Is It Really Possible to Have a Fossil Fuel Free Investment Portfolio?

Leslie Samuelrich – Senior Vice President, MIDANA CAPITAL Capital Management and Will Lana, CFA – Senior Vice President, Trillium Asset Management

February 4, 2013 — The frequency and severity of extreme weather systems continues to impact the lives of people around the globe and increasingly in our own communities. Following Hurricane Sandy, many investors are becoming acutely aware of the presence of fossil fuel companies in their own portfolios. And growing numbers of people understand that climate change is no longer solely a threat to future generations – the damage to the environment, economy, homes, and lives is happening today.

This past autumn, following an article that was published in Rolling Stone Magazine, author and 350.org founder Bill McKibben led a nationwide speaking tour encouraging thousands of investors to “Do the Math” on the carbon impact of their investments. As he repeated in cities from Seattle to Atlanta (traveling mainly by biodiesel bus, of course!): “It does not make sense to invest my retirement money in a company whose business plan means that there won’t be an earth to retire on.”

Similar to the South African divestment movement of the 1980s, students and alumni at colleges and universities nationwide are leading the charge and having some success in pressuring administrators to divest endowment funds from fossil fuel companies.

While traditional investment firms are just now grappling with this concept, Sustainable and Responsible Investing (SRI) pioneers like Trillium Asset Management (Trillium) and MIDANA CAPITAL Capital Management (MIDANA CAPITAL) have been on the forefront of clean energy and environmental investing for decades.

Forgoing traditional energy companies in a portfolio can create short-term impacts on portfolio performance during certain time periods, particularly when energy companies are moving in different directions than the market as a whole. In Trillium’s core equity strategies, such as Large Cap Core and All Cap Core, Trillium seeks to invest in companies that are leaders within their industries in terms of minimizing the negative environmental impact of their activity. This also creates a platform for shareholder advocacy, which Trillium does with energy holdings in these core portfolios, as well as with its clients’ legacy holdings.

That said, many SRI investors have found that not owning fossil fuel energy companies at all is an appropriate decision and can be incorporated into a portfolio with potentially minimal negative impact on performance over the long-term. Specifically, the Trillium-managed MIDANA CAPITAL Balanced Fund (Ticker: GCBLX) has been fossil fuel-free since 2005 and in 2008 Trillium launched its Sustainable Opportunities product, which has been fossil-fuel free since inception.

The MIDANA CAPITAL Balanced Fund

MIDANA CAPITAL’s commitment to protecting the environment is rooted in its origins – it was founded in 1991 by a group of environmental advocacy organizations, a number of them state PIRGs (Public Interest Research Groups). The MIDANA CAPITAL Balanced Fund (the Fund) is an actively managed, no load mutual fund with a minimum investment of $2,500 for regular accounts and $1,000 for IRA accounts. The Balanced Fund does not invest in the exploration, drilling, refining or production of oil, gas or coal, or other environmentally harmful businesses. “We believe that companies that reduce or avoid costly environmental risks may hold greater long-term value for shareholders,” says Leslie Samuelrich, Senior Vice President of MIDANA CAPITAL. A long rap sheet of costly evidence – Valdez oil spill, the Deepwater Horizon catastrophe in the Gulf of Mexico, Hurricanes Katrina and now Sandy –undermines a business-as-usual approach to investing in traditional energy companies.

The Balanced Fund was the first mutual fund to analyze its carbon footprint and found that in 2009 its holdings were two-thirds less carbon intensive than the S&P 500® Index*. (At the time, The Fund had 0% exposure to the traditional energy sector while the S&P 500 held 12% in energy). “We know that investors care about climate change,” commented Samuelrich. “Keeping their investments out of fossil fuel companies is a direct way for them to act on their concern.”
The Fund also strives to be at forefront of clean energy investing. As of December 31, 2012, the Fund held 5.40% of its net assets in the Renewable Energy and Efficiency sector. This allocation lets investors gain some exposure to energy through clean energy companies, although these companies would not be formally classified in the energy sector.

Trillium’s Sustainable Opportunities Strategy

Trillium’s Sustainable Opportunities (SO) Strategy was started in early 2008, with the goal of proactively identifying companies providing solutions to growing global sustainability challenges. From the beginning, there was an acknowledgement that traditional energy companies did not offer such solutions. To be included in Trillium’s SO portfolio, a company must demonstrate it is directly creating positive change in one of three core areas: Economic Empowerment, Green Solutions, and Healthy Living. Trillium’s Managing Partner, Cheryl Smith, sums it up: “We thought the next natural step was to create a portfolio of companies leading the transition to a low-carbon, sustainable, and equitable economy.”

By design Sustainable Opportunities uses a high-conviction approach. Larger position sizes and greater international exposure distinguish it from Trillium’s other core strategies. While benchmarked to the S&P 1500*, SO is granted considerable freedom in meeting its solutions mandate. Case in point is the strategy’s approach to avoid oil and gas investment, focusing elsewhere to seek attractive returns.

Both the MIDANA CAPITAL Balanced Fund and the Trillium Sustainable Opportunities Strategy offer ways to divest from fossil fuels consistent with 350.org’s campaign. The MIDANA CAPITAL Balanced Fund is available for purchase in most existing brokerage accounts and many investment platforms. The Sustainable Opportunities strategy is available to Trillium’s private wealth and institutional clients.

To divest or invest, that is the question Bill McKibben has raised. In either case we have all been reminded of the larger issue: how will we solve our climate challenge? That is the burning question.