Fossil Fuels, Divestment & Reinvestment
When retail and institutional investors make the decision to divest from fossil fuels---coal, oil and natural gas companies---this decision should not be the end of the portfolio review process, but rather the beginning of a series of reinvestment decisions. Investors who divest from fossil fuels will likely consider opportunities for investment in renewable energy and energy efficiency. Investors may also choose to reinvest in a range of sectors in the public equities market and in a range of asset classes. This webpage is meant to provide a broad framework for thinking through reinvestment options.
Where do I want to reinvest? What are my reinvestment parameters?
This chart and the following notes provide a brief overview of the asset classes where reinvestment is possible for retail, accredited and institutional investors to address climate changes risks and encourage progress toward a low-carbon economy. More details and resources can be found in the US SIF Foundation's guides for retail and institutional investors, Investing to Curb Climate Change.
*options more limited for retail investors
The term “retail investors” refers to individual investors who are generally unaccredited and invest relatively small amounts. “Accredited individual investors” are people who meet certain wealth standards and whom regulators consider financially sophisticated, with less need for the protection provided by certain government filings on the part of their advisors. The term “institutions” refers to organizations investing large sums and subject to fewer regulatory protections, such as investment companies, insurance companies, mutual funds, religious organizations, pensions and trusts.
Retail investors who wish to put climate change investment strategies into action in a manner that is appropriate for their age, investment objectives, risk tolerance and return expectations may want to enlist the assistance of a financial advisor. A good place to start is the directory of financial services offered by US SIF members, as they have expertise in sustainable and responsible investing options and strategies. Under “Directory Categories,” select “Financial Advisors and Brokers.”
Accredited and institutional investors may also wish to enlist the services of financial advisors or investment consultants with expertise in sustainable and responsible investing strategies. In the directory of financial services offered by US SIF members, under “Directory Categories,” select “Investment Consulting Firms” in addition to “Financial Advisors and Brokers.”
• Institutional Pathways to Fossil Free Investing
Direct Stock Ownership and Separate Accounts
Investors who divest from publicly traded fossil fuel companies should consider how to re-weight the public equities portion of their portfolios. Investors may wish to purchase additional shares in companies that generate power from renewable energy; offer energy efficiency solutions for buildings, industrial uses or power generation; or produce goods and services, such as wind turbines, for renewable energy generation. In addition, investors may wish to set parameters for companies in other sectors—such as consumer goods, financial services, health care, industrial goods, services and technology—to give preference to companies that are setting goals and making progress in reducing their carbon footprints.
Accredited and institutional investors can also turn to separate account managers with expertise in sustainable and responsible investing. A good place to start is the separate account strategies offered by US SIF members. Some of these managers already offer fossil-free strategies, and others can customize their strategies to exclude fossil fuel companies. Visit our Separate Account Strategy chart for more information.
Mutual and Exchange Traded Funds
For investors in mutual funds or exchange traded funds, an important next step is to assess mutual and exchange traded funds through the lens of climate change; several clean energy mutual funds exist as do mutual funds with broader sector holdings that do not include fossil fuels. A good place to start is the list of mutual funds offered by members of US SIF. By clicking on the screening and advocacy tab, visitors can see a broad range of sustainability criteria, including funds that consider climate change criteria in portfolio selection or invest in clean energy or energy efficiency. Some of these funds do not invest in fossil fuel companies.
Investors that own shares in publicly traded companies should continue to pay close attention to the shareholder resolutions offered at their annual meetings and be sure to vote their shares. Many climate and other sustainability resolutions are being proposed to companies in a range of industries. More information on shareholder engagement can be found in Investing to Curb Climate Change: A Guide for the Individual Investor.
Related research on portfolio construction and financial performance:
• Carbon Risks and Opportunities in the S&P 500
• Portfolio Carbon: Measuring, Disclosing and Managing the Carbon Intensity of Investments and Investment Portfolios
• Unburnable Carbon: Are the World’s Financial Markets Carrying a Carbon Bubble?
Investors can screen corporate bonds the same way they screen public equities---avoiding bonds in carbon-intensive companies in favor of companies that offer energy efficiency solutions or renewable power generation and companies in other sectors that are setting goals and making progress in reducing their carbon footprints. Other fixed income options include Green Bonds (offered via a World Bank program), and municipal bonds for transit-oriented development and other projects that reduce carbon intensity.
Mutual and Exchange Traded Funds
In addition to purchasing bonds directly, investors can add fixed income to their portfolios through mutual and exchange traded funds. To find a list of fixed income and balanced mutual funds that consider climate change and clean technology in portfolio selection, visit the list of mutual funds offered by members of US SIF. By filtering for “fixed income” or “balanced” and clicking on the screening and advocacy tab, visitors can see which funds in this asset class consider climate change criteria in portfolio selection or invest in clean energy or energy efficiency.
Loan Funds and Microfinance
Community development financial institution (CDFI) loan funds that promote transit oriented development, energy efficiency retrofits for buildings, sustainable agriculture and other environmentally oriented projects can be part of efforts to address climate change. Most advisors consider these investments restricted to accredited investors, but state filings may or may not contain this restriction, and some loan funds accept investments from non-accredited investors who invest directly.
To find a CDFI loan fund, please visit Opportunity Finance Network. You may also visit CARS, an independent CDFI rating source.
Microfinance loan funds can also be part of efforts to address climate change and other sustainability issues. MicroPlace is a brokerage platform that connects retail investors with organizations working on green initiatives, assistance to women and sustainable rural development. These organizations, or issuers, issue interest-bearing short-term notes that investors can purchase for as little as $20. Investors earn a 0.5 to 4.5 percent return on investments, which mature in 3 months to 5 years, and the principal is repaid at maturity.
To learn more about microfinance loan funds, please visit MicroPlace.
Checking and savings accounts and certificates of deposit from community development banks and credit unions are easy ways to invest and make social and environmental impact. These banks and credit unions have a commitment to financing small businesses, non-profits, commercial real estate and affordable housing, which may include loans for energy efficiency retrofits, as well as other green initiatives in low- and middle- income communities.
To find a community development bank or credit union, please visit:
• National Federation of Community Development Credit Unions
• National Community Investment Fund
• Community Development Bankers Association
You may also find more information on community investing via the US SIF Foundation report, Options & Innovations in Community Investing.
Accredited investors can invest in alternative investment funds, such as private equity funds or funds of funds, venture capital funds, property and real estate investment funds and hedge funds. A number of these funds are now directed towards environmentally sustainable companies, renewable energy, energy efficiency, sustainable agriculture and forestry and waste management.
Private Equity and Venture Capital Funds
Increasingly, private equity options include financing for clean energy, energy efficiency, environmental services, waste management, water, and sustainable and biodegradable materials. Accredited and institutional investors will want to consult with their financial advisors or consultants about the most appropriate private equity vehicles.
Ranging widely from direct investments in farms and forests to more indirect investments in property-related instruments, real estate comprises a large portion of the alternative investment universe. Climate-focused real estate investments include: green building; sustainable timber-, farm- and ranchland and nature conservation; brownfield redevelopment; urban infill development and responsible community reinvestment; and smart growth and transit-oriented development.
For more information, please consult Sustainability Trends in US Alternative Investments.
Disclaimer: This webpage is provided only for informational purposes and does not constitute investment advice.