Hello! I am Mel, one of Sun Light & Power’s newest team members. When I was given the opportunity to write a blog post for Earth Day I was excited and more than a bit nervous. After I saw the theme for Earth Day 2023 was "Invest in our Planet,” I thought, I have to write about that! It’s so important!
Almost all greenhouse gasses are caused by industry. It stands to reason that if we fix the way we do business on planet Earth, then we can reduce the worst impacts of climate change. If we want to get industrial businesses to respond then we should be using the leverage that matters to them most, money.
Sell or reform assets that don’t match your climate values; Buy ones that do!
First things first, I am a layperson in the investment realm so the following does not constitute financial advice. Please research thoroughly and consult with actual experts before investing/divesting.
Selling off investments that don’t agree with your ethics is a form of divestment. Divestment as a strategy for ethical change can be traced back to 18th century religious groups that forbade investments with companies engaged in harmful practices including the slave trade.
As I was doing research I found many references to the divestment movement that was begun by the United Nations in the 1960s responding to the South African apartheid regime. The movement picked up steam in the 1980s when many American companies and university endowments began cutting ties with South African businesses.
The first organized Anti-Apartheid Organization to be founded in an American higher education institution was at the University of California campus right here in Berkeley. The UC Berkeley students and faculty were unrelenting, resulting in the withdrawal of 3.1 billion dollars' worth of investments from South Africa, the largest divestment by an American university, earning praise from Nelson Mandela. (Correcting for inflation, 3.1 billion dollars in 1986 would translate to $8.5 billion today.)
Another interesting fact from this era in California is that Barack Obama gave his first public speech at Occidental College in 1981 at a rally organized to demand that the college divest from any South African interests.
The logic of the modern fossil fuel divestment movement rests on more than just an ethical need for change to preserve our planet for future generations of humanity and every living organism. There is sound economic reasoning encouraging divestment as well. If we are to curb global warming to 2 degrees Celsius (3.6 degrees Fahrenheit) a whopping 33% of known oil reserves will not be burnable. For natural gas and coal these figures are even higher, 49% and 82% respectively.
An asset that is unusable and must be written off is called a stranded asset. Since this risk of fossil fuel assets losing their value as we transition into clean energy is not being adequately factored into the stock prices of fossil fuel business, many experts believe we are experiencing a carbon bubble. A 2013 study conducted by HSBC found that European fossil fuel companies like Royal Dutch Shell and BP could lose 40% to 60% of their market value when the carbon bubble bursts.
So, if you haven’t already done so, please consider divesting from fossil fuels! You’ll need to check through the stocks, bonds, mutual funds and other assets that you already own and look for anything that doesn’t agree with your ethics. They might have an obvious flaw, like being an actual oil company with a documented history of undermining government regulations dealing with climate change. Or perhaps their flaw is more subtle, like operating in an unnecessarily energy intensive way.
If you decide to divest, collect all of these investments into a category of their own, but don’t get rid of them quite yet. Divestment might feel amazing, but it's not the only strategy suggested by experts.
While I was researching divestment I encountered an interesting point made by Tom Johansmeyer in the Harvard Business Review. He used an example of an asset manager in possession of a coal burning plant. He pointed out that if they sell the plant, the buyer will be motivated by profits so they will likely improve the plant and extend its life cycle. He suggests a different strategy called run-off. The asset manager would keep the asset but resist improvements, with an eye toward decommissioning the plant sooner rather than later.
This approach reminds me of sustainability-motivated shareholder activism, where a shareholder uses their equity stake to put pressure on managers to reform a business. Most of the time shareholder activists are a company, a group of people, or a very high-net worth individual. It’s similar to the run-off strategy because you're trying to raise the ethical standards of something that you own rather than cutting ties with it.
I’ve been thinking about this issue a lot since I first read about run-off. I think it makes a lot of sense to attempt to reform instead of selling a problem asset. However, most of us don’t have enough equity in a coal burning plant to make run-off feasible or own enough shares of a problem asset or can form a group that owns enough to effectively participate in sustainability motivated shareholder activism. It occurs to me that it might take a while to rule out reform strategies so we could always take our time looking into our assets and divest later if it doesn’t work out.
Now that your portfolio is looking clean(er), it's time to think positively about what companies and assets you want to support. Investing that takes ethical standards into account is often called ESG (environmental, social, and governance) investing.
If you want to get involved with ESG investing you could get help from a financial advisor or a robo-advisor, which is a digital advisor. If you use an in-person financial advisor it's advisable to find out whether they are a fiduciary financial advisor, which means they are required by law to act in your best interest, but may have higher fees. If you use a robo-advisor make sure you first thoroughly research their methodology. If you decide that you don’t want any help, do extensive research and consult reviews from independent research firms like Morningstar that can reveal a fund or company’s ESG performance.
As you look through options you’ll see some funds focusing on a specific issue, like green energy, making it easier to create a portfolio that reflects your values. It’s also important to make absolutely sure that funds or companies are living up to their purported green values and not merely greenwashing as an advertising technique.
Before I started digging into ESG research I thought that ESG funds would naturally not perform as well as non-ESG funds. I’m happy to report that there’s a lot of research that shows that I was wrong about this. For example, a 2021 Charles Schwab analysis of mutual funds ranked “Sustainable Investment - Overall” and found that these funds' performances ranked close to the middle of its peers in the same category and have about the same amount of risk. Additionally, their analysis showed that these funds dipped less than their peers during market drops from 2007 to 2021.
There is some indication that ESG funds didn’t perform as well during the most recent market dip of 2022, however that could be attributable to the fact that ESG’s overall are heavily invested in tech, which was the most affected industry. They also lack energy investments as they avoid carbon intensive industries, and energy was the sole sector of the market that did well last year. Despite these trends, ESG investing still delivered similar returns as the broader market. The S&S 500 dropped 19.4% while the Morningstar US Sustainability index dropped by 18.9%.
Finally, I’ll point out that 2023 is an exciting time to get involved with green energy investing, if you aren’t already. According to a January 2023 analysis by BloombergNEF, in 2022 worldwide investments into the clean energy transition hit $1.1 trillion, which is equal to what was spent producing fossil fuels. This means last year was the first year that green energy investments were as significant as what was spent on oil, gas and coal.
These steadily increasing investments into green energy have been having an obvious effect. 2022 was also the first year that renewables were responsible for generating more electricity than coal in the US, according to the US Energy Information Administration. That’s a huge success that we will literally be building upon as our collective investments lead to more and more sustainable energy infrastructure projects.
Thanks for going on this journey with me! I get really inspired when I think about increasing my dedication to green energy with all of you who are also increasing your dedication. It's a time when being just a small part in something big is a good thing - I want to be a single cog in a massive machine of environmental reform. I want to be a tiny fleck in the multitude of us as we shift our weight towards a greener future.
Let’s see what we can accomplish in 2023!
Mel Georgiades is the Sales & Marketing Assistant at Sun Light & Power