do passive funds delay the transition from the carbon economy?

[GUNDERSON]

And do they also represent a threat to index investors as they become the "holders of last resort" as the carbon bubble pops? Some interesting perspective in this report:

https://sunriseproject.org.au/wp-content/uploads/2020/01/Sunrise-Project-Report-The-Passives-Problem-and-Paris-Goals.pdf

[maizefolk]

I think Betteridge's law of headlines likely applies here.

[Eucalyptus]

Not if people get on board with deliberately fossil-fuel-free index funds. That's what I'm doing here in Aus. Looking at performance of the three main options we have (a Vanguard global ETF, a Betashares global sustainability leaders ETF, a Betashares Aus ETF) they are performing just fine and dandy cf the rest of the market including Fossil fuels. My superannuation (Unisuper), I have all of that in the sustainable options and the last few years they have also tracked equal or better the non-sustainable options.

[Buffaloski Boris]

No. Because greed usually wins. So long as various carbon industries are making money, they will find investors. If not in the public equities markets, then private capital.

[MustacheAndaHalf]

When you buy shares on the stock market, you get the same stock price regardless of being a passive or active investor.  When companies involved with fossil fuels see a drop in their future profits, active investors will drive down the price.  Their weighting in the index will decrease, so new purchases will buy less of the fossil fuel companies.  I think active and passive investors will be doing very similar things, rather than all active investors doing one thing, and all passive investors doing another.

If you think the market isn't efficient, then you'd say fossil fuel stocks are worthless, and it's a matter of time.  But they could issue dividends and have lower P/E ratios to reflect their future prospects.  They will take steps to remain relevant in the stock markets, even as their business shrinks.

[TomTX]

And do they also represent a threat to index investors as they become the "holders of last resort" as the carbon bubble pops? Some interesting perspective in this report:

I've gone to 100% ESGV +VSGX.

[TomTX]

No. Because greed usually wins. So long as various carbon industries are making money, they will find investors. If not in the public equities markets, then private capital.

Tell that to the frackers in West Texas going bankrupt because they can't get financing.

[TomTX]

Fracking is good for the environment. It displaces coal production which is worse. 

Fracking in Texas is done primarily for the oil, which does not displace coal. The natural gas is a byproduct, and Texas has such a glut that it is being flared (burned off) from an unprecedented number of wells, despite numerous new pipelines and LNG facilities.

[Buffaloski Boris]

No. Because greed usually wins. So long as various carbon industries are making money, they will find investors. If not in the public equities markets, then private capital.

Tell that to the frackers in West Texas going bankrupt because they can't get financing.

A lousy business model isn’t going to get funding. Note the qualifier “so long as various carbon industries are making money.”  Emphasis on making money. Something that fracking doesn’t seem to be doing much of these days.

[seattlecyclone]

And do they also represent a threat to index investors as they become the "holders of last resort" as the carbon bubble pops?

What do you mean by "holders of last resort?" Do you expect an index fund to go around buying up tons of shares of these companies if and when the price starts to fall? An index fund, by design, won't be doing that. If you want your fund to track the broad market performance, you'll be buying about the same fraction of every company out there. VTSAX has a current total fund value of $897 billion. Meanwhile the US stock market has a total market cap of about $34 trillion. The fund value is about 2.6% of the total market cap, and so VTSAX endeavors to own roughly that fraction of every publicly traded company out there. They'll hold 2.6% of the companies that go up in value, and 2.6% of the companies that go down in value.

A look at their holdings will bear this out. Getting my shares outstanding numbers from Yahoo Finance, it looks like they own 2.8% of Microsoft, 2.6% of Apple, 2.4% of Amazon, 2.8% of Facebook, and so on down the line. They can't keep it exactly on target because companies issue and retire shares all the time, people buy into and sell out of the fund all the time, etc., but they keep it pretty close.

[TomTX]

Cool. Oil production is also a GOOD thing.

Oil is uncompromised GOOD? As is wasting massive amount of natural gas?

Ridiculous.

[Buffaloski Boris]

Cool. Oil production is also a GOOD thing.

Oil is uncompromised GOOD? As is wasting massive amount of natural gas?

Ridiculous.

Nothing that I can think of is an Uncompromised good. However since I like being able to drive, having food delivered to my grocery store as well as having a warm house, I think oil is a good thing. Actually I think oil is a very good thing since I really like eating and hate hypothermia. The viewpoint of scowling Nordic teenagers notwithstanding.

[John Galt incarnate!]

Fracking is good for the environment. It displaces coal production which is worse.
There are many industrial processes that do not have a "green" alternative i.e. cement making.

