become all the rage in investing over the past several years, as investors flock to their low fees and reject the gospel of active management. But you probably don’t know that investing in a broad-based index fund not only ignores rapid changes in the energy economy but also makes the investor complicit in climate change denial. And just as climate denial ignores the inherent risks of fossil fuels to environment, economy, and society, “set it and forget it” index investing ignores the inherent risks of fossil fuels and related stocks to your portfolio.

If you own an S&P 500 Index fund, you own 65 fossil fuels–related companies. That’s 12.14 percent of the index, or about $12 of every $100 you deposit, going directly into fossil fuels (according to fossilfreefunds.org, which confirms my Bloomberg terminal’s information). This includes producers such as ExxonMobil and Anadarko Petroleum; oil and gas services companies including Halliburton, Schlumberger and BakerHughes; and several fossil fuels–fired utilities like Sempra Energy and FirstEnergy Corp. To boot, you are investing in many of fossil fuels’ project-funding banks (Bank of America, JPMorgan Chase, and Citigroup, the so-called “bankers of extreme oil and gas”), and demand drivers (internal combustion engine manufacturers, coal and gas turbine makers, many of whom, such as Ford, are actively resisting improving mileage standard requirements).

Current conventional wisdom holds that the best and most sensible way to invest in stocks is to buy a broad-market index fund with the lowest fee you can find, and then forget it. More than that, we are conditioned to judge every fund by its performance’s adherence to an index; even non-index funds are routinely judged by how closely they mirror the returns of a major benchmark. The terms “risk profile” and “risk adjusted returns” of a fund usually mean nothing more than a measure of how much (less or more) a fund’s performance varied from a benchmark index. But I would argue that, given the massive risks embedded in the present holdings of indices like the S&P 500, these benchmarks have outlived their usefulness as measures of investment risk, and now present far more portfolio danger than we are led to believe. In short, our yardstick for measuring risk is broken.

How broken? Consider this: In owning that basket of S&P 500 stocks, you are making an active bet that economic growth will be perpetuated by fossil fuel-derived power. This bet is now visibly, clearly not the way forward. As British environmental economist Nicholas Stern recently said, “Strong investment in sustainable infrastructurethat’s the growth story of the future. This will set off innovation, discovery, much more creative ways of doing things. This is the story of growth, which is the only one available because any attempt at high-carbon growth would self-destruct” [emphasis mine]. For its part, and more pointedly, the investment bank division at Morgan Stanley in 2016 advised clients that long-term investment in fossil fuels may be a bad financial decision, writing: “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels.”

What both Stern and Morgan Stanley understand is that the world has changed and our approaches to investment need to change with it.

I won’t belabor a case that’s already been convincingly made (see here, here, and here), but it has become clear that the age of fossil fuels is beginning to end:

• Costs of renewable technologies continue to plummet while fossil fuels remain volatile commodities
• Consumers, businesses, and investors are shifting
• Policies instituted by national governments (led thus far by China and Germany) and local governments (the U.S. state of California, and others)

The decline of fossil fuels will impact investments as much as it will impact any aspect of the economy. The S&P 500 as it’s now constituted is too packed with fossil fuels and other sources of systemic risk to represent any kind of credible reference for calculating safety of returns or expecting to earn them. In terms of the outcomes it promotes, S&P 500 is functionally the same as climate denial. It is time for a new standard.

How do we realize this new standard? We need to recognize that avoiding indexing isn’t just about putting your money where carbon isn’t; it’s now about putting your money where the future is. Think, as an investor, about the outcomes of economic and technological innovation, combined with awareness of the risks of climate change. Where is investment money flowing in response to rapid changes in both? I believe some of the answers include renewable energies, water, sustainable farming practices, efficient transportation, connected cities and grids, AI and machine learning, robotics, biotech, and new approaches to real estateto name a few.

It is in seeing the world for what it has become, rather than what it was, that investors and markets will allocate capital to manage risks and profit from new opportunities. All of which leads in the opposite direction from fossil fuels.

Enough with the old indices. We should be buying what’s next instead.

This piece was originally published by worth.com at http://www.worth.com/index-funds-are-climate-change-denial/

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha ® Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, “Green Alpha’s Next Economy.”

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