By bringing high-performance tools to the mass market, “fossil free” robo-advisors can help the divestment movement scale fast – and wisely
A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. Robo-advisors are typically low-cost, have low account minimums, and attract younger investors who are more comfortable doing things online. – Investopedia
Institutions Have Divested $5 Trillion. How Can Individual Investors Catch Up?
As is often the case in the financial markets, savvy institutional investors have been the first movers in fossil fuel divestment. The world’s largest sovereign wealth fund (Norway’s), the State of California, and Stanford University have been among the first to divest from coal and other carbon-intensive assets, contributing to over $5 trillion of divest/invest-committed assets under management. (U.S. institutional investors manage $18 trillion of assets.)
By contrast, the $14 trillion U.S. individual investor market is still in its infancy with respect to fossil fuel divestment. (Funds compliant with the DivestInvest Pledge are featured in the Find A Fund tool on this website.)
Why have individual investors lagged behind? Let’s explore the reasons.
A Short History of Financial Technology — From Brokers to Toddlers to “Robots”
Prior to 1975, ordinary investors could only buy and sell securities through stockbrokers who – like car salesmen – were on commission and not necessarily acting in the best interests of their clients.
With the explosive growth of the internet and favorable regulatory changes, online discount brokers like E-Trade eliminated the need for a human stockbroker, making it inexpensive and easy – perhaps too easy – to buy and sell stocks. But without sound advice, many investors struggled to invest in a disciplined and balanced fashion and were hard hit by the financial crisis.
Beginning in 2010, further regulatory changes and advances in technology made it possible for robo-advisors like Betterment (sometimes called “digital advisors”) to apply the best practices of fiduciary financial advisors to online investing.
Today even financial giants like Charles Schwab and Vanguard now offer robo-advising, managing over $30 billion of assets on automated platforms. But none of the major players systematically address fossil fuel divestment and related sustainability concerns.
Divestment is No Longer Rocket Science
Initially, you needed to be a real expert to know what companies to avoid holding in your investment portfolio. Beginning in 2014, that began to change.
Inspired by Bill McKibben’s “Do the Math” tour and prior work of CarbonTracker.org built on pioneering global carbon budget analyses, Fossil Free Indexes published the Carbon Underground 200 list of the 200 largest owners of fossil fuel reserves worldwide. Divestment campaigns across the globe now use The Carbon Underground 200 as the standard reference point for “fossil fuel companies” in their divestment asks.
In 2015 As You Sow launched Fossil Free Funds, a website that made it possible for individual investors to easily identify Carbon Underground 200 companies, as well as other undesirable holdings, in their mutual funds and exchange traded funds. The following year Macroclimate® published The Macroclimate® 50 – an exclusion list of the 50 largest public-company owners of coal-fired power plants worldwide – the #1 problem according to climate experts. (Disclosure: the authors of this blog article are co-founders of Macroclimate®, a “fossil free” robo-advisor. Beginning April 2017, as a public service, its Macroclimate® 50 exclusion screen will become a standard free feature of Fossil Free Funds.)
In short, the essential data is now readily available – free of charge – to aspiring divestors. It’s one thing for institutional investors like sovereign wealth funds and university endowments to integrate this information into a disciplined and balanced strategy. How can everyday investors do so?
Robo-Advising Can Accelerate the Divestment Movement
Until recently, divesting was nearly impossible without sacrificing the essential elements of a balanced and broadly diversified investment plan – not to mention hours of research. With advances in sustainability metrics and portfolio construction, “fossil free” (and “deforestation free”) robo-advisors like Macroclimate® are changing that.
Now individual investors anywhere in the U.S. have access to institutional-grade mutual funds that specifically exclude investments most likely to be harmed as the world’s financial markets respond to the growing threats of climate change – while continuing to overweight companies with positive sustainability practices. Most importantly, these funds follow the same factor-based methodology that has produced a strong record of market outperformance.
“Fossil free” robo-advisors also now offer E-Trade-like ease of use – but with intelligent automated advice. They allow you to tailor “fossil free” investment portfolios to your risk tolerance, time horizon and cash needs — in just a few minutes online.
Why Does This Matter?
Scale and speed are keys to the success of the divestment movement – which is why the collective and expedited actions of investors are vital. Automation via robo-advising can drive scalability and impact quickly.
Is a Robo-Advisor Best for Me?
Robo-advisor clients typically do not receive personalized one-on-one investment advice independent of the interactive websites. However, some robo-advisors welcome collaboration with trusted advisors who assist you with your financial planning, investments, tax preparation, insurance and/or estate planning.
Compared to traditional advisors, robo-advisors are typically lower cost, and have lower account minimums. Use this comparison chart to help you decide if a robo-advisor is best for you – or get started now with the following special low-minimum offer from Macroclimate® for DivestInvest Pledge Signatories.
Open “Fossil Free” Account with $10,000
Mark holds a BA from University of California, Berkeley, MA in communication research from University of Minnesota, NASD Series 65 certification, and is a graduate of Stanford’s Executive Program in Financial Management. Mark currently serves as a Chair of the External Advisory Board of the University of Minnesota’s Institute on the Environment, one of the leading climate science research centers, and as a member of the Dimensional Sustainability Funds Council. From 2009 through 2015, Mark also served as Managing Director of Vision Prize®, a research partnership that captures scientific meta-knowledge on climate risks and solutions, in collaboration with IOP Publishing and researchers at Carnegie Mellon University.
Peter received his Ph.D. and M.S. in Behavioral Decision Research from Carnegie Mellon University and B.A. in Mathematics from Swarthmore College. From 2009 through 2015, Peter also served as Director of Research of Vision Prize®.
Macroclimate® (macroclimate.com) is an automated investment service – “robo-advisor” – that limits exposure to climate risk. The firm has over $100 million of assets under management, and has been a Dimensional-approved investment advisor since 2004. As an SEC-registered fiduciary fee-only advisor, Macroclimate® never earns commissions based on where it invests clients’ assets. Macroclimate® is a Certified B Corporation, and donates 5% or more its annual revenue to environmental research and climate action.