People are spoiled and think all forms of energy are interchangeable, but they aren't. Fossil fuel is still an important part of improving the human condition.

Too bad high schoolers  aren't taught  the rudiments of the basic laws of thermodynamics and about energy density, the BTU, etc.

[Buffaloski Boris]

Fracking is good for the environment. It displaces coal production which is worse.
There are many industrial processes that do not have a "green" alternative i.e. cement making.

People are spoiled and think all forms of energy are interchangeable, but they aren't. Fossil fuel is still an important part of improving the human condition.

Amongst relative evils, fracking probably is more environmentally friendly than some energy extraction methods. Even coal is better than uranium extraction. Talk about a horror show.

I wonder whether some of the more extreme enviros really care all that much about advancing the human condition. Shared misery seems to be more their goal.

[MustacheAndaHalf]

And do they also represent a threat to index investors as they become the "holders of last resort" as the carbon bubble pops? Some interesting perspective in this report:

I've gone to 100% ESGV +VSGX.

When you dig a little deeper, you might question if this is really trying to avoid the industry, or just specific companies.  Here's part of Vanguard's description of Vanguard ESG U.S. Stock ETF (ESGV):
"Specifically excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power"

Okay, so no companies in the fossil fuels industry.  But now look at the portfolio page, and click on portfolio holdings:
https://investor.vanguard.com/etf/profile/portfolio/esgv

Holdings 90-120 are where it gets interesting...
Schlumberger Ltd. - they provide services for oil companies, like the platforms.  If the oil industry disappeared tomorrow, this company would go bankrupt.
Phillips 66 - Owns numerous gas stations and jet fueling stations.  No fossil fuels, they also go bankrupt.

Technically I guess they don't produce fossil fuels - but both companies are completely dependent on the industry.

[seattlecyclone]

And do they also represent a threat to index investors as they become the "holders of last resort" as the carbon bubble pops? Some interesting perspective in this report:

I've gone to 100% ESGV +VSGX.

When you dig a little deeper, you might question if this is really trying to avoid the industry, or just specific companies.  Here's part of Vanguard's description of Vanguard ESG U.S. Stock ETF (ESGV):
"Specifically excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power"

Okay, so no companies in the fossil fuels industry.  But now look at the portfolio page, and click on portfolio holdings:
https://investor.vanguard.com/etf/profile/portfolio/esgv

Holdings 90-120 are where it gets interesting...
Schlumberger Ltd. - they provide services for oil companies, like the platforms.  If the oil industry disappeared tomorrow, this company would go bankrupt.
Phillips 66 - Owns numerous gas stations and jet fueling stations.  No fossil fuels, they also go bankrupt.

Technically I guess they don't produce fossil fuels - but both companies are completely dependent on the industry.

Pretty much all companies are dependent on the industry. How well do you think FedEx would weather an extended interruption of oil supplies? Walmart? The oil companies are worthless without their customers, and boy howdy do they have a lot of them who lack any near-term alternatives.

[John Galt incarnate!]

Fracking is good for the environment. It displaces coal production which is worse.
There are many industrial processes that do not have a "green" alternative i.e. cement making.

People are spoiled and think all forms of energy are interchangeable, but they aren't. Fossil fuel is still an important part of improving the human condition.

Amongst relative evils, fracking probably is more environmentally friendly than some energy extraction methods. Even coal is better than uranium extraction. Talk about a horror show.

I wonder whether some of the more extreme enviros really care all that much about advancing the human condition. Shared misery seems to be more their goal.

One of my friends is a nuclear engineer.

He told me about a study done by one of the national laboratories.

I think it had something to do with   coal-fired electricity  production versus nuclear-powered electricity production.

I don't remember exactly what the comparison was.

IIRC, the researchers' main conclusion was that the use of coal to generate electricity is 10,000% more radioactively "dirty" than the use of uranium, a multiple that astonished me.

[maizefolk]

IIRC, the researchers' main conclusion was that the use of coal to generate electricity is 10,000% more radioactively "dirty" than the use of uranium, a multiple that astonished me.

Yup. I cannot speak to the exact percentage, but there are a lot of radioactive elements embedded in the average ton of coal, and most of those go up the smokestack and out into the atmosphere we all breath when the coal gets burned.

Nuclear reactors generate radioactive waste, but the whole reason that's a problem from an economic and logistics standpoint is that we are indeed capturing it and storing it away, not freely releasing it into the environment.

[Buffaloski Boris]

Fracking is good for the environment. It displaces coal production which is worse.
There are many industrial processes that do not have a "green" alternative i.e. cement making.

