Money Rehab with Nicole Lapin - "Should I Stop Investing In Oil Even Though It Makes Me Money?" Listener Question

Episode Date: July 11, 2023

Nicole answers an email from a listener who wants to know: will renewable energy companies ever outperform oil? Nicole's advice goes beyond market trends, and gets at the heart at the responsibility we have to both our financial future— and the future of the planet. Find Barron's list of top ESG companies here: https://www.barrons.com/articles/most-sustainable-esg-us-companies-1b5f70fd

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. it's time for some money rehab. If you're listening to this show, you love money. And if so, you're in good company because I love money too. And also, you probably want more money because who doesn't? But there's a limit, right? Money isn't priceless, and you probably wouldn't compromise your morals for a payday. But where

exactly is that line? A money rehabber sent us an email mulling over this very question. They wanted to stay anonymous, so here's our producer reading their question. What are your thoughts on renewable slash clean energy, specifically as it pertains to the future of EVs and fossil fuels? There has been a lot of hype around this topic lately, but reality does not seem to quite line up in my opinion. As an investor in fossil fuel companies, specifically the shale industry, I am interested in your take on the future of oil. Can there be a happy medium here, both in the short and long term? Or is this an all or nothing proposition? And how would a new administration potentially change the overall outlook? I love this question so much because it is a complicated

one and it's a common one. The fossil fuel industry has seen good returns over the last five years despite the disruption caused by travel bans during COVID lockdowns. Chevron, for example, is up almost 25 percent in the last five years, and Exxon is up over 25% over the last five years. Those are solid returns. But on the other hand, fossil fuels are driving climate change to a point of no return. Many scientists have said that the world needs to dramatically reduce its dependence on fossil fuels by 2030 or humanity is, quote, doomed, on fossil fuels by 2030 or humanity is, quote, doomed, which is never a fun thing to think about on a Tuesday, but here we are. This drops us into a sticky situation. Do you invest in fossil fuels because it might improve your financial picture and turn a blind eye to this whole humanity

doomsday situation? And let's just put all the cards on the table for a second, because it sounds like an easy decision, but it isn't always. When you're stressed about how you're going to afford the cost of living in retirement, that can feel a lot more urgent than climate change. And yes, of course, I believe in climate change and I do support us living greener lives. But I also get financial anxiety, and I'm not here to judge the decisions that you make to provide for yourself or your family. But here's some good news. There are actually ways to make money while also saving Mama Earth. And in order to break this down, we're going to need to talk about ESG investing,

which is probably what this listener, let's call her Amanda, was thinking when she said, quote, there's been a lot of hype around this topic. ESG is an investment approach that accounts for not only financial returns, but also the broader impact of a company on the world. Let's break it down letter by letter. In ESG investing, the E stands for environment. No surprises there. ESG investors look for companies that prioritize sustainability, take steps to reduce their carbon footprint, conserve natural resources, and minimize pollution. Bonus points if the company actually does something to help the environment, like innovation around renewable energy or sustainable supply chains. The S in ESG stands for social, or how a company treats people,

whether it's their employees, customers, suppliers, and communities. In general, ESG investors are looking for companies that promote diversity and inclusion, provide safe working conditions, and contribute positively to the communities in which they operate. And lastly, the rogue letter that no one ever really guesses, the G stands for governance, as in how a company is managed. So here we're looking for a diverse board of directors, fair compensation, respect for shareholder rights, and prioritization of ethical corporate behavior. I'll talk more about how you can search for ESG companies in a minute, but first, let's take a step back and talk about why we care. ESG investors aren't considering their investments in these companies as charity. In fact, ESG investing is driven by the belief that companies with strong environmental,

social, and governance practices are actually better positioned for long-term success. But Amanda is wondering, is that really true? Will ESG companies outperform fossil fuel companies? So while oil and gas companies have a steady track record of returns, it's expected that the demand for oil will gradually decrease over time because of the global push for decarbonization and the transition to renewable energy sources. I will note, though, that this transition will be slow. And to Amanda's question about how changes in political power might affect the fossil fuel industry. Historically,

Democratic administrations have been friendlier to renewable energy than Republicans. So if we vote a Republican majority into office, we can expect to see a slower transition into renewable energy. Regardless of which political party is in power in the short term, oil will probably continue to play a significant role in meeting global energy demand. But let's look out to that longer term. Renewable and clean energy sources like solar, wind, hydropower, and geothermal all have a lot of attention because of their potential to mitigate climate change and reduce environmental impacts. This attention makes renewable energy, in general, a ripe industry for investing.

