Are our Investments contributing to climate change and threatening our financial future?

If you are doing all this: you are flying less, riding your bike or taking transit, if you are eating less meat – if you still have money invested in the traditional stock market, the carbon footprint of your portfolio is gonna dwarf the carbon footprint of all those different personal options – Tim Nash, founder of Good Investing and the Sustainable Economist blog.

Tim Nash was speaking at the Ottawa 350-hosted event “Investing for a post-oil era.” He cited research by CoPower which suggested that the annual carbon footprint of an average $100,000 Canadian investment portfolio is about 1.4-times greater than the annual carbon footprint of a round trip flight, driving a gasoline car and eating an omnivorous diet combined.

A potential Carbon Bubble threatening our Financial Future?

Beyond the climate change impact of the investments, our investments may pose a serious threat to our future financial security. Tim Nash spoke of the carbon bubble. The value of the proven fossil fuel reserves currently is about $27 trillion. However, based on our available carbon budget in order to keep within 1.5oC global warming, we can only burn fossil fuel worth about $7 trillion (figure 2). “Which means we have to leave a lot of this carbon underground if we are serious about meeting our climate change agreement,” the investment coach suggested.

“Right now, these proven carbon reserves are listed as assets on the balance sheets of these companies,” he said. If countries decide that we will leave these in the ground, these assets will become worthless. Like what happened in the popping of the housing bubble in 2008. “What we are talking about here with the carbon bubble is about three times as big. It is a massive bubble,” he said. This bubble is already starting to deflate. “If you are invested in your run-of-the-mill investments, a big part of your portfolio is invested in these companies that own the assets.” The assets can become toxic like the real estate assets in 2008, and massive devaluation may happen quickly. “If you don’t divest from fossil fuels… [] …you may end up holding the [bag].”

Fossil fuel free investments…the way out?

The way out could be by divesting our investments from fossil fuels. However, a common barrier to divesting from fossil fuel-based investments is the concern that such divestment may yield poor returns. Tim Nash addressed these concerns. He said a lot of investors think investing sustainably or divesting from fossil fuel will hurt their returns. However, this is not true, he indicated. Compared to a traditional low-fee portfolio using Exchange-Traded Funds (ETFs), a similar fossil-fuel free portfolio has performed better (see figure below). Over a ten-year period, the returns from a traditional investment portfolio were lower than the return from a fossil fuel-free portfolio (figure below). While it is true that current performance is not an indication of future returns, if current trends in global transition towards green economy are any indication, future returns are expected to be higher than past returns. So, we should “skate to where the puck is headed,” he quipped.

So, lets divest our investments from fossil fuels! Today, there are a multitude of options including Tim Nash’s fossil fuel-fee portfolio and Genus Capital Management’s portfolios, green bonds from companies such as CoPower and local green energy investment opportunities such as OREC.

You can watch a recording of Tim Nash’s talk here:

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