Fossil-Fuel Shares Lead the Stock Market. How Awkward.

If you are paying attention to science, this is awkward in the extreme. To cite just one recent, important report, a body of experts convened by the United Nations and known as the Intergovernmental Panel on Climate Change, found in February that the world’s cities, farms and coastlines are insufficiently protected from the dangers that climate change has already wrought, including increasingly severe droughts and rising seas. Incessant burning of fossil fuels, the report found, will make matters much worse.

Yet for short-term investors, energy is looking better than ever.

Russia’s assault on Ukraine and the mounting Western sanctions are improving prospects for fossil fuel, Bank of America noted in a report to clients on Thursday. “Our commodity strategists expect that a sharp contraction in Russian oil exports could trigger a full-blown 1980s-style oil crisis,” with energy prices rising much higher, the report said. “Not owning energy is becoming more costly,” it said. “With China reopening, peak driving season and favorable positioning/valuations, we see more upside” for energy prices.

Two conflicting goals

This poses a classic dilemma for investors who want to follow the guidance of much academic research and be fully diversified. I try to do this by putting my money into low-cost index funds that track the entire stock and bond markets. These funds are marvelous in many ways. They reduce the risks of specific stock selection — owning the wrong stock at the wrong time — and of emphasizing the wrong sectors at inopportune moments.

There is an important catch, though. Complete diversification means owning all sectors and companies, and, in the current environment, that definitely includes traditional fossil fuel companies.

What should you do if you accept the findings of science and, furthermore, want to follow the dictates of your conscience? Suppose your main concern is having clean hands, which means, to you, not profiting personally from fossil fuels. One thing you can do is exclude fossil-fuel shares from your portfolio. It is increasingly easy to accomplish, even in 401(k)s and other retirement plans, assuming your workplace plan has a “sustainable” or “socially responsible” investing option.

Article source: https://www.nytimes.com/2022/06/03/business/stock-market-energy-climate-change.html