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© Greater Good Financial 2019


Advisory services offered through Resources Investment Advisors, Inc. ("RIA"), an SEC-registered investment adviser.  

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YOUR ULTIMATE GUIDE TO ESG INVESTING

Who is this article for??  THE AVERAGE INDIVIDUAL INVESTOR

The father, wife, husband or anyone who wants to make smart financial decisions but also cares about their impact on the world.  

Let's also clarify something else. 

 

Unless you are a DIY investor, you will probably never be 100% satisfied with any socially responsible portfolio.  Here’s why…

Your values are unique

 

Unless you are picking individual stocks, you will end up with some investments that you may not agree with. Socially responsible investing is not about finding the perfect investment, it is about giving a voice to your dollars.  

Execution > Perfection 

Who is this article for?? 

 

THE AVERAGE INDIVIDUAL INVESTOR

The father, wife, husband or anyone who wants to make smart financial decisions but also cares about their impact on the world.  

Let's also clarify something else. 

 

Unless you are a DIY investor, you will probably never be 100% satisfied with any socially responsible portfolio.  Here’s why…

Your values are unique

 

Unless you are picking individual stocks, you will end up with some investments that you may not agree with. Socially responsible investing is not about finding the perfect investment, it is about giving a voice to your dollars.  

Execution > Perfection 

 

What is ESG, sustainable, responsible and impact investing?

We will primarily talk about Socially Responsible Investing (SRI)

Let’s start by lumping the various names and acronyms associated with socially responsible investing into two categories

 

Socially Responsible Investing and Impact Investing






 

The major shared idea between both groups is that you are avoiding investments into companies that do “bad” things while purposefully choosing to invest into companies that do “good” things. 

 

Socially responsible investing (SRI) is geared more towards individual investors. The investment is focused more so on financial return like a traditional investment while also having a social or environmental impact. 

Impact investing is geared more towards institutional investors, high net worth investors and foundations. The investment is focused more so on social & environmental impact. Because these investors are not dependent on financial return for their retirement livelihood, they can accept below market rate returns in exchange for higher social returns. 


Most commonly, socially responsible investments avoid investing into companies that produce or sell things like:

alcohol  -------------------------------------------->

tobacco  --------------------------------->

 

gambling  ------------------------>

 

firearms  -------------->

oil  ----->

 

Investment techniques have shifted past exclusion only and added the inclusion element. Meaning, you are also actively purchasing companies that are engaged in such actions as social justice, environmental sustainability, clean alternative energy or women led companies.

 

A great resource to sort and filter through the various SRI funds is the USSIF (US Forum for Sustainable and Responsible Investment) list found here.   

History of Socially Responsible Investing 

We have been investing “responsibly” for hundreds if not thousands of years.  The more modern idea of socially responsible investing goes back to the 1960’s where the focus was on the growing movement of women's rights, civil rights and labor issues. 

 

During the 1970’s and on through the 1990’s, large institutions avoided investments in South Africa and actively withdrew investments in the area. This outflow of investments put pressure on South African businesses and eventually led to the end of Apartheid.

 

The 1990’s brought more focus on environmentally sustainable development and climate change.

 

The 2000’s has seen the addition of gender lens investing and an increasing focus on workplace equality.

 

According to Morningstar, assets invested into socially responsible investments has grown by nearly 600% in the last decade. 

 

Source: Vanguard Research Aug 2018. ESG, SRI and Impact Investing: A primer for decision-making

As the collective voice of Millennials grows and as the demographics of the financial industry shifts towards younger financial planners, I believe there will be a dramatic shift towards socially responsible investments.

Despite the growth of socially responsible investing, Financial Planners appear to be reluctant to embrace the idea. As a financial planner myself, I feel your pain. 

A long term misconception has existed that socially responsible investments tend to under perform compared to traditional investments.  

 

According to the US Bureau of Labor Statistics , Millennials will make up roughly 50% of the workforce by 2020 and roughly 75% of the workforce by 2030. 

