A Practical Guide for Nonprofits Considering Divesting from Fossil Fuels, Part Two

Purpose: The purpose of this article is to provide a framework for leaders of non-profit organizations that are considering divesting fossil fuels from the organization’s investments. (See Part 1 here)

Part 2 - Practical Implementation Considerations When Divesting From Fossil Fuels

If your organization decides to divest from fossil fuels, additional discussion is needed to decide how to implement divestment. Divestment is handled differently from organization to organization, often due to the nuances of the holdings in an organization’s investment portfolios. Implementing divestment can be divided into decisions about two main areas

• Committing to selling existing holdings in fossil fuel companies.

• Committing to not add future holdings in fossil fuel companies.

Considerations Regarding Existing Holdings: For investors that are holding individual stocks or bonds in fossil fuel companies, the implementation can be relatively straightforward - instruct the investment manager to sell those holdings, assuming that there is a liquid market for those securities and the holdings can be sold at, or close to, their market value. 

For portfolios that are invested in diversified funds such as mutual funds or private investment funds, the question is more nuanced. Fossil fuels may only represent a small part of the fund - is your organization willing to liquidate the entire holding in order to eliminate the fossil fuel portion? Sometimes, investment managers offer similar versions of funds that are run with fossil-fuel free mandates and so a switch can be implemented relatively easily. Other times, a currently used fund has no fossil-fuel free equivalent and the fund must be replaced entirely. An important question to ask is will the change meaningfully impact the ability of the portfolio to reach the organization’s investment goals and if so, is the difference acceptable to the organization?

Considerations Regarding Future Holdings: Making a commitment about future holdings is considerably easier. Organizations commit to not adding any new holdings in fossil fuel securities and structure their new investments so that each investment is mandated to exclude fossil fuels. The organization should be comfortable with any impact on the portfolio that this decision may create, such as realizing that comparing the portfolio’s returns to indexes that include fossil fuel investments (like the S&P 500) may be less of an appropriate comparison going forward.

Discussing the Decision with Investment Advisors: The decision on existing versus future holdings should be followed up with discussions with one’s investment advisors and managers to understand how they would implement the climate related changes to portfolios and if those changes are satisfactory to the organization. Input from the investment advisors may cause the organization to rethink or clarify its divestment approach.

Putting it All Together

Most organizations end up selecting one of these three main categories of divestment.

The three major categories of fossil fuel divestment:

1. Fossil-fuel free - organizations eliminate all current investments in fossil fuels and commit to not adding any in the future.

1. Full commitment - the organization makes a commitment to become fossil-fuel free over a set time period, but continues to hold some fossil fuel investments.

1. Partial commitment - the organization makes a commitment to eliminate some but not all types of fossil fuel companies (i.e. coal, but not natural gas), or to divest from all fossil fuel companies,  but only in specific parts of a portfolio or in specific asset classes (i.e. in public investments but not private investments, or in equity investments but not bond investments).

Before the implementation of investment changes, it is worthwhile to create a statement where the organization articulates its approach to divestment, its timeline, and identifies what will be divested, and, or, no longer purchased. Additionally, many organizations choose to communicate this statement to stakeholders, often highlighting how the decision was reached and how it reflects the non-profit’s mission. This may lead to additional impacts on your organization - such as strengthening the connection to younger constituents who rank climate as one of their top concerns.

Steps To Take Regardless of the Divestment Decision: Regardless of whether an organization adopts divestment, there are other important climate-related issues to consider:

• Consider investing in renewable energy companies. While the argument for eliminating fossil fuel holdings is nuanced, the argument for investing in renewable energy is more straightforward. Greater demand for renewable energy investments drives up their value, leading to greater rewards for the renewable energy industry and more supply of new renewable energy offerings. Though how to incorporate renewable energy into a portfolio is a separate discussion, one reasonable choice could be to shift one’s investments from fossil fuels to renewable energy, as both are tied to the demand for energy (this is sometimes called the Divest/Invest approach). This changes the discussion from whether fossil fuels must be eliminated from portfolios, to how to incorporate support for renewable energy investments, potentially avoiding clashes within an organization, but still ultimately enabling action regarding climate change. 

• Contemplate other ways to address climate change such as increasing the organization's energy efficiency or creating programming that highlights climate issues.

• Consider publicizing the organization’s approach and commitment to addressing climate change, as spreading the word is a valuable benefit of having a public presence and constituency. 

The bottom line: your organization may decide to divest its portfolio of fossil fuel holdings, but if so, it should understand what it is seeking to accomplish. Non-profit leaders should take the time necessary to decide if divestment is the best course of action for the organization’s goals and values. Expand the conversation to include not just divestment of fossil fuels, but also how the organization can include renewable energy investments and climate-related programming in its activities, which may create organizational buy-in and galvanize concrete action. 

