3 Simple Steps to Divest on Earth Day

By Markets Fool.com

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Source: U.S. Government

We're all investors, which makes us divestors, too. We decide what we won't invest in, or we decide what we won't invest in any longer. For those looking to make their money fossil-fuel free or environmentally friendly, here are three simple steps to divest on Earth Day.

Divestment 101
Divestment is a conscious decision to say no to equity of a certain company, type, origin, or whatever other indicator you want to use. The fiscal act first came to fame in the 1980's, when citizens called for a divestment from South Africa and its apartheid movement, ultimately resulting in 26 states, 22 counties, and over 90 cities agreeing to take action against corporations conducting business in South Africa.

More recently, divestment has gained ground as a tool to--either symbolically or economically-- signal the rejection of corporations engaged in anything anyone deems to be environmentally unfriendly. For some, that could mean Big Oil like ExxonMobil. For others, that could mean coal companies like BHP Billiton. For most, the divestment movement has centered around becoming "fossil free" and is loosely defined as not investing in the top 200 fossil fuel (coal, oil, or gas) companies by reserves size.

But whatever your intent, if you've got a divestment idea in mind, here are the three most important steps to make it happen this Earth Day.

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1. Assess Current Investments
This seems like a simple step, but it's one of the easiest to overlook. While individual stocks are identifiable, what about those mutual funds? Index funds? Do you ever open those letters explaining what the heck is in your 401(k)?

This isn't just an important divestment step -- it's an important investment step. Understanding your entire portfolio is essential to making the best financial decisions possible. While full information may take a while to come by, start by checking out Morningstarfor a simple-to-use interface that allows you to examine the top 25 holdings of any fund you own.

Once you've figured out your finances, you're ready for the next step.

2. Set Some Rules

Source: Flickr; Red Mum

Here's the fun part. Now you get to set some rules for yourself. If you're having trouble getting started, you can take a look at what others have already done. Check out fossilfree.org for a list of those 200 fossil fuel companies, Stanford University's decision to divest from coal, or 10 cities' decisions, from Ithaca to Seattle, to divest from fossil fuel investments.

When you're setting rules, it's important to keep them clear and nonconflicting. Luckily, publicly traded companies are filled with good data, so you can take your pick from powerful metrics. While targeting corporations with large fossil fuel reserves is one tactic, it may make more sense to divest from companies with the largest current sales or profits from fossil fuels, since they may be more tied to present-day fossil fuel extraction than those with the largest reserves.

You might also create some hard stops. Is the corporation invested in hydraulic fracturing (e.g.,Halliburton), a process you believe to be environmentally reprehensible? Divest.

Likewise, you may want to give some freebies if you value a company's desire to change. Does this fossil fuel-heavy company also invest in renewable energy (e.g.,Southern)? Keep it in.

For each rule, it's important to set a timeline, as well. Divestment doesn't have to happen overnight, and your rules can be slotted, accordingly. For many divestment strategies, the immediate step is to freeze new investments in your off-limit companies. Then steadily divest from all off-limit companies, either as stocks or as parts of funds, until you're entirely free in five years' time.

3. Divest ... but Reinvest

Source: EIA.gov

Divestment closes investing doors -- but it opens others, too. Before you divest, it's vital to know how you want to reinvest. For those who choose to exclude certain stocks, reinvesting can simply mean expanding your normal investment to those stocks that were "next on the list" or investing a bit more in each stock already in your portfolio. By way of example, the Fossil Free Index US excludes the top 200 fossil fuel companies by reserve size and stocks up on everything else in the S&P 500 , and on a historical five- and 10-year horizon, its returns have been right alongside the S&P 500.

You can also consider pro-social investments, although it'll be increasingly important to consider diversity. There are thousands of fossil fuel stocks, but only a handful of investment-worthy renewable energy stocks. But for those who truly believe our future is in alternative energy, it makes perfect sense to stock up on First Solaror SolarCitywith all that extra cash.

Divest on Earth Day
Every good investor has an investment strategy, and many of us have already "divestment" in certain stocks: no small caps below $200 million, no equity not listed on an OECD country stock market, no corporations with excessive CEO compensation, et cetera. Extending that list to the same set of morals we live our lives by can be an exciting way to invest money in that which we believe, all the while knowing we're not supporting that which we don't.

The article 3 Simple Steps to Divest on Earth Day originally appeared on Fool.com.

Justin Loiseau has no position in any stocks mentioned and is currently on a divestment strategy. The Motley Fool recommends Halliburton, SolarCity, and Southern Company. The Motley Fool owns shares of ExxonMobil, Halliburton, and SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.