As the world warms and frequent droughts become more common, many investors look for ways to fight climate change with their dollars.
One increasingly popular way for investors to support the environment is to divest away from fossil fuels. Fossil fuel divestment is when an investor or institution does the opposite of investing. Instead, they sell their position in fossil fuel companies or, in some cases, companies that support fossil fuels.
Energy prices skyrocketed in 2022, and several oil companies moved into Russell’s growth indexes. Even so, many investors feel it's important to divest from fossil fuels to help combat climate change — while at the same time getting a financial return.
The Short Version
- Fossil fuel divestment is when institutions and investors sell their shares in fossil fuel companies or bonds.
- Many major companies and universities have committed to divesting away from fossil fuels.
- Many investors who divest from the fossil fuel sector do so for ethical reasons and often invest in renewable energies instead.
- Fossil fuel investments continue to be present in many funds and portfolios, so ask your fund manager if you’re concerned about fossil fuel investments.
What Is Fossil Fuel Divestment?
For years, financial institutions and investors have poured money into the fossil fuel industry through stocks and bonds. The oil and gas industry has long been a lucrative investment. But increasingly, more and more investors are moving away from fossil fuels.
Instead, they divest their investments. This means that the investor or institution gets rid of its fossil fuel investments, usually by selling its shares in fossil fuel companies or bonds.
Divesting is basically the opposite of investing.
And it’s become more popular. According to DivestInvest, about 1,500 investment institutions overseeing a combined $39.2 trillion in assets under management are committed to fossil fuel divestment.
The Ford Foundation said in 2021 it would cease to invest in fossil fuels, while Maine became the first state to sell off fossil-fuel holdings in its public pension fund. And many universities have also committed to divest, such as Harvard, the University of Michigan, Georgetown, and others.
How Does Fossil Fuel Divestment Work?
Usually when an investors divests it's for financial reasons. However, in the case of fossil fuels, investors or institutions who decide to divest usually do so based on an ethical choice. These investors are concerned about the fossil fuel industry's environmental impact.
Earth's temperature has risen twice as fast since 1981 and the Intergovernmental Panel on Climate Change (IPCC) has found that fossil fuel emissions are the primary cause. The majority of emissions are by transport, followed by electricity and industry.
How to Know If Your Investments Are Tied to Fossil Fuel
Many retail investors might be investing in fossil fuels without knowing it. That’s because many funds or retirement accounts might have exposure to the fossil fuel industry.
If you invest in a fund, ask to see a breakdown of the fund's assets. You can find a list of fossil fuel companies on any stock broker site or fossil-free websites like Go Fossil Free.
While some institutions have moved away from fossil fuels, others have decided to continue their investments after strong energy growth in 2022.
BlackRock, the largest asset manager in the world, famously recanted its 2020 decision to divest from fossil fuels after pressure from state officials in Texas, who threatened to withdraw its state pension funds from companies that boycott oil and gas.
How to Invest in Renewable Energy
It’s one thing to divest from fossil fuels, but what do you invest in instead?
Thankfully the rise of fossil fuel divestment has also increased renewable energy investments. It’s easier than ever to find companies making strides towards greener energy. However, it’s worth checking their financial reports and marketing to ensure they aren’t greenwashing.
Here are a few ways to invest in renewable energy:
One of the most forward ways to invest in renewable energy is to invest in companies in the sector. That can mean buying shares of wind and solar power or electric car companies that are moving away from fossil fuels. You can also invest in pure-play clean tech firms directly involved in renewable energy.
There’s an exchange traded fund (ETF) for just about everything, and green energy is no exception. You can look up ETFs that invest in a broad basket of renewable energy securities. This takes less time than finding individual stocks to buy and ensures that your investments are diversified.
Read more >>> How to Diversify Your Investment Portfolio
Green Bonds 🌱
Another way to invest in renewable energy instead of fossil fuels is to invest in green bonds. Green bonds are bonds that raise money to support climate-related or environmental projects. These bonds are usually asset-backed and are often issued by companies. In some cases, they may even come with a tax incentive. General Motors recently made waves when it issued green bonds for the first time to fund electric vehicles in a bid to compete with Tesla.
Read more >>> How to Invest in Bonds: Diversify Your Portfolio
Other Ways to Move Away from Fossil Fuels
Investing in renewable energy and divesting from fossil fuels isn’t the only way to make a difference in the fight against climate change.
You can use clean energy, such as solar power, in your home. And you can ask your energy provider if they have a green energy option. Another obvious way to move away from fossil fuel consumption is to get an EV or hybrid car.
You can also divest your bank accounts and credit cards away from financial institutions that still support fossil fuels. There are now several “green banks” like Aspiration that may better align with your values.
The Bottom Line
Fossil fuel divestment is a growing trend among investors. Along with ESG and socially responsible investing, fossil fuel divestment is an investing strategy that aligns financial gain with concerns about the impact of climate change and the environment.
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