--

Jonathan Bernstein is the lead advisor at Bernstein Planning and Investment Management.  Jonathan graduated from Yale College and has worked in financial advising for 17 years. He previously served as Director of Research for Hefren-Tillotson, Pittsburgh’s largest independent wealth manager, managing over $18 billion of client investments and created the firm’s Impact Portfolios. Jonathan is both a CERTIFIED FINANCIAL PLANNER™ certificant and a CFA® charterholder. He has been advising individuals and institutions on sustainable investing since 2017.

A Practical Guide for Nonprofits Considering Divesting from Fossil Fuels, Part One

Purpose: The purpose of this article is to provide a framework for leaders of non-profit organizations that are considering divesting fossil fuels from the organization’s investments.

Part 1 - How Nonprofit Leaders Can Discuss Divestment

Intro: Divestment from fossil fuel investments is a growing approach for investors looking to address climate change, with the number of entities reporting full or partial divestment growing from 181 in 2014 to 1,951 in 2023 (representing over $40 trillion of assets) according to the Global Divestment Commitments Database. Despite growing support, divestment is often a contentious issue when presented to non-profit boards and investment committees.  Trying to analyze the decision from multiple angles can create an end result that reflects the organization’s values and decreases the emotional toll of the process on board members and staff.  

What is Divestment? Divestment means eliminating a particular type of investment from one’s investment portfolio. In this discussion, it is referring to eliminating investments in fossil fuel related companies - namely those involved in oil, natural gas or coal.

How to Discuss Divestment? Divestment, like climate change, is a complex issue, and should be evaluated from multiple perspectives. This is particularly important for non-profits when different leaders in the organization - executive directors, board chairs, investment committee members, may come at the issue of divestment from differing mindsets. 

An effective approach to create an open, collaborative dialogue is to discuss the pros versus the cons of divestment. Below are examples of pros and cons that organizational leadership can discuss to understand how divestment lines up with the organization’s values and mission.

Example Discussion Topics

Arguments for Divestment:

• Divestment as a moral imperative. If fossil fuels are harming the earth and imperiling humanity, then profiting directly off the sale of fossil fuels is not appropriate, especially for an organization that is devoted to bettering humanity. While one cannot necessarily filter out all investments in a portfolio that create moral objections, one can draw the line in certain cases, and much like many portfolios exclude tobacco manufacturers, excluding fossil fuels is a reasonable exclusion as well.

• Divestment is an investment decision. If one has a strong belief that fossil fuel companies will underperform the broader markets over the long term, then selling fossil fuel investments today may be a wise long-term decision. Proponents of this argument point out that it is likely that not all and perhaps only a fraction of the current reserves of fossil fuels will ultimately be able to be used or sold before society phases out fossil fuel use. This argument implies that fossil fuel companies are holding large amounts of assets that will drop in value over time and accordingly, from just an investment perspective, it makes sense to decrease holdings in fossil fuels over the long term (even if over the short term, fossil fuel investments may produce returns that exceed the general market).

• Divestment may impact performance less than many people expect. Organizations may find it helpful to review data that compares the returns of commonly reviewed stock indexes such as the S&P 500 to fossil-free versions of the index. S&P has maintained the S&P 500 Fossil Fuel Free Index since 2015 and provides comparisons to the general S&P 500 index. Performance of the two indexes, particularly over multi-year periods, are very similar. International indexes also exhibit similar performance between the general index and the fossil fuel free version.

• Divestment has social benefits that are independent from economic impacts. Many look to the campaign to sanction and divest from South Africa as a model for the importance of fossil fuel divestment today. For example, growing support in the 1980s for divestment (and sanctions) was essential for uniting Democrats and Republicans to pass the Comprehensive Anti-Apartheid Act of 1986, which was the most significant country-wide anti-apartheid legislation of its time. Today, the expanding list of major institutions that are divesting from fossil fuels provides greater pressure on those that have not yet divested.

Arguments Against Divestment:

• Our society remains reliant on fossil fuels for the foreseeable future and many people continue to use fossil fuels to power their everyday lives. It may be contentious within an organization to divest from fossil fuels at an investment level, but continue to benefit from them in day to day use. An alternative approach is to emphasize investing in renewable energy to the extent possible, rather than focusing on complete divestment of fossil fuels (see part 2 more on this idea).

• The majority of fossil fuel reserves are owned by government or state energy firms (with estimates of close to 75% of reserves). The focus should be on putting pressure on governments to divest fossil fuels rather than on selling investments in publicly traded companies, which are the minority owner of fossil fuels. 