 

Millennials are becoming increasingly aware of where their dollars are being spent and invested. They are also demanding more transparency about the impact their dollars are making.


Potential Problems with SRI Investing

While I believe socially responsible investing is the way of the future, a number of “problems” exist. 

 

How does one determine which investment values are important when everyone has different values? 

 

How closely do you choose to hold your values with regards to your investments? 

 

If you are against investments in big oil companies for example, do you exclude all stages of the oil refinement process? 

Do you exclude retail stores because they receive their inventory on oil consuming semi trucks? 

Do you exclude IT companies or banks that may support oil companies?














 

There is no one size fits all solution to socially responsible investing

 

Would it be a better use of your time to focus on finding good companies & sectors to invest in rather than choosing those to exclude?  (The short answer is yes, but more on this later in the performance section)

 

Will excluding investments in certain companies really impact their bottom line or inspire companies to change?

 

If your primary goal is to leave the world a better place, would you be better off investing “traditionally” (assuming you believe it will result in greater investment performance), making more money and then choosing to give more money away later?

Where can you invest responsibly? 

Let’s start by defining the two main types of accounts that you can use to invest.  Accounts that YOU CONTROL and accounts that you PARTICIPATE in.  







 

This distinction is important to understand for two main reasons

 

1) Your primary place to invest with your heart & your values is in the accounts you control.  

 

2) You may have little to no socially responsible investment options inside of your company sponsored plan.  (accounts you participate in)

 

Let’s look at these two options a bit deeper…

 

Option #1 - accounts you control. You can have these accounts anywhere.  Schwab, Vanguard, Fidelity or any big brokerage firm. 

 

Option #2 - accounts you participate in.  Bear with me through some boring details because I think this is very important to understand

ACCOUNTS YOU CONTROL

Checking

Savings

Brokerage Accounts

IRA's

ACCOUNTS YOU PARTICIPATE IN

401(k)

403(b)

Pensions

Employer Sponsored Plans

Unless you change jobs frequently (or recently), most people have a majority of their investments held in their current employers retirement plan. 

 

It is important to understand that while this is your money,

you are only PARTICIPATING in the plan. 


 

Investment options in these plans are normally decided by an investment committee. This committee has a fiduciary responsibility to manage the plan investments “for the exclusive benefit of participants and beneficiaries, and with the care, skill, prudence and diligence of a prudent expert.” 

 

Additionally the the Department of Labor states that these fiduciaries “may not use plan assets to promote public policy causes at the expense of participants and beneficiaries financial interests or retirement security.”  

 

 

While socially responsible investments are not new, there is a stigma that they are higher cost & have lower returns than a comparable traditional investment. Investment committees are very hesitant to take risk when they could be sued. 

 

The “risk” in SRI investing is that it is “outside of the norm.”  It’s not the old school traditional investment that most investment committee members are used to. As a result, few investment committees choose to add socially responsible investments in your company’s retirement plan.  

 

This means that for most of us, our primary retirement savings account has little to no chance of having a social impact! 

Translation - someone other than you is choosing your investment options. These people have a personal liability to pick low cost, good returning investments for you. They cannot promote public policy causes or they risk being sued. No one likes being sued, so most investment committees tend to play it safe and stick with more traditional investments. 

The good news is, the industry is changing. While the department of labor's position on socially responsible investments is relatively opaque (and thus hard to translate for the investment committee fiduciaries), they now allow the fiduciary (the investment committee) to use ESG factors as a “tie-breaker” when choosing among funds that have similar performance and fee structures. 



 

 


 

I believe there is sufficient research showing that socially responsible investments can offer similar growth potential and better risk adjusted returns than traditional investments.

 

Meaning, SRI investing could actually protect those fiduciaries from a lawsuit even better than a traditional investment. 

 

 

Consider this. In 1999 only 17 hybrid cars were sold in America.  In 2015 nearly 500,000  hybrid vehicles were sold! Now the pinnacles of the automotive industry, Porsche, Ferrari and others are embracing hybrid technology in their absolute best, top dollar vehicles.  

