President, Green Century Capital Management, Inc.
I want to address two investment issues concerning investing in or divesting from fossil fuel companies. The first is the possible risk posed by holding coal, oil and gas companies. The second is the opportunities available in the growing energy efficiency and renewable energy sectors.
Divesting may allow investors to avoid the risks of holding fossil fuel companies in their portfolios
Oil, gas and coal mining companies hold reserves of fossil fuels. Currently, these reserves, also referred to as carbon assets, are counted as positive assets on a company’s balance sheet with the assumption that all listed reserves will be able to be used, sold and burnt. However, according to analysis by Carbon Tracker Initiative the burning of these fuels will exceed the carbon levels regarded as necessary to control global warming.
In fact, companies currently have five times the amount of fossil fuel reserves – with an economic value of $20 trillion than experts agree can be burned and limit the rise in global average temperature to no more than two degrees. If or when governments act to restrict carbon emissions, fossil fuel companies owning those reserves will not be allowed to extract and sell them. These assets will become devalued and investors who invested in these companies may suffer reductions in the value of their holdings. The uncertainty around the timing of government regulation on global warming and fossil fuel reserves adds to the risk factor of holding fossil fuels – no portfolio manager will be able to predict the timing of regulation and may be left holding these assets after they have become devalued. Divesting now could allow investors to reduce their exposure to what may become stranded carbon assets.
As investors and their portfolio managers consider divesting from fossil fuels, it can also be helpful to remember that fiduciary responsibility involves acting in an organized manner with a due diligence process that looks at the risks of investments. One important financial indicator is a fossil fuel company’s level of capital expenditures, which includes the amount of money it spends seeking and developing new ways to extract fossil fuels. The top 200 fossil fuel companies (by reserves) had adjusted capital expenditures of $674 billion between 2013 and 2014. In contrast, these same companies only paid $126 billion in dividends to their shareholders over the same period. This means that these fossil fuel companies are pouring the vast majority of their profits into exploration and extraction projects. Not only may this increase the amount of carbon assets that may be devalued later, it has a direct effect on shareholders now. Five leading fossil fuel companies have tripled capital spending in the last five years, which means that money that could be coming to shareholders, such as pension fund investors, is going into drilling for more oil that may never be able to be sold. It is possible that divesting from fossil fuels may be regarded as more responsible than staying invested in them, given the escalating global warming crisis and its impact on fossil fuel reserves. Transitioning to a fossil fuel free portfolio may prepare investors for future carbon regulation now, possibly reducing future risks.
Finally, Divesting also may allow investors to take advantage of new and growing investment opportunities
By moving assets out of fossil fuel companies, investors are able to invest in and gain exposure to companies leading the transition to a more sustainable economy.
One of these opportunities is in the growing field of green businesses such as clean technology, energy efficiency, water infrastructure, and the renewable energy sector.
Green Century Capital Management is an investment advisory firm that manages two environmentally responsible mutual funds. Green Century was founded in 1991 and has managed a fossil fuel free portfolio since 2005.
You should carefully consider the Funds’ investment objectives, risks, charges and expenses before investing. To obtain a Prospectus that contains this and other information about the Funds, please visit www.greencentury.com, call 1-800-93-GREEN or email firstname.lastname@example.org. Please read the Prospectus carefully before investing.
Stocks will fluctuate in response to factors that may affect a single company, industry, sector, or the market as a whole and may perform worse than the market. Bonds are subject to risks including interest rate, credit, and inflation. The Funds’ environmental criteria limit the investments available to the Funds compared to mutual funds that do not use environmental criteria.
This information has been prepared from sources believed to be reliable. The views expressed are as of the date of this writing and are those of the Advisor to the Funds.
The Green Century Funds are distributed by UMB Distribution Services, LLC., 235 W. Galena Street, Milwaukee, WI 53212. 2/15