We've already seen this a bit in recent years as government leaders call for climate change. They incentivize green energy through tax breaks. Because of those tax breaks, renewable energy companies perform better, which makes them better investments. And as these companies become higher profile, more people invest. And as these companies get more money from investors, they are able to create better products. It is a glorious flywheel of wins for investors, companies, and the environment. Another example of this is the darling of the ESG world, electric vehicles.

EVs have emerged as a promising solution to reduce dependence on fossil fuels, decrease greenhouse gas emissions, and look good doing it. Many countries, including the U.S., are implementing policies and incentives to promote the adoption of EVs, like financial incentives, charging infrastructure development, and stricter emission standards. Now, I told you I'd give you some tips on finding good ESG companies. So let's circle back to that. And to be honest, it's not particularly easy to find these companies that are doing well and doing good.

Investors can look up a company's ESG score, which is a score between one and 100. But we should be careful here because companies score themselves. Seriously, there's no neutral third party rating these companies on ESG metrics. So I'm a little wary. For example, Chevron, the literal oil company, gives itself almost a 70 score. And for reference, the highest ESG score I've ever seen is 75. So Chevron is being pretty, pretty generous with itself. Like most things in finance, I recommend relying on a third party. Barron's, which is one of the leading sources of financial analysis, worked with Calvert Research and Management, a leader in ESG investing, to come

up with a list of 100 companies that are strong in ESG qualities. I've linked that list in the show notes. But don't get me wrong here. Investing in the environment isn't a slam dunk. Let's zoom back in on electric vehicles, which has been one of the most promising green investments. Honestly, thanks in no small part to Elon Musk. I do have to give credit where credit is due. Despite the popularity of EVs and more and more legacy car companies like Ford investing in making electric models, the path forward is not so clear. Late last week, Governor DeSantis struck down a bill in Florida that would have saved state and local governments $277 million over 15 years by

adding more electric vehicles to their fleets. Plus, new green products are exactly that, new. There will be companies that make green tech and products that don't make it. Investing in ESG companies is like investing in any startup. It's risky. So with that being said, WTF do we do? My approach here is to go for the funds. You OG money rehabbers will not be surprised by this because you know my favorite investing approach is to index funds and chill. You can invest in index funds and exchange-traded funds that specifically focus on ESG criteria and meet certain ESG standards, like the ETF with the ticker symbol ESGV, which tracks 1,500 large companies but excludes companies that get revenue from producing or selling fossil fuels, weapons,

tobacco, and other controversial products that are not so ESG. And compared to oil's 25% gains over the last five years, ESGV is up 54%. So take that, oil. And I'll be honest with you, and this is for you, Amanda, my investing queen who is dabbling in shale. You know how I typically recommend investing in index funds that mirror the S&P 500 for newbie investors? That actually does give you exposure to oil companies. Among the S&P 500's top 20 stocks over the last year, 10 of them are energy companies. And while a few of those are renewable energy companies, most are in the oil and gas industry. And in a perfect world, as renewable energy becomes bigger business, more renewable energy stocks will take the place of the oil stocks in the S&P 500. However, unfortunately, the world is not perfect, but it can be good if we put in the effort. And so here's what I have to say about that.

be good if we put in the effort. And so here's what I have to say about that. I don't invest in fossil fuels because investing in companies that make fossil fuels is very different from putting gas in your car. Investing in a company means funding their future and that company's place in our future. And I don't think we have a future if we support the fossil fuel industry. I believe the work that innovative scientists are doing out there every single day shows us how fossil fuels are threatening our future. I care too much about the next generation to set them up for failure. And I know that people can reach financial freedom without ever investing in fossil fuels.

I mean, if I did it, you can, too. For today's tip, you can take straight to the bank. If you're looking to invest in ESG, here's another fund to check out. It's an ETF with the ticker symbol ESGU. And like ESGV, it's a fund that excludes companies that get revenue from producing or selling fossil fuels, weapons, tobacco, and other controversial products. The extra cool thing about ESGU is that it mirrors the S&P 500 and it works out really well. The S&P 500 is up 57% over the last five years and so is ESGU. So you get all of the gains without any of the sacrifices to the environment.

Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynew Money News Network for exclusive video content. And lastly, thank you.

No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.