On Earth Day 2024, United Church Funds Looks Back at Fossil-Free Investing, and Pushes Forward

The mandate was clear in 2013: Divest from fossil fuel companies. That was the overwhelming consensus at General Synod 29, meeting in Long Beach, California, where the United Church of Christ (UCC) became the first religious denomination to call for such action. In response, United Church Funds (UCF), the UCC’s primary investment manager, created the Beyond Fossil Fuels Fund (BFF), a global equity fund that screens out investments in corporations that produce or explore for fossil fuels, in 2014. Shortly thereafter, UCF created the Beyond Fossil Fuels Balanced Fund, which added a fixed income allocation emphasizing green and sustainable bonds.

“So much has changed since then,” said Matthew Illian, UCF’s Director of Responsible Investing. “Back in 2014, there was limited data available on carbon emissions production by source, and corporations were not expected to disclose this information. Now, there are regulations that require many large corporations to begin reporting carbon emissions, and there are data researchers providing reasonable and/or more reliable estimates based on energy consumption.”

Ten years after the launch of BFF, which we recount in a special report in the UCC’s 2023 Statistical Profile, and with better access to data and disclosure, UCF has updated the equity strategy of BFF to align with Net Zero goals – that is, cutting greenhouse gas emissions (GHG) to as close to zero as possible.

UCF’s BFF equity manager, PGIM Quantitative Solutions, has enhanced its strategy to include a 50% reduction in carbon emissions intensity relative to its benchmark. Carbon emissions intensity is a measurement that helps compare carbon footprints across companies by controlling for sales revenue.

“This means, for example, that a company that sells significantly more cement will not be graded more harshly than a competitor that sells less cement,” Illian explained. “Carbon intensity measures carbon emissions per dollar of sales revenue.”

On the fixed income side, managed by the Core Fixed Income team of the Pension Boards UCC, increasing allocations to green bonds also helps to reduce carbon emissions and carbon intensity. Currently, just over half of the fixed income portfolio consists of green, social and sustainable bonds.

Since inception ten years ago, both BFF funds have consistently outperformed their benchmarks and peer groups, proving false the perception that responsible climate strategies harm investment performance and returns.

“In managing the portfolio, we’re going to have a carbon emission intensity score for every stock in the universe. And we’re going to marry that with expectations from our stock selection model, where we’re looking for companies with high return expectations,” said Stacie Mintz, PGIM Quant’s Managing Director and Head of Quantitative Equity, in a recent video interview with UCF’s Institutional Relationships Executive, Stacey Pettice. “This is much better than more naïve approaches that would just exclude certain companies and re-weight arbitrarily.”

The takeaway from all this, Illian explained, is that responsible investing in general and climate investing in particular is an evolving field. “We are in no way done, when it comes to our strategies,” he said. “And as we learn new and better ways to reduce our carbon footprint, our investors should expect more changes to come.”