 

What once was looked on with skepticism is now embraced as the future of the automotive industry. 

 

Socially Responsible Investing will have this day soon enough... 

If we really want to change the world and allow our investments to make an impact, we need to speak up and let our voice be heard.

Talk to your HR representative.  Talk to them often! Share information with them! 

Socially Responsible investing can reduce risk 

There is plenty of data available that allows us to look at a company’s cash flow, book value, assets vs. liabilities etc. We can use this data to decide whether or not a company is a good financial investment.

 

Socially responsible investment analysis can go a bit deeper into the analysis of a company’s worthiness of investment.

 

Traditional financial analysis has a difficult time determining how exposed a company is for internal fraud for example. I’m not saying that a deeper ESG analysis of a company would expose this risk necessarily, but it does tend to take deeper look at a company’s governance practices.

 

While you can never entirely eliminate intentional deceit or corruption, analyzing a company with a socially conscious lens can provide a different picture when looking to make an investment. This data can paint a picture of a company’s ethical business practices.

 

A company’s ethical behaviors may speak much louder than their financial behaviors

Consider companies like Volkswagen, Wells Fargo & Equifax. Many socially responsible investment funds did not include these companies in their portfolio. Not because these company’s financial data looked bad, but because their ESG data showed lower governance measurements.

 

Research shows that companies with higher ESG ratings (particularly higher governance ratings) tend to have lower earnings volatility. These companies also tend to have a lower amount of public controversies and scandals. 





 

We as humans tend to feel the pain of losing, two times more than we feel the joy of winning.  As in, you would remember a $1,000 loss much more vividly than a $1,000 gain in your portfolio.

 

Lower earnings volatility can equate to a more stable portfolio. When your portfolio is more stable your emotions tend to be more stable also, allowing you to make wiser financial choices

 

If you have a portfolio that tends to be more stable and you believe you are doing good by investing into companies that are improving the world,

 

Companies with higher ESG ratings (particularly higher governance ratings) tend to have lower earnings volatility

I believe that you will be better mentally prepared to make smart financial decisions in poor market conditions.

Performance

I believe that many financial planners are the barrier to growth in the socially responsible investment world.

“Funds designed to exclude stocks, such as the sin sectors — no tobacco, alcohol and guns — don't tend to measure up.”

I did not want to take the amount of time, effort and energy to re-learn another way of investing.

Performance. Let’s face it, we’re investing in the stock market for performance right? We are allowing ourselves to take on investment risk in the hopes of investment reward.  

As a professional in the financial industry, one of the main objections related to socially responsible investments has always been, “if you’re going to limit the companies you can purchase by excluding them, you’re going to limit your performance.”  

Trends show that consumers have a high amount of interest in socially responsible investments. However there is a low amount of interest by financial professionals.

 

In the early days of socially responsible investing, the stigma of underperformance rang true because investment options were mostly exclusion based.

 

We now have socially responsible funds with 10+ year return data and a number of comprehensive studies related to the performance of socially responsible investments. 

 

A 2015 study by Deutsche Asset & Wealth Management and Hamburg University   found that across 2000 empirical studies on ESG performance, 90 percent show a positive correlation between ESG and corporate financial performance.

 

CNBC reviewed years of Morningstar data   and stated “on the performance of socially responsible funds versus traditional funds and benchmarks and found that there is no significant performance drag.”  

 

But…

 

There is a caveat

 

Jon Hale, head of sustainability research at Morningstar, said:

 

“academic research has shown that stock exclusion tends to be a negative factor in performance, while companies that score highly on ESG metrics (environmental, social and governance) show performance that is consistent with traditional benchmarks.

 

"The ESG performance of companies appears to be something that can be used to generate value in a portfolio; traditional exclusion can be a drag," Hale said.

 

In other words, it is better to identify reasons to invest into a company rather than focus on reasons to avoid owning that company. 

