How Climate-Friendly Is My 401(k)?

September 12, 2018

I believe that climate change is happening now. If we don’t get it together, our grandchildren will get really mad at us.

 

How bad can it get?

 

By the end of the century, chronic flooding is projected to affect as many as 670 coastal communities in the United States, including Annapolis; Southern Maryland; Cambridge, Massachusetts; Norfolk; Virginia Beach; Charleston, South Carolina; Miami; Oakland, California; four of the five boroughs of New York City; and many others. Don’t buy land there!

 

 

From a study by the Union of Concerned Scientists, published in a peer-reviewed journal Elementa. Its website allows users to zoom in all the way down to the street level.

 

In 80 years, current agriculture will likely be infeasible due to severe soil erosion. And if major rice-producing regions in Asia disappear due to sea level rise, it will be very difficult to feed 11.2 billion people, which is the median United Nations forecast by 2100.

 

How can I help stop climate change?

 

As my contribution to reduce my carbon footprint, I’ve tried to reduce my beef & dairy consumption, unplug devices when not in use, and use public transit when possible.

 

However, I often feel like I should do more. I envy my sister who has enough space to be able to compost. I’m so excited for one of our clients, as they power their home in Takoma Park with solar panels, and they’ll soon buy an electric car.

 

I’ve also been inspired by fellow financial planners who put their money where their mouth is. They have pushed me into creating a greener investment portfolio. Earlier this year, I switched away from an S&P 500 index fund (which holds Exxon Mobil and other big oil companies) to a greener fund that only buys companies that meet certain environmental and social criteria.

 

Am I sacrificing my IRA’s performance?

 

Actually, not really. We used to think there would be a trade-off if we did the right thing. But several studies now show otherwise. A 2015 meta-study of over 2000 reports showed that roughly 90% of the studies did not show a negative correlation between environmental, social and governance criteria and corporate financial performance.

 

If you were an early climate change believer and excluded all U.S. energy companies in your U.S. portfolio from 1925 to 2017, you would have made an average annual return of 11.48%, compared to the general S&P 500 index of 11.53%. I wouldn’t call that a trade-off.

 

 

From The Race of Our Lives Revisited by Jeremy Grantham of GMO

 

There’s also a medium-term investment risk for continuing to hold fossil fuel companies in your 401(k) and IRA. If for some reason the world gets it together and decides to more aggressively act against climate change, or the pace of solar & wind technological advancements makes it so much cheaper than extracting oil from the ground, then Big Oil companies’ underground oil reserves will be left stranded, and their valuations can plummet.

 

Magis

 

I feel compelled to further “greenify” my retirement savings. I was pleasantly surprised that there are now fossil-fuel free ETFs for emerging market stocks. I’m currently doing my due diligence on a clean-tech ETF, which holds about 50 companies involved in energy-efficiency, water purification, eco-friendly agriculture, and alternative energy.

 

Do you have a desire to align your values with your investments? Schedule a free discovery call with us and we can explore how we can work together to accomplish this goal.

 

 

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