• The actual impact of divestment is unclear historically. While campaigns for institutions and governments to divest from apartheid South Africa began in the 1960s, it is difficult to quantify what direct impact these actions had on the end of apartheid, in particular because many of the divestments were put in place close to the end of apartheid. More clear is the impact of banks refusing to issue new loans to South Africa, with Chase Manhattan Bank declaring in 1985 that it would not renew loans in South Africa. A Chase executive later explained that the economic and political instability in South Africa made the business risk too high for the company. Accordingly, the takeaway may be that efforts to make it more difficult and less compelling for loans to be made to fossil fuel companies may be an even more important issue than divestment. One course of action could be to inquire about your bank’s climate record and fossil fuel investment policies. If the bank is actively financing fossil fuels, changing banks and explaining the reason for the change could be an impactful move.

• Engagement by shareholders of fossil fuel companies has been successful. In 2021, a small investor group in Exxon successfully campaigned to appoint three representatives to Exxon’s board that had diverse experience in the energy sector including in renewable energy. Exxon subsequently announced a $15 billion commitment to advance low carbon solutions. Ownership in fossil fuel companies provides the opportunity to vote on shareholder proxies and engage with company management as a stakeholder, potentially creating change that divestment cannot. As Mark van Baal, founder of Follow This, an organization devoted to organizing shareholders to combat climate change noted "if the responsible investors divest and less responsible investors step in, I think the boards of these companies will be popping corks…After seven years of campaigning, we can conclude that [oil and gas companies] won't change on their own accord."

By discussing the pros and cons, organizations can come to a consensus on a divestment stance and make a decision about fossil fuel investments.

Part 2 covers the practical implications of deciding to divest from fossil fuels. 

--

Jonathan Bernstein is the lead advisor at Bernstein Planning and Investment Management.  Jonathan graduated from Yale College and has worked in financial advising for 17 years. He previously served as Director of Research for Hefren-Tillotson, Pittsburgh’s largest independent wealth manager, managing over $18 billion of client investments and created the firm’s Impact Portfolios. Jonathan is both a CERTIFIED FINANCIAL PLANNER™ certificant and a CFA® charterholder. He has been advising individuals and institutions on sustainable investing since 2017.

Three Financial Topics to Discuss with Your Kids in 2024

A friend said to me recently, “I wish school taught me less about trigonometry and instead taught me what a mortgage is.” That got me thinking about how little we teach our kids about personal finance. With that in mind, here are three topics that I think are particularly relevant to discuss with kids in 2024.

1.  How inflation impacts the amount of money one has to spend. 

   Hardly anyone born post-1980 talked about inflation until the pandemic hit. Then coronavirus lockdowns created drastic changes to our buying habits, which made the prices of certain in-demand goods skyrocket. Eventually, this led to a general rise in the inflation rate to as high as 9%. 

   But though inflation was rising nationally, the impact on individuals differed quite a lot depending on a person’s circumstances. A few examples will be helpful to understand this.

   New car prices rose about 21% from the beginning of the pandemic until the end of 2023. For anyone buying a car, the jump in car prices was a huge added cost - thousands of dollars. But for those who did not need to buy a car, the impact of car inflation was much less significant.

   Similarly, house prices also shot up during the pandemic, but for anyone who already owned a house with a fixed rate mortgage, monthly payments stayed the same, even as new home buyers were paying much more for similar homes. 
   Why should kids know this? The point is that while changes in the overall inflation rate are important, individuals should also pay close attention to the prices of what they personally spend most of their money on. If the price of your specific items goes up, you will have less leftover for other essentials. But if you are lucky and the prices of what you want or need are not rising, then the bite of inflation will be less detrimental.

2. The connection between the Federal Reserve setting short term interest rates and mortgage rates.

   The Federal Reserve (the Fed) does not directly control mortgage rates. But the interest rates banks charge for home mortgages are impacted by the short term interest rates set by the Fed. The Fed, as the central bank of the United States, oversees several short term interest rates and sets these rates based on its outlook for the U.S. economy. Every month or two the Fed meets to decide if rates should be changed or kept steady.

   The most important rate the Fed controls is the federal funds rate. This is the rate banks earn on overnight lending to each other. Banks use this rate to help them decide what interest rates to charge to their customers for loans on homes, credit cards and cars. Since banks can borrow from each other at the federal funds rate, banks will almost always set the interest rate on their loans to customers higher than the federal funds rate, generating a profit for the bank. Accordingly, and this is the key point for kids to understand, the higher the federal funds rate, the higher the interest rates banks will charge for loans.