 

This is one reason why I believe that passive funds are not the best way to invest responsibly.  You need an active manager to do this properly. 

 

As the Deutsche Asset & Wealth Management   study states, “ESG outperformance opportunities exist in many areas of the market. In particular, we find that this holds true for North America, Emerging Markets, and in non equity asset classes.” 

Here is a peek “behind the curtain” from a financial planners perspective...

 

I’ve spent over 12  years in the financial industry and many more years with an interest in investments. Within the last 3-4 years I finally convinced myself through enough research and evidence that passive investing is a better approach to investing. When I opened Pandora’s box of socially responsible investing and came to the conclusion that active investing is the better way to go, I almost shut this box completely. 



 

I believe many other advisors are in this same situation. 

 

Your financial planner is likely (hopefully) acting in a fiduciary capacity. Meaning that they need to believe in both the merits of socially responsible investing, but also believe that it is in your best interests

 

Now that we have 10+ year investment track records, a sufficient number of industry studies, more consumer awareness and better reporting, the myth of socially responsible investments under performing traditional investments is starting to fade away. 

 

I personally believe that socially responsible investments offer investment performance comparable to traditional investments. At a maximum, socially responsible investments can offer greater growth potential with better risk adjusted returns. 

Social Returns

Social returns are much harder to measure. Much of the socially responsible investment measurements can be fairly subjective. There is some liberty in the interpretation of the data.

 

If you choose not to invest in oil producing companies and instead invest into alternative energy, what exactly do you measure? 

 

How much less oil is consumed as a result of your decision? 

How much the alternative energy sector has grown? 

How many more trees have been saved? 

Air or water quality? 

And how exactly do you tie all of that data back to your choice to invest or not to invest in a particular company? 

 

 

 



 

 

As mentioned earlier, one end of socially responsible investing spectrum are SRI investments. The other end is Impact investments. 

 

 

 

Impact investments purposely invest into companies or projects that have a specific (measured) impact focus. 

 

With impact investments, environmental or social return is usually the primary focus with a financial return as a secondary concern.  In this case, the social return tends to be measured more accurately than a traditional socially responsible mutual fund or ETF.

 

However, the "average" retail investor typically does not use impact investments.

For a traditional socially responsible investment available to the average investor (mutual funds or ETF’s), the social return is not measured in near as much depth.

 

The investment management teams primary concern is building a strong investment fund of solid companies that fit their social guidelines, not in measuring the social return of these companies. 

 

As a result, you are going to have to focus more on the intention behind your investment decisions. You are making a choice to invest with your values.  

As you can see, it is very difficult to measure the social returns of a socially responsible investment.

Emotional Response may equal better results

Behavioral finance has become a very important aspect of investing over recent history. It has shown us how much power our emotions and behaviors have over our investment decisions. 

 

When you look at the return history of a particular mutual fund,

 

there is generally a difference between the investments stated return over a given time period and the actual return of the typical investor. 

 

For example, say you look at mutual fund XYZ’s return over the last 10 years. Let’s say the funds average return was 10% per year. One would conclude that if you had been invested in the XYZ fund over the last 10 years, you would receive this same 10% return. 

 

In reality however, the typical investors average return is less than the funds 10% return. You have to factor any buy or sell trade costs, commissions and account fees paid. Many investors will either sell, or buy shares during that 10 year period for a number of reasons. 

 

This results in a return for the investor that is likely less than that 10% return that the XYZ fund experienced.  

A study by Derek Horstmeyer,  Assistant Professor at George Mason University, concluded that there can be a “return gap” between traditional investors and socially responsible investors. 

Alternatively, investors in S&P 500 index funds and those using socially responsible funds have the lowest return gaps of 0.77% and 0.93%.

If you have strong conviction in your investments, you can feel more at peace and more emotional stability which can lead to more rational investment decisions.

 

Poor financial decisions is the largest contributor to the return gap. 

