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Why Fossil-Free Investing is Better for Your Portfolio

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By Rio Richardson

November 11, 2021

WHAT ARE FOSSIL-FREE INVESTMENTS?

Fossil-free investing means avoiding giving your money to the biggest polluters in the world: companies whose main lines of business are in extracting, processing or burning fossil fuels like coal, oil and gas. These companies aren’t just contributing to climate change and polluting our natural world, but they also plan to continue. Exxon, the United States’ biggest fossil fuel producer, has only pledged to cut CO2 emissions by 15-20% by 2025, which is far below what is needed to limit global warming to 1.5°C.

By refusing to invest in these companies, we’re sending them a message: stop lobbying against climate legislation that keeps us safe and start participating in the conversation about what a world that does not exceed 1.5°C of warming looks like.

HOW DO I KNOW IF MY 401(K) IS INVESTED IN FOSSIL FUELS?

You may be thinking - surely I don’t have any money invested in these companies?

But you likely do, through your 401(k) or other retirement plan. Often, 401(k)’s are made up of stocks from a wide range of companies. Retirement investment advisors usually recommend not to concentrate retirement savings in a small number of stocks, as these can change value rapidly, which is bad for long-term investing like retirement savings. But diversifying investments does mean you likely have your retirement savings invested, at least partially, in fossil fuel companies.

The best way to find out whether your 401(k) is invested in fossil fuel companies is to use a free online tool like https://fossilfreefunds.org/.

On Fossil Free Funds, you can look up the specific fund that your 401(k) is invested in by ticker or name, or you can look at the most popular index funds or target date funds. Each fund is given a rating from A to F based on what % of their portfolio is invested into fossil fuel companies. The average fund is about 5% invested in fossil fuel companies, and this tool gives a C to funds that fall in that range.

Let’s look at one of the most popular 401(k) funds, the Vanguard Target Retirement 2050 Fund.

While its title would not flag it as being especially invested in fossil fuel companies, it actually has more than the average investment in them, at over 6%, resulting in it getting a D rating. The fund has investments in Exxon Mobil, Chevron and Berkshire Hathaway (which plans to keep at least 14 coal fired power stations running after 2030).

If 6% doesn’t sound like a lot to you, this represents $1.4 Billion that could be going towards companies that aren’t actively fighting against saving our planet.

HOW WILL SPHERE’S PERFORMANCE COMPARE TO MY EXISTING FUND?

Sometimes, ‘impact’ investments in environmental or social companies can get a bad reputation for having worse performance or being more expensive than ‘normal’ investments. Sphere has been specifically designed to be as low cost as possible, saving you money on fees that could detract from your total retirement savings.

And while no one can predict the future of the stock market, divesting from fossil fuel companies has been a smart financial decision over the last 10 years. The Sphere 500 Fossil-Free Index (SPFFXI) contains the top 500 companies in the US, excluding ~40 fossil fuel companies. The below chart shows that returns over its 10-year back-test period are 46% higher than the returns of the SPDR S&P 500 ETF.

SPFFXI 10 year back test — *Note: Indexes are not investable and do not have fees or trading costs.*

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There are plenty of reasons for this. The value of shares in fossil fuel companies has dropped about 20% since 2012 and cut back on new big projects by 34% in 2020. With more people getting their money out of fossil fuels, we want these companies to soon realize that they have no other option than to change their operations.

IS THIS ESG INVESTING?

“ESG”, or “Environmental, Social, and Governance” is a general set of criteria that is used to evaluate how much positive or negative impact a company has. Impact investors can use these standards to pick which companies to invest more heavily in, or ‘screen out,’ of their investments. Generally, ESG Investing, Sustainable Investing, Socially Responsible Investing (SRI) and Impact Investing are terms that are used fairly interchangeably.

SPFFXI does not use broad-based ESG criteria in its investment strategy. Instead, it uses one piece of simple criteria to screen out roughly 40 fossil fuel companies from our index. We keep this simple because we have a simple mission: to convince these companies to help create global, binding legislation that limits warming to 1.5°C (450 ppm of CO2 equivalent).

The index is still exposed to carbon-intensive industries (such as airlines, shipping and logistics) because their business models are not necessarily dependent on fossil fuels and with technology innovation they could change their practices to be less carbon intensive. This is different than the ESG funds that underweight companies that pollute more and overweight companies that pollute less.

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As with all investments, there are risks involved with investing in SPFFX. Risks include, but are not limited to, sustainability considerations, general market or market event, common stock risks, climate investing considerations risk, sector risk, and third-party data risks as it relates to the composition of the Index. For a detailed explanation of the risks associated with SPFFX and the underlying Index, please read the prospectus.

The Sphere 500 Climate Fund tracks the Sphere 500 Fossil-Free Index. The Sphere 500 Fossil-Free Index starts with the top 500 US companies by market capitalization and then excludes those companies designated as participants in the fossil fuel industry. The Sphere 500 Fossil-Free Index will not invest in companies whose main lines of business include producing, distributing, or refining fossil fuels, holding reserves of fossil fuels, utilities that are primarily fossil fuel-powered, and producers of equipment for any of the above. However, the fund may invest in companies that use fossil fuels as a part of their business or have used fossil fuels in the past. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Index returns do not reflect the effects of fees or expenses. It is not possible to invest directly in an index.

The performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance, please call 844-2-SPHERE or visit the fund’s website at https://www.oursphere.org/fund.

Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results. No portion of the content should be considered a solicitation to buy or an offer to sell shares of the fund in any jurisdiction where the solicitation or offer would be deemed unlawful under the securities laws of such jurisdiction. The Sphere 500 Climate Fund is distributed by Ultimus Fund Distributors, LLC, member of FINRA and SIPC, which is not affiliated with Sphere or SPFFX. NOT FDIC INSURED NOT BANK GUARANTEED. MAY LOSE VALUE.