   However, it is also important to know that changes to the federal funds rate do not go hand and hand with changes to mortgage loan rates (mortgage rates line-up better with the rate on 10-year Treasury bonds). But they do generally move in the same direction. So if the Fed is increasing the federal funds rate, mortgage rates are likely to rise. If the Fed is cutting the federal funds rate, mortgage rates will probably fall. And if the Fed isn’t making any changes, mortgage rates will probably not change drastically.

   Why should kids know this? Loans fund the largest financial purchases in most people’s lives - homes, cars and college. Knowing what influences loan interest rates creates savvier consumers, as kids can understand how the Fed’s interest rate decisions are likely to make borrowing less or more attractive in the future.

3. Where to get useful information about personal finances (hint, it begins with a B and rhymes with cooks) and what sources to avoid.

   Pediatricians recommend reading books to children starting from the time they are born. While a finance-related book for a newborn is probably a stretch, for an older child, there are actually some terrific books aimed at introducing key financial topics to kids. The books are written in easy to grasp language.

   The problem is that few of us are aware of these books and so most children never get a chance to see them. As a parent, an act as simple as taking some books out of the library can be instrumental in helping set your child on the road to financial competence. Try browsing what is available at your library or request a specific title.

   Personally, I think an excellent first book for kids ages 8 and up is:

   Finance 101 for Kids: Money Lessons Children Cannot Afford to Miss by Walter Andal

   What kids should avoid is getting the fundamentals of finance from randomly searching on social media sites, as it is very difficult to ascertain the quality or accuracy of any advice kids might receive from these sources. By introducing well researched, age appropriate finance books at an early age, parents can get the process started of kids thinking responsibly about how money impacts their lives. And as kids get older, parents can help kids find more advanced personal finance books.

Lastly: If you speak about these topics with your kids, please let me know how the conversation went. I will be sharing more pointers for talking to your kids about finance in future posts and I would love to include your insights as well.

How to Fix the Cash in Your 529 Plan

Summary: Many 529 Plans use stable value funds as their cash holding. When interest rates rise significantly, like they have recently, these funds often return much less than money market funds. Better options may be available for investors willing to change their holdings. 

Now is an extremely important time to check on the cash in your 529 plans. Many people assume that because money market funds are offering 5% rates of interest, so too do similar investments in 529 plans. Not so. Take the popular Nevada Vanguard 529 Plan. It offers just one cash investment option and the yield is just 2.59% as of November 20th. If you compare the rates of return for the cash investment vehicle in many of the largest 529 plans, you will find that they are significantly below what popular money market funds are earning. Below is a chart of the some of the most popular 529 plans in the U.S. and whether the cash options they offer are significantly underperforming money market returns this year:

 Sources: Respective 529 plan websites, reviewed as of 9/30/2023.

The same below average interest rate applies for the cash component of many of the 529 target enrollment funds. That means that if your child is already in college or soon to enroll, your 529 money may be earning thousands of dollars less than you think.

The reason this is happening is because of the type of fund being used in many plans, combined with the rapid recent rise in interest rates. Many 529 plans use what is called a stable value fund for cash-like investments. Stable value funds are similar to money market funds in that they are designed to never go down in value, but in practice, they can have returns that are quite different, especially during times of rising interest rates. 

To get technical, stable value funds typically purchase short term bonds as well as guarantees from insurance companies to prevent the funds from losing money if the bonds owned drop in value. This approach is less than ideal in periods of time (like now) when bond yields have risen quickly following many interest rate hikes. 

The problem for stable value funds is that they still own many lower yielding bonds they purchased a few years ago. This limits the interest rate they are able to pay today.

In contrast, money market funds do not hold investments for very long, often replacing all their investments every few weeks. That means their holdings are recently issued higher yielding investments, allowing them to outearn stable value funds by a meaningful amount. In stable value funds’ defense, when interest rates hold steady or drop, they tend to outearn money market funds and so over long periods of time, they usually do better than a money market fund. 

Suggested Steps

If you are about to spend money on college, your time horizon is short and you need to know what will earn you the most tuition money now. Here are some suggestions to take to help you maximize your dollars:

Research Your Options - Find out how much interest the cash in your 529 plan is earning. If the interest rate (or year to date returns) are well below the returns of popular money market funds, that’s a good sign that it’s a less than optimal choice today. 

Consider Switching Funds Within Your Current Plan -  Fortunately, some 529 plans offer multiple cash options, making switching to a higher earning fund easy. The Utah my529 plan (Gold rated by Morningstar and one of the top 10 largest 529 plans), offers both a stable value fund and a money market type fund (Utah’s FDIC-Insured option). As of September 30th, the FDIC-Insured option has returned almost 2.5% more than the stable value fund. 