People are spoiled and think all forms of energy are interchangeable, but they aren't. Fossil fuel is still an important part of improving the human condition.

Amongst relative evils, fracking probably is more environmentally friendly than some energy extraction methods. Even coal is better than uranium extraction. Talk about a horror show.

I wonder whether some of the more extreme enviros really care all that much about advancing the human condition. Shared misery seems to be more their goal.

One of my friends is a nuclear engineer.

He told me about a study done by one of the national laboratories.

I think it had something to do with   coal-fired electricity  production versus nuclear-powered electricity production.

I don't remember exactly what the comparison was.

IIRC, the researchers' main conclusion was that the use of coal to generate electricity is 10,000% more radioactively "dirty" than the use of uranium, a multiple that astonished me.

Operation of a nuke plant is very clean. The problem is the mining of the uranium and the disposal of the waste. Search uranium mining on the Navajo reservation for an example.

[FIKris]

There are plenty of low-fee ESG (Environment, Social, Governance) funds now; Vanguard has 'em.  Both index and ETFs.  Expense ratios are 0.12-0.14. 

I'm on the board of directors of an electric utility that has historically been reliant on coal for about 60% of our generating needs. We considered it the cheapest resource, until a couple years ago.  Now we can get wind and solar for less than 2 cents per kWh wholesale. That's less than just the costs to fuel the coal plants.  So now it makes economic sense to shut down the coal plants and switch to renewables.  And that's what we're doing. 

Investing coal extraction is a losing bet.  When that became clear to investors a few years ago, coal stocks crashed.  They won't recover. Oil may someday follow the path of coal.  Especially since most global automotive companies have committed to serious fleet electrification.

Getting out of these as long-term investment strategies makes sense.  That's why BlackRock & others are moving away from them.

[ChpBstrd]

The concept that index investing temporarily props up the prices of poorly performing incumbents is something I’ve never understood. If that were the case, fortunes could be made shorting those companies one knows will underperform and going long the rest of the market. If anyone actually believes index funds distort prices, one should be all over the exploitation of this market inefficiency, instead of complaining about it.

In theory, if one could pick the companies of the future and avoid the GE’s of the world, then one could retire on a 5% or 6% WR instead of 4%. But good luck with that.

[TomTX]

And do they also represent a threat to index investors as they become the "holders of last resort" as the carbon bubble pops? Some interesting perspective in this report:

I've gone to 100% ESGV +VSGX.

When you dig a little deeper, you might question if this is really trying to avoid the industry, or just specific companies.  Here's part of Vanguard's description of Vanguard ESG U.S. Stock ETF (ESGV):
"Specifically excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power"

Okay, so no companies in the fossil fuels industry.  But now look at the portfolio page, and click on portfolio holdings:
https://investor.vanguard.com/etf/profile/portfolio/esgv

Holdings 90-120 are where it gets interesting...
Schlumberger Ltd. - they provide services for oil companies, like the platforms.  If the oil industry disappeared tomorrow, this company would go bankrupt.
Phillips 66 - Owns numerous gas stations and jet fueling stations.  No fossil fuels, they also go bankrupt.

Technically I guess they don't produce fossil fuels - but both companies are completely dependent on the industry.

Neither fund is perfect. They are a reasonable first approximation, and far less exposed to decarbonization than VTI.

[js82]

No. Because greed usually wins. So long as various carbon industries are making money, they will find investors. If not in the public equities markets, then private capital.

Tell that to the frackers in West Texas going bankrupt because they can't get financing.

A lousy business model isn’t going to get funding. Note the qualifier “so long as various carbon industries are making money.”  Emphasis on making money. Something that fracking doesn’t seem to be doing much of these days.

Agree.

Broadly speaking, if the extracted-carbon-fuel industry becomes unprofitable, passive funds aren't going to meaningfully delay the transition away from oil/gas.  Unprofitable is unprofitable.  The biggest governor of this transition is going to be the price of energy versus the price of extraction - the primary governor of this will be a combination of continued development of green tech(bringing down the cost of alternative energy sources), increased difficulty of extraction as reserves dwindle, and government regulations putting a finger on the scale in terms of relative costs.

[PDXTabs]

I think Betteridge's law of headlines likely applies here.

I don't think that it applies. The actual title of the linked paper is The Passives Problem and Paris Goals: How Index Investing Trends Threaten Climate Action and even includes a quote for Jack Bogle.

[norajean]

Google some of your most hated stocks and you will see companies which have seen huge stock appreciation in the last decade. Chemical makers, fertilizer companies, big pharma, Comcast, Fox, horrible airlines, etc.  I'm not sure what stock you would like to hold to make you feel better.

