Do most investments really support the fossil fuel industry? For example (writing in 2020), if you own Vanguard Total Stock Market Index Funds ($VTSAX), 8.4% of your investments are going to fossil fuel stocks. Or if you have Fidelity 500 Index Fund investments ($FXAIX) 9% of your money is invested in fossil fuel stocks. 

How does sustainably focused investing work? There is growing interest in Environmental, Social, and Governance (ESG) investing. An investment company that adopts this approach will offer funds that weigh more than financial gain as a selection criteria. You can select funds that include one or more of the three areas of focus and to varying degrees. It’s up to you to decide what is important to you:

1. Environmental – as it states, these funds invest in companies with higher environmental focus than industry peers, such as renewable energy and sustainable materials. A fund might also invest in a mining company that’s inherently risky from an environmental standpoint but ranks high on managing the environmental impacts of its products and services. 
2. Social – these funds seek out companies that have a positive record dealing with social justice issues such as human rights, diversity, animal welfare, and consumer protection. 
3. Governance – funds that focus on the issue of governance look for a company’s record on executive compensation, employee compensation, management structure, and employee relations. An employee owned company might be an attractive addition to such a fund.
4. And some investors now believe that ESG criteria have a practical purpose beyond any ethical concerns. The more critical attention paid to company practices and policies can alert fund managers to certain risk factors such as the financial fallout from BP’s 2010 oil spill and Volkswagen’s emissions scandal.

Don’t sustainably focused investments underperform?  We are increasingly hearing from financial actors, such as BlackRock and Jim Cramer, that fossil fuel investments are poor bets.  Yet some people may hold on to a persistent belief that socially responsible funds tend to perform worse than the broader market.  But this impression is countered by a 2015 study in the Journal of Sustainable Finance Investment which examined 2,200 pieces of research and found that 90% of the studies showed no negative correlations between higher concern for social factors including environmental impact and returns on investment.  A large majority of the research actually showed positive returns compared to similar stocks.  A 2016 study from the Journal of Applied Corporate Finance shows similar results, and the mutual fund research firm Morningstar filed a similar report in 2019. 

What can you do beyond buying mutual funds and stocks? Shareholder advocacy has shown to be successful in shaping the strategies of funds. Those who have a stake in public pension funds, faith-based investors, socially responsible mutual funds, and labor unions, can help pass shareholder resolutions that shape the investment strategies of those funds. For example, those invested in a city’s pension fund can come together to pressure the city to divest from fossil fuels in their investments. 

If your company 401K does not have fossil fuel free options or ESG funds, explain that you would like to see an ESG option made available.  If your company does not have ESG options, use this fossil free action tool kit and ask your company management to define investment products that will exclude fossil fuel investments. With greater interest from employees, your company may make sustainable investing through your 401K possible for you.