How to divest fossil fuel investments, and maybe impress the kids

NEW YORK (Reuters) - Bonnie Frye Hemphill was one of thousands of U.S. college students who last year petitioned their schools to divest endowments of fossil-fuel investments.

She hasn’t yet succeeded in getting her now-alma mater, Yale University, to divest. She has achieved a victory at home, however, inspiring her parents, Todd and Nancy Hemphill, to make their retirement fund fossil-fuel free by selling a few thousand dollars worth of Exxon Mobil Corp. shares.

“This was not because we are raging tree huggers,” said Hemphill, 27, who graduated with a masters degree from the Yale School of Forestry & Environmental Studies in May. “It was an easy thing to do that had good moral implications.”

The divestment movement was sparked by environmentalist Bill McKibben, whose goal is to reinvigorate the debate about global warming by getting colleges and other institutions to stop investing in the 200 publicly traded companies that hold the majority of the world’s proven coal, oil and gas reserves.

Fossil-fuel companies respond that the divestment movement is oversimplifying the issue, making it sound like the world can switch to alternative sources of energy in just a few years.

While there certainly hasn’t been a groundswell of wealth management clients asking to divest, many financial advisers - particularly those who offer socially responsible investing services - say they are getting more questions about the issue.

“We wanted the conversation to trickle in every direction,” McKibben said in an interview with Reuters. “Parents do follow the leads of their children.”

Veris Wealth Partners, a San Francisco-based wealth management firm focused on what it calls impact investing, said its environmentally conscious clients have been energized by the idea of divesting, with clients bringing it up several times a week.

“That’s the word that’s entered the lexicon,” said Anders Ferguson, a partner at the firm.

It is up to advisers to show clients the risks to divesting and the best options for how to do it.


There’s no set definition for divesting. For extremists, it means no oil, gas, coal, chemical, utility or mining companies. Others give a pass to energy companies that receive positive environmental ratings.

The first question to address is what this will do to clients’ investment returns.

And that all depends on who you ask, with the energy industry citing research that shows the detrimental effect divesting has on returns and socially responsible asset managers making the case that it is a smart long-term strategy.

The Associated Press said in May that a study it commissioned found that an endowment of $1 billion that excluded fossil-fuel companies would have grown to $2.26 billion over the past decade, while an endowment that included these investments would have grown to $2.14 billion. The study based its research on the returns of the S&P 500.

David Kathman is an analyst who covers socially responsible mutual funds for Morningstar Inc. After following these funds for years, he has concluded that it is difficult to prove that social screens make any significant long-term difference to investment returns.

In the short term, however, fossil fuel divesting can have a significant negative - or positive - impact on returns, he adds, because energy stocks are so closely correlated to oil prices.


While the Hemphill family had an easy time divesting - they say it took a five-minute conversation with their financial adviser - the process can be a lot more complicated when the investments are in mutual funds.

At this point most fossil-free funds can claim that label because they are focused on a niche area, like water companies or solar stocks - not a place diversified enough to put a larger percentage of someone’s nest egg.

There are only three diversified fossil-fuel-free mutual funds, the Green Century Balanced fund, the Portfolio 21 Global Equity Fund and a fund started in March called the Shelton Green Alpha fund.

If clients do not like the relatively high fees on those funds - all topping 1.38 percent - see if they would be willing to go with a fund that takes environmental factors into consideration, but has some fossil fuel investments, like the TIAA-CREF Social Choice Equity fund or the Vanguard FTSE Social Index fund, which both have very low fees.

There are a lot more options for clients with larger accounts since you can customize a portfolio for them.

You can get advice on this from one of the many companies that specialize in this area - such as First Affirmative Financial Network, Trillium Asset Management, Advisor Partners, Calvert Investment Management, Aperio Group and Nelson Capital Management, a subsidiary of Wells Fargo & Co..

Clients can also talk to their retirement plan provider about making fossil-free investments available.

“If people are willing to speak with their wallet, there will be products that meet client demand,” said Daniel Kern, president of Advisor Partners.

Reporting by Jennifer Hoyt Cummings, editing by Linda Stern and Andrew Hay