Horstmeyer’s study showed that for a typical Large Value & Large Growth investment, the typical investor return gap was 2.16% & 1.93% respectively. Meaning, if these particular investments returned 10% over a 10 year history, the investors actual return was around 7.84% & 8.07%.

 

 
 

 

 

 

 


 

In short, the behavioral decisions associated with making a socially responsible investment can equate to a better return for the investor, regardless of whether or not there is an actual “performance difference” between a socially responsible investment and a typical investment. 


 

Imagine we’re in another market like the the recent Great Recession. The market stinks. Everything you see in the news says things are only going to get worse. 

 

Your financial planner keeps telling you that selling when the market is down is one of the worst mistakes you can make. You know this is true, but as the market loses more and more, your emotions start to take over.

 

You don’t want to see your hard earned savings go to zero so your start to feel a bit more panicked.  

 

But you remember that you are invested in companies that are doing good in the world. Your investments are making a positive impact.

 

If you decide to “cash out”, that decision now affects much more than just you. You are now making a choice to pull your investment out of companies that are doing good in the world. This may be enough of an emotional barrier to stop you from cashing out on your investments. 

 

I’m not saying that socially responsible investments will directly result in better investment performance.

What I am saying is: 

We’ve talked about WHY to use Socially Responsible Investments

 

Now let’s talk about some of the mechanics of what makes a Socially Responsible Investment.

If investment details cause you to yawn and daydream....

 

You may want to just jump to the conclusion.

Corporate ESG Data Reporting 

 

ESG data is one of the most common measurement factors associated with socially responsible investing.  This is the reporting and measurement of a company’s Environmental, Social and Governance impact.  

 

With traditional financial analysis, it is relatively easy to look at a company's financial records and extrapolate financial data. Clear and standardized accounting practices exist for this.

 

ESG data can be skewed because the data itself is more subjective in nature. The good news is, as socially responsible investing has become more popular, more companies are taking notice and reporting their sustainability data.

 

According to Bloomberg, more than 11,700 publicly traded companies worldwide disclose ESG indicators . These measurements are becoming so common that Morningstar has integrated ESG measurements into their ratings in the form of the Morningstar sustainability globes.  

 

However, one problem is that a company can have different ESG ratings from multiple rating agencies.

 

As stated by Jon Hale head of sustainability research at Morningstar,

 

“this is not surprising because no standard definition of company sustainability exists.” 

 

While it is good that more companies are beginning to report their sustainability measurements, the reporting and measurement of this data is not yet standardized.

 

Consider this example…

 

I’m a car guy. I drive a gas hog, V8 powered car. The library near my home has parking spots designated for “fuel efficient vehicles only.” 

 

BUT, the sign does not give a measurement or definition stating what “fuel efficient only” means. It is open for interpretation. I have on occasion been known to park in these spots chuckling to myself. If someone confronted me, I can always tell them “I burn 100% of the gas I put in my car.” 

 

Because ESG measurements can be similarly subjective, it can lead to misrepresentation of the reported data.

 

There is also a distinction between companies who are sustainably focused.  IE, sustainability is part of their company mission, and companies that disclose ESG data because we as consumers demand it.

 

I’m not saying this is common or problematic. I’m merely trying to point out that while we have come a long way in the reporting and measurement of ESG data, we still have a long ways to go.

Negative Screening 

Historically socially responsible investments were primarily derived by “screening.”  More specifically, negative screening. The investment portfolio excluded (screened) companies based on social and environmental data. An investment manager may exclude tobacco, firearm, alcohol or oil companies.







 

One of the main stigmas associated with socially responsible investment has been tied to negative screening. The thought is, if you have 100 companies to invest in and you exclude 30, you are limiting your investment options and thus, limiting your potential investment performance.

 

This stigma stemmed from reality. In short, negative screening does potentially limit performance. The long answer we already covered in the performance section.

 

Let’s look at this practically (if a bit nerdily)

 

You have a $100,000 investment portfolio. You’re young so you’re in a 80/20 portfolio and using the Vanguard Total Stock market index fund for the 80% that is in stocks.

