Potential alternatives to having fossil fuel producers in your retirement investment portfolio
Many investors believe that fossil fuels are essential for strong retirement investment returns. But is that actually true? In this article, we test that assumption—comparing the performance of portfolios with and without fossil fuel exposure. While we focus mainly on investment performance (also known as risk-adjusted return), we also explore considerations for those who care about aligning their portfolio with environmental values.
We’ll break down investment performance, explore fossil fuel-free indexes, and offer practical steps for values-minded investors. Whether you’re saving through a Roth IRA, Roth 401(k), or taxable account, it’s worth understanding your options.
Retirement Investment: Discerning Fossil Fuels Role In Investing
When people talk about investment selection, they often mention two styles of investing: passive and active.
Passive investors believe markets are efficient enough that trying to “beat the market” is a losing game. Instead, they invest in index funds that aim to match the performance of a broad market benchmark, such as the Standard and Poors (S&P) 500 or the MSCI All Country World Index (ACWI), while keeping fees low.
But passive investing still involves making asset allocation choices—specifically, choosing which mutual index to track and finding a mutual fund or exchange traded fund that tracks that index. For example, the S&P 500 selects the largest 500 US companies. The MSCI All Country World Index (MSCI ACWI) captures Large and Mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,559 constituents, the index covers approximately 85% of the global investable equity opportunity set.
If you’re like many retirement savers, you may already be invested passively through a Vanguard Target Retirement Fund in your 401(k). While these are passive by design, the mix of index funds they include is determined by a portfolio manager. Once the allocation is set, the fund simply tracks its chosen indexes—regardless of what industries (fossil fuels or otherwise) those indexes contain.
The following index funds represent the Vanguard Target Retirement 2050 Series portfolio:
- Vanguard Total Stock Market Index Fund Institutional Plus Shares
- Vanguard Total International Stock Index Fund
- Vanguard Total Bond Market II Index Fund
- Vanguard Total International Bond II Index Fund
By contrast, active investing means trying to beat the market by choosing specific stocks, sectors, or timing. This might include increasing investments in fossil fuel stocks or technology stocks that vary from the index benchmark. Active investing involves choosing individual stocks or sectors—like fossil fuels—with the hope of outperforming a market index. But what if there was a way to invest in the same index, minus the fossil fuels?
Retirement Investment and a Fossil Fuel-Free Index
The MSCI ACWI is a common benchmark used in diversified global portfolios. MSCI also offers a fossil fuel-free version, called the MSCI ACWI ex Fossil Fuels Index. This index removes companies that own fossil fuel reserves or are involved in oil, coal, or gas production.
According to MSCI’s fact sheet, the fossil fuel-free version has consistently delivered similar or better performance over many periods. In fact, it has often done so with slightly less risk. As always, past performance isn’t a guarantee of future results. But today’s data offers something important: you don’t have to sacrifice returns to align your investments with your values.
Unfortunately, you cannot directly invest in an index. You will have to find investments that track the index or seeks to benchmark against it to invest in. A couple options will be included later.
MSCI ACWI vs MSCI ACWI ex Fossil Fuels Comparison
Let’s put some dollars against the numbers in the fact sheet. Here are some detailed comparisons for two investors—one in the MSCI ACWI and the other in the MSCI ACWI ex Fossil Fuels index—across two investment strategies. Here are the visual comparisons:
- Lump Sum Investment Chart — Shows the performance of a $100,000 one-time investment over 10 years. The MSCI ACWI ex Fossil Fuels slightly outperformed the MSCI ACWI by year 10.
- Systematic Investment Chart — Tracks $10,000 invested each year. Again, the fossil-fuel-excluded index slightly outpaced the broader index by the end of the 10-year period.
Lump Sum Investment ($100,000 at Start)
Year MSCI ACWI MSCI ACWI ex Fossil Fuels
0 $100,000 $100,000
1 $113,650 $114,720
3 $141,625 $143,449
5 $187,280 $185,880
10 $242,222 $248,049
Systematic Investment ($10,000 annually for 10 years)
Year MSCI ACWI MSCI ACWI ex Fossil Fuels
0 $0 $0
1 $10,000 $10,000
3 $33,841 $33,997
5 $65,280 $65,060
10 $153,754 $155,677
As you can see from the data, either from a lump sum or systematic investing perspective, the fossil fuel free index wins over a historical 10 year period.
Ways to Incorporate Fossil Fuel-Free in Your Retirement Investments
If you want to invest in a fossil fuel-free global portfolio, you don’t need to be a stock picker or hire a hedge fund manager. You can invest through low-cost ETFs that track these indexes.
Sphere
The Sphere 500 Fossil-Free Index tracks the Top 500 US companies by market capitalization minus 93 fossil fuel and related companies:
- Removed 52 fossil fuel companies.
- Removed 41 deforestation, tobacco, civilian firearm, military weapon, and private prison companies.
The independent non-profit As You Sow creates the list of fossil fuel and other companies that are excluded.
Green Century
Green Century is a mutual fund manager that provides several fossil fuel free mutual funds. Two are index fund based and the other actively managed.
The Green Century Equity Fund seeks to achieve its objective by investing in the stocks of the companies that make up the MSCI KLD 400 Social ex Fossil Fuels Index, a custom index calculated by MSCI, Inc.
The International Index Fund tracks the MSCI World ex USA SRI ex Fossil Fuels Index. This Index is composed of the common stocks of the approximately 240 companies in the MSCI World ex USA SRI Index that is then customized for Green Century to eliminate the stocks of companies that explore for, process, refine or distribute coal, oil, or gas, or produce or transmit electricity derived from fossil fuels, or have carbon reserves.
The Balanced Fund is an actively managed fund comprised of equities and fixed-income securities. It typically holds 60% to 70% of its net assets in multi-cap stocks and 30% to 40% in investment-grade quality bonds. The Balanced Fund was an early investor in green bonds and now has more than 74% of its fixed-income portfolio in green and sustainable bonds.[1]
As You Sow’s Fossil Fuel Free Funds Research
As You Sow provides a publicly available Fossil Fuel Funds Free research tool. You will find that it’s methodology and evaluation may vary from the other providers discussed earlier.
There research highlights that some mutual fund companies may score high that don’t scream like they are fossil fuel free. For example, the Amana Growth Fund doesn’t have Green in its name but gets an A grade.
All of the funds listed in this article do not constitute an investment recommendation. I am providing these as examples to encourage you to do your own research or find an investment advisor that is knowledgeable in this area. There are even professional tools that go beyond what I’ve shown.
Final Thoughts on Fossil Fuel Free Retirement Investments
For years, the narrative was that investing according to your values—such as avoiding fossil fuels—meant settling for lower returns. But that argument is no longer supported by the data presented today.
So, if you’re wondering whether fossil fuels deserve a place in your portfolio, should focus on your goals, your values, and what you believe about the future of energy and the economy. This article shows that fossil fuel-free retirement investments don’t automatically mean sacrificing return.
Related Reading:
Evaluating Risk-Adjusted Returns: The Key To Smarter Investing
Social Values-Adjusted Investment Returns: Balancing Profit & Purpose