Fossil-Fuel Shares Lead the Stock Market. How Awkward.

It’s not a secret Stock market It has been Rocky From the beginning of the year. High-tech giants like Apple, Microsoft, Google, and Amazon didn’t help at all. All their stocks have declined at double-digit rates.

So far in 2022, the S & P 500 has fallen by more than 12%, temporarily below its peak by more than 20%, and stock prices have fallen. Bear market area. The stock market can be disastrous, but when you’re worried about the future of the planet, things get worse.The fact is that it’s only one wide Stock sector Last year it has brought consistent profits. A traditional fossil fuel and a company that extracts, refines, sells and services it.

In fact, looking at the performance charts of the top S & P 500 companies in 2022, we found that 19 of the top 20 spots belong to companies that are somehow related to fossil fuels. Occidental Petroleum showed the best performance, up 139%.

This is not just a phenomenon in the United States. Saudi Aramco, Saudi Arabia’s state-owned oil company Apple To distinguish between The most valuable in the world Listed company. Most of last year Rising oil prices Have It has exceeded the value of businesses based on silicon chips.

This is extremely annoying if you are paying attention to science.Quote only one important thing these days reportA gathering of experts convened by the United Nations and known as the Intergovernmental Panel on Climate Change, found In February, cities, farms and coastlines around the world are not well protected from the dangers posed by climate change. already Forging, including increasingly severe droughts and rising seas. Reportedly, the constant burning of fossil fuels will make things worse.

But for short-term investors, energy looks better than ever.

RussiaBank of America said in a report to its customers Thursday that the assault on Ukraine and the tightening of sanctions in the West have improved the outlook for fossil fuels. “Our commodity strategists anticipate that a sharp reduction in Russia’s oil exports could lead to a full-blown 1980s-style oil crisis,” the report said. “Not owning energy is becoming more expensive,” he said. “With China’s resumption, peak driving season and favorable positioning / valuation, energy prices have risen even further.”

Two conflicting goals

This presents a classic dilemma for investors who want to follow the guidance of many academic studies and want to be fully diversified. I’m trying to do this by investing in a low cost index fund that tracks the entire stock and bond markets. These funds are great in many ways. They reduce the risk of choosing a particular stock (owning the wrong stock at the wrong time) and highlighting the wrong sector at the wrong moment.

However, there is an important issue. Full diversification means owning all sectors and businesses, which in the current environment definitely includes traditional fossil fuel companies.

What if you want to accept the discoveries of science and follow the instructions of your conscience? Suppose your main concern is to have clean hands. This means that you will not personally benefit from fossil fuels. One of the things you can do is to exclude the fossil fuel share from your portfolio. Assuming that your workplace plan has “sustainable” or “social responsibility” investment options, even a 401 (k) or other severance plan will be easier to achieve.

However, excluding fossil fuels from your investment loses the highest performing parts of the market.

One easy way to see this cost is to compare two S & P 500 index funds. SPDR S & P500ETF TrustA plain vanilla fund that tracks the S & P 500, and SPDR S & P500 Fossil Fuel Reserve Free ETF.. The second fund excludes fossil fuel companies with high performance but climate warming.

The difference is reflected in this year’s earnings. Ordinary vanilla S & P funds fell 12.1%, while fossil fuel-free funds fell 13.7%. pain!

You might say that these performance discrepancies aren’t the end of the world, but the unlimited use of fossil fuels is probably. It may be added that fossil fuel-free portfolios may exceed the more comprehensive index when energy prices fall. The gap may widen at some point in the future. When fossil fuels are no longer a central part of the world’s energy mix. Still, avoiding fossil fuels is definitely costly.

But apart from the benefits of diversification, there is a debate about owning the entire market, even if you are struggling to invest in fossil fuel companies. That is, through ownership of the shares, you can try to use your voice to ensure that the company you invest in acts in a way that you can accept.

It’s not as easy as it sounds.As I did It pointed outThe majority of shareholders who have an interest through mutual funds, exchange-traded funds, or pension plans cannot directly vote for annual policy and board meetings at US companies. Fund managers voted on their behalf, and until recently, they didn’t bother to ask what shareholders liked.

Voting experiment

It began to change in experiments including: Engine No.1Undertaken activist hedge fund Exxon Mobil And I won a very successful battle.

Last June, the No. 1 engine-led investor coalition successfully replaced three directors on Exxon’s board of directors to drive an intelligent transition to a sustainable energy-based future. Did.

In an interview on Tuesday Jennifer GrancioThe No. 1 engine chief executive officer said he had won the Exxon battle in no small measure because the battle was claimed to be about money rather than ethics and social preferences.

“We still need fossil fuels — we know it,” she said. “But we also know that good companies are moving towards the right allocation of capital and the transition to sustainable energy. ExxonMobil doesn’t have the right people on the board to do that. did.”

After all, companies that don’t take into account the costs of properly addressing climate change won’t thrive, Grancio said. These discussions persuaded ExxonMobil and most other listed companies’ largest shareholders, BlackRock, Vanguard and State Street, to support Engine No. 1.

Now, with the help of Betterment, an asset management platform, TumeloUK financial technology company Engine No. 1 asks investors in the S & P 500 Index. FundHow would you like to vote, using the provocative ticker VOTE?

One question chosen by Tumelo and Betterment is whether the fund’s shareholders support a resolution calling on Exxon to complete an audited report on the financial implications of achieving net zero carbon emissions by 2050. Asked.

“We received those voting results from Betterment and considered them,” Grancio said. “And we voted for that agent.” Black lock And other investors.this passed itHowever, some other resolutions aimed at curbing carbon emissions in energy companies have not been successful.

Just the beginning

This is still a light-year away from the direct voting by investment trust investors that I think is necessary. Still, progress can be seen in such fledgling steps. Ask shareholders what they want and respect their tastes.

Georgia Stewart, CEO of Tumelo, said: “This is just the beginning.”

The Securities and Exchange Commission Not surprisingly, we have introduced regulations that require companies to disclose climate-related risks. Many proxy campaigns have undoubtedly provided the impetus for new rules. Business group that is resist.. The Ministry of Labor Also under consideration Rule This protects retirement plan investors from the risk of climate change. Congressman With Washington State government Dominated by the Republicans are beginning to fight climate change disclosures.

These issues have not been resolved.

I think they are important for millions of people who make economic sense to diversify by owning the entire market through index funds. However, it is difficult to recommend holding a stake in a fossil fuel company if the cost of climate change is not fully reflected in the price of energy.

Understanding a company’s contribution to climate change will require an active role by investors with the will and ability to monitor the company and exercise voting rights in internal battles. But we also need many citizens to exert influence on these issues in the wider political arena.

Shareholder campaigns to shape corporate behavior can only be done so far. There are no proxy campaigns for Saudi Aramco or any other state-owned enterprise that extracts energy abroad. Also, proxy voting is not possible for private companies that are increasingly entering the energy business in the United States and Canada.

“Climate change is a large planetary problem that requires ongoing efforts for decades,” he said. Boris Kentov, Responsible for sustainable investment in Betterment. “These problems will be complex and the solutions will be complex. Putting all responsibility for changing the world in the investment portfolio is a fundamentally problematic premise.”

There is no cure-everything is here and there is no easy answer for investors, but at least at the moment when all of them are too few, there are some signs of progress.