 

As of 11/30/18,  5.2% of this fund was invested into oil & gas companies. This means of your $100k, roughly $4,160 of your portfolio is invested into oil and gas companies. ($100k x 80% x 5.2%). 

 

As of 12/31/18, this fund invested in 3,545 companies according to Morningstar. That means roughly 184 potential oil and gas companies in this 5.2%.

 

If you chose a similar socially responsible investment that excluded oil and gas companies, each of these 184 companies would only lose out on a $22 investment because of your choice to invest responsibly.

 

  This math is not perfect but it is meant to paint a picture.  

 

Divestment

Divestment is similar to negative screening in that you are excluding certain investments or certain sectors The difference being,  divestment is the act of removing an existing investment or investment class from a current portfolio. This is a step beyond negative screening.

 

Normally divestment does not affect the individual investor, it is more prevalent in large and existing institutional based investments.

The CalSTRS (California State Teachers Retirement System) pension account divested more than $200 million of investments it held in tobacco investments. As you can see, divestment can make a greater impact. Especially when larger institutions pull significant investments out of a company or sector.

 

As an individual investor this usually won’t be something you deal with on a regular basis other than when you originally make the step to move from traditional investments to a socially responsible portfolio. As a result, that’s about the extent that we’ll cover this topic for now. 

Negative screening CAN have an impact, but I believe there are more effective ways to use socially responsible investing to affect change.

Positive Screening 

Positive screening involves making an active a decision to invest into companies that have a positive social impact. While this may sound like it should already be happening in a socially responsible investment, remember that socially responsible investing primarily revolved around negative screening historically. 

 

Think of companies like Patagonia, Toms shoes or other social enterprises that build a company not only for shareholder profit, but for global change.

This may also include companies with positive ESG measurements. 

 

Positive screening is often times combined with negative screening. 

Active vs Passive Investments

Picking a ripe avocado takes skill because the data points are subjective, they are less clear. Picking a ripe avocado is not a mechanical decision. 

I am not going to cover the entire active vs. passive debate in depth, merely how it pertains to socially responsible investing. I am a firm believer in passive investments. There is enough research (in my opinion) to prove that passive investing has historically outperformed active investing. 

 

BUT, as I’ve already stated earlier,

 

 

 



 


I believe that in order to make the most impact with your investments you need a professional to actively search through company data to exclude companies that a passive funds screen may miss.

 

You also (ideally) want this team to actively invest into companies and sectors that are doing the most good in the world. 

Socially responsible investment managers are looking to buy companies that do good in the world. Companies that can sometimes be in newer (possibly higher) growth sectors. They also have a better chance of effectively screening a companies ESG ratings for better risk adjusted returns

Consider this example.  Buying a power drill vs. buying an avocado.  (a logical comparison right??)

 

 

 

 

 

 


Let’s say I want to buy a new cordless drill. I could buy a Milwaukee, Dewalt, Ridgid or any other big name drill, I’m probably not going to screw it up. (pun intended) 

 

Any of these drills will be sufficient for a diy’er like me. It’s a mechanical purchase and the drill produces a mechanical return.  


Now let’s say my wife asks me to go buy some avocados. Any husband who’s ever been given this challenge can relate. Picking a good avocado is much more subjective. You have to look at it’s color, how it feels etc.  


Much like traditional financial analysis vs. socially responsible analysis, measuring & interpreting ESG data does not always fit well with a mechanical exclusion based screen.

 

Meaning if you want to make the greatest impact with your investments, you need to use an actively managed fund. I do not believe that negative screening is sufficient to build a truly purposeful socially responsible portfolio. 

 

Active managers can read into that subjective data to read between the lines on how a company is governed.

 

They have a better chance at finding the ripe avocados. 

 

Like we talked about earlier, this can be a good risk reducing measure. Yes, an active fund will likely cost more than a comparable passive fund but you may have a better risk adjusted return with an actively managed fund.  

