Divest your assets in 5 easy steps.
"Don’t judge each day by the harvest you reap, but by the seeds you plant.”
–Robert Louis Stevenson
Step 1: Identify your fossil fuel assets.
Identifying what counts as a “fossil fuel” asset can be a little bit tricky. For example, the rating agency Macroclimate 30 considers Berkshire Hathaway a fossil fuel company due to its 90% stake in Berkshire Hathaway Energy, an energy conglomerate.
Yet General Electric wasn’t considered a fossil fuel company despite its majority stake in Baker-Hughes, an oilfield services firm, and pressure from climate groups like the Natural Resource Defense Council to step building coal-fire power plants. Climate change contributors are in the eye of the beholder, it seems.
However, some tools exist that allow you to quickly and easily identify the climate change impact of your investments.
Step 2: Choose a divestment approach
Your job isn’t necessarily over after selling off your fossil fuel investments. You need to decide what to replace them with.
In general, there are three types of divestment approaches, each with their own pros and cons.
In a “subtractive” approach, investors simply re-invest divested funds in their remaining non-fossil fuel assets, leaving the portfolio as little changed as possible. This is the most straight-forward way to divest, but doesn’t consider the risks that reducing their exposure to the energy sector creates.
Many investors believe that you should swap oil firms for renewable ones.
Yet this is harder than you might think: many renewable-energy focused funds include oil companies that happen to spend a lot on renewables. Investors need to be aware that their fund managers’ values and incentives may not always align with their own.
Investors do this for a variety of reasons ranging from maximizing their social impact to their belief that clean energy funds will perform well over the next decade.
Divesting from energy and utilities can leave your portfolio vulnerable to energy price inflation and underexposed to global growth, creating tracking error with the S&P 500. This was estimated in 2015 to shave off 0.6% in yearly returns, leading to large missed gains over the lifespan of these assets due to compounding. In a “neutral” approach, investors replace their fossil fuel investments with an asset or assets that mimic the long-term risk & performance profiles of fossil fuel firms.
Step 3: Create an "exit" strategy
There are a number of ways you can offload your divestment assets. Simply selling your carbon assets and re-investing them in carbon-free investments could impose a steep cost by triggering capital gains tax on the appreciated assets.
For some people, donor-advised funds could be a way of solving this: Contributions to these accounts count as charitable contributions for tax purposes and can include in-kind investments like carbon-heavy financial assets.
On the other hand, if your investments are sold at a loss, this could reduce your tax burden.
We recommend individuals ask their own investment advisors to help them outline their different pathways for carbon investment.
Step 4: Identify your replacement assets
You’ll need to decide what kind of assets you will use to replace you fossil fuel assets. The assets you choose should align with your divestment goals: Do you want to invest in renewables, reduce the diversification risk of your investments, or pursue a “simple” approach?
Step 5: Execute
Divestment can carry a lot of risks for the un-warry investor.
You should never pursue a divestment strategy until you have know all the steps that you will need to take and have considered all your options.
Talk to your advisor about the divestment approach that best aligns with your investment goals