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Can a portfolio really be fossil fuel free?

Investors globally are taking a deeper look at their portfolios and assessing their carbon footprint by understanding their exposure to carbon-intensive sectors and companies. This is driven in part by the continued momentum among pensions, endowments and foundations to set meaningful carbon reduction targets and goals as pressure mounts to address climate change solutions.

While there is no regulatory or universally accepted definition, a fossil fuel free portfolio has traditionally meant no investments in companies engaged in extracting, processing, refining coal, oil and gas. But is this enough to call a portfolio fossil fuel free? It's complicated.

There is no question that divesting from these sectors alone achieves significant and meaningful reduction of carbon emissions. But the reality is that most industries, even the green ones, like wind and solar, are still users of hydrocarbons in manufacturing, operations, shipping, heating, packging etc. In fact, globally, about 78% of GHG emissions from human activity are from the production and consumption of energy which includes using gasoline for transportation, non-renewable electricity production, oil and gas production, and heating and cooling of buildings. Google and Facebook alone release extraordinary amounts of carbon emissions in the operation and cooling of their IT servers. The energy burn of cryptocurrency “mining” is on a whole other level, especially considering where most of it is mined, but that’s a topic for another time.

At Honeytree, fossil fuel based companies do not make the cut because (1) they don’t meet our basic financial requirements due to their cyclicality, and (2) we currently exclude fossil fuel extraction and production given the lack of transition to renewables demonstrated by these firms. We believe and have demonstrated that a global portfolio can be well diversified and perform well without these businesses.

[Windmills generate power in the prairies with clouds and blue sky in the background]

But we also go further than avoiding these investments. We look for companies where sustainable growth is associated with a commitment to increase use of renewables, a track record of reducing relative energy usage, increasing use of recycled materials, reducing water use and leading industry innovation in these areas. We hold companies that have made their production facilities more efficient and greener, by transitioning their transportation fleet, and pushing their suppliers to improve their carbon footprint. We only hold companies where environmental excellence is a core part of their strategy, and is directly overseen by the board. We look for and hold companies that have set meaningful targets (and achieved them) towards a limit of 1.5 degree rise in global temperature, according to science based targets.

The planet is facing a huge threat from climate change, and we need all actors in the ecosystem - investors, governments, corporations and people - to proactively focus. As investors, shifting capital to those companies that are moving the dial drives innovation, and ultimately the bottom line not only for companies but also for people and the planet.

While nothing is truly fossil fuel free, it is this system-wide impact that we need to continue to strive for.


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