[vand]

Index funds and carbon-emissions?

Sorry, nope. None whatsoever.

People really do try to make the most tenuous links.

The OP report is just typical green-lobby nonsense.

#savegreta

[MustacheAndaHalf]

...
Holdings 90-120 are where it gets interesting...
Schlumberger Ltd. - they provide services for oil companies, like the platforms.  If the oil industry disappeared tomorrow, this company would go bankrupt.
Phillips 66 - Owns numerous gas stations and jet fueling stations.  No fossil fuels, they also go bankrupt.

Technically I guess they don't produce fossil fuels - but both companies are completely dependent on the industry.
...

Pretty much all companies are dependent on the industry. How well do you think FedEx would weather an extended interruption of oil supplies? Walmart? The oil companies are worthless without their customers, and boy howdy do they have a lot of them who lack any near-term alternatives.

Right now transportation relies on fossil fuels, but this thread titled "transition from the carbon economy" hints at replacing fossil fuel with alternatives - electric, hydrogen, etc.  Those replacements would keep companies like Apple, Microsoft, Amazon, Google in business.  But companies that service oil platforms and gas stations would vanish.

Just seems odd that ESG excludes Exxon, but is okay with including gas stations (according to Vanguard's fund holdings).

[TomTX]

Just seems odd that ESG excludes Exxon, but is okay with including gas stations (according to Vanguard's fund holdings).

Perhaps the rationale is that "gas stations" will convert over to EV charging stations - Sheetz is one chain which is already installing EV charging. For the typical gas station, the gasoline/diesel sales are typically near break-even for profit. They make their money in the convenience store/restaurant - and an EV driver will generally be hanging around longer, likely to buy more.

[seattlecyclone]

...
Holdings 90-120 are where it gets interesting...
Schlumberger Ltd. - they provide services for oil companies, like the platforms.  If the oil industry disappeared tomorrow, this company would go bankrupt.
Phillips 66 - Owns numerous gas stations and jet fueling stations.  No fossil fuels, they also go bankrupt.

Technically I guess they don't produce fossil fuels - but both companies are completely dependent on the industry.
...

Pretty much all companies are dependent on the industry. How well do you think FedEx would weather an extended interruption of oil supplies? Walmart? The oil companies are worthless without their customers, and boy howdy do they have a lot of them who lack any near-term alternatives.

Right now transportation relies on fossil fuels, but this thread titled "transition from the carbon economy" hints at replacing fossil fuel with alternatives - electric, hydrogen, etc.  Those replacements would keep companies like Apple, Microsoft, Amazon, Google in business.  But companies that service oil platforms and gas stations would vanish.

The transition from fossil fuels will not happen overnight. It's going to take a while. The portion of these companies' business that comes from selling oil will dry up over time. In the meantime there is still quite a lot of opportunity for profit. Will they see the writing on the wall and use their resources to expand into other areas of business? Who can say? The history of business is riddled with companies that failed to adapt to changes in the business environment and went bankrupt, but there are also quite a few that have been able to survive and thrive over many years.

[ChpBstrd]

...
Holdings 90-120 are where it gets interesting...
Schlumberger Ltd. - they provide services for oil companies, like the platforms.  If the oil industry disappeared tomorrow, this company would go bankrupt.
Phillips 66 - Owns numerous gas stations and jet fueling stations.  No fossil fuels, they also go bankrupt.

Technically I guess they don't produce fossil fuels - but both companies are completely dependent on the industry.
...

Pretty much all companies are dependent on the industry. How well do you think FedEx would weather an extended interruption of oil supplies? Walmart? The oil companies are worthless without their customers, and boy howdy do they have a lot of them who lack any near-term alternatives.

Right now transportation relies on fossil fuels, but this thread titled "transition from the carbon economy" hints at replacing fossil fuel with alternatives - electric, hydrogen, etc.  Those replacements would keep companies like Apple, Microsoft, Amazon, Google in business.  But companies that service oil platforms and gas stations would vanish.

The transition from fossil fuels will not happen overnight. It's going to take a while. The portion of these companies' business that comes from selling oil will dry up over time. In the meantime there is still quite a lot of opportunity for profit. Will they see the writing on the wall and use their resources to expand into other areas of business? Who can say? The history of business is riddled with companies that failed to adapt to changes in the business environment and went bankrupt, but there are also quite a few that have been able to survive and thrive over many years.

The process of switching from steam locomotives to diesel locomotives took about 30 years.

In countries where petroleum products are not government-subsidized (Japan, China, Russia), another transition to electric took place.