Unfortunately, plans like New York's 529 Program (Direct), Nevada’s Vanguard 529 College Savings Plan and California’s ScholarShare College Savings Plan only offer a stable value fund for cash investments. Additionally, their target enrollment date options invest as much of 60% of the entire fund in the stable value funds. Even Utah, which uses multiple cash options in their enrolled student target option, has 20% in a stable value fund. 

If your plan does not offer a more competitive cash-like fund, you have a few alternatives. Most plans offer a bond index like the Total Bond Market Index. However, a bond fund, unlike a stable value or money market fund, has the potential to lose money, especially if interest rates move higher. 

Carefully Consider a 529 Rollover - Another possibility is to actually roll over one’s 529 plan to another state’s 529 plan, but there are quite a few wrinkles to that - including an IRS limitation on how often one can make a rollover and recapture rules in certain states (including NY) that create a tax bill for rollovers. Accordingly, you really need to do your homework before doing a rollover and swapping to a different plan. 

Investigate Recreating Your Target Enrollment Fund - And what about those in target enrollment funds heavily invested in a stable value fund? It may make sense to move out of the target enrollment fund and into your own version of the target enrollment fund. For instance, for those in the Utah plan, one could mirror the allocations of the target enrollment fund, investing in the same amount of the underlying investments (i.e. 7% in the Total Stock Market Index Fund, 5% in the International Stock Index Fund, etc.), but swapping out the stable value fund for the higher yielding cash option. Alternatively, if one is able to rollover penalty-free to another 529 plan, moving the assets to a plan with more investment options could be a reasonable decision. 

Bottom Line: Periodically check the options in your 529 plan. While stable value funds are generally attractive options for cash holding needs, in today’s interest rate environment, you may be able to earn more by swapping your stable value fund for a different option. If you would like to discuss your specific 529 situation, please feel free to reach out directly.

Jonathan Bernstein is the lead advisor at Bernstein Planning and Investment Management.  Jonathan graduated from Yale College and has worked in financial advising for 17 years. He previously served as Director of Research for Hefren-Tillotson, Pittsburgh’s largest independent wealth manager, managing over $18 billion of client investments. Jonathan is both a CERTIFIED FINANCIAL PLANNER™ certificant and a CFA® charterholder.

Keeping Your Grown Up Kids Out of the Basement

Encouraging your kids to dream big is one of the great joys of parenting. But helping them implement their plans so they become financially independent adults is harder. Here are key steps to take before your kids discover the top rated hotel of all time - Le Hotel Mom & Dad

• Talk about cost of living – college graduates can often relocate anywhere they choose. Cities like New York and San Francisco are great to live in – if you can afford them. Two months of rent in San Francisco can often pay for an entire year in more affordable cities like Cleveland or Detroit. Before your kid pursues a dream job in an expensive city, discuss a budget and compare the cost of living in multiple places. If there’s a big gap between income and expenses in your child’s desired city, have a frank discussion of who will pay for that. Make it clear that credit card debt is not an option for shortfalls. If you want to cover the gap for your child, be explicit in how long you plan to do so. Having no limits will encourage your child to assume that you will always provide extra money.

• Go over how taxes work – many young people have no idea how much of their future paychecks will disappear after payroll deductions.  Help your child estimate after-tax paychecks. That pre-tax salary may sound like plenty, but be hardly enough once it arrives in the bank. Explaining how far an entry level paycheck goes is essential if your kids are going to have a realistic expectation of paying for their post-graduate lives.

• Explore funded graduate school options – educational level has a huge impact on most people’s lifetime earnings. That’s why pursuing a graduate degree responsibly is an important conversation. Many kids are not eager to leave college and join the workforce. Some may assume a costly master’s degree is a great next step. Make sure your child explores free or low cost options first. Many PhD programs offer full tuition and stipends for students (and some master’s programs do as well). Many universities offer tuition benefits for employees – your child could try out the work world by getting a university job, while earning a tuition-free master’s degree.

• Encourage saving – if kids assume they can spend every cent they’re given, why would they treat a paycheck any differently? Set up savings or investments accounts for your kids and prompt them (a little nagging isn’t always bad) to move a bit of money to the account each month. Explain that this money will be theirs to help them through a rough patch or to buy something important in the future. This encourages kids to value financial independence and perhaps to even prefer it.

We all want the best for our children.  By discussing how to transition into adulthood before the bills start piling in, you can help your child navigate life without you (or your basement) being needed every step of the way.