While active funds do tend to cost more than a comparable passive fund, I believe that the increased cost could be offset with the potential for increased performance.

 

This increased performance could come from better governance screening, better selection of companies and also our emotional reactions discussed earlier. 

There are ways to keep your costs low even if you use active funds such as buying institutional shares of these same active funds. For example, our actively managed socially responsible investment portfolio ranges 0.41% to 0.58% which is in line with the 0.52% average investment cost according to Morningstar.

In order to make the most positive impact and have the best risk adjusted returns, I believe you need to use an actively managed investment. 

Shareholder Advocacy

An effective shareholder advocacy campaign can actually change the way a company operates. 

For the better.

Meaning, as we start to invest more money into socially responsible investments, the people managing these investments will have more leverage to influence a company’s environmental and social impact.

Shareholders of companies can sponsor recommendations to the company (in the form of shareholder resolutions) at the annual shareholder meeting. Shareholder resolutions can be successful at inciting change within the company. 

 

Shareholder advocacy is becoming more powerful from within actively managed socially responsible funds.If you are using passive exclusion based investments you do not have the option to promote change from within the company because:

 

you don’t have any ownership in a company you’ve excluded. 

 

An active management team can cast votes for the board of directors. They can engage a companies board of directors. They can attend shareholder meetings and voice their opinions. 

That’s a win...

According to USSIF (The Forum for Sustainable and Responsible Investment), from 2016 through the first half of 2018, 165 institutional investors and 54 investment managers collectively controlled $1.8 Trillion in assets and either filed or co-filed shareholder resolutions on ESG issues. 






 

That’s a bigger win...

Green Century funds has been a leader in the actively managed mutual fund community in shareholder advocacy. Green Century has engaged more than 200 companies on a variety of issues and has played an instrumental role in countless environmental successes.

 

These range from convincing the world’s largest palm oil producer to stop burning forests in Southeast Asia to securing commitments from Starbucks and Jack in the Box to only serve poultry raised without the routine use of medically important antibiotics in their U.S. locations by 2020. 

 

Let’s look at the other side of the coin. The 12 largest providers of index mutual funds and exchange traded funds have been very active with engaging and voting to protect shareholder value. 

 

The largest “traditional” index funds (non SRI) are enormous shareholders of countless companies. These index fund companies (Vanguard for example) have been engaging in shareholder advocacy in increasing amounts. 

 

Vanguard could have an ENORMOUS environmental, sustainability and governance impact if it pressured companies through shareholder advocacy. However, to date most of the advocacy these index funds have enacted has been to “protect shareholder value”. 

 

Meaning that their advocacy may not be geared toward any specific ESG values.  

Expenses 

Actively managed socially responsible funds have about average expenses while socially responsible ETF’s (passive funds) have slightly higher expenses.

Meaning that socially responsible investments are likely to lower their fees in the future as they gain more investable assets.

A Morningstar Study states, “on the whole, the distribution of sustainable fund expense ratios is similar to that of the overall fund universe for open-ended mutual funds, but higher for ETF’s”  






 

As an investment fund acquires more invested assets, it has more purchasing power and can receive lower costs of doing business. Often times an investment fund will pass these lower costs onto their investors by lowering the expense ratio. 

 

Of the 235 funds Morningstar categorizes in the ESG category, 100 of these funds have less than $50 million in assets. In the investment world, $50 million is small potatoes.

 

Conclusion

 

Humans are unscientific. We rarely react in the ways necessary to achieve the same results as in scientific data. 

This is why we created our unique business model. It is designed to motivate you to take action and do the most good in the world.

I believe that there are three main barriers to explosive growth in this sector. 

 

1) The under performance myth associated with socially responsible investing . 

2) The majority of the financial planners seem to disregard socially responsible investments and choose not to recommend them to their clients. 

3) Retirement plan investment committees are even slower to embrace socially responsible investments than the financial planners. 

 

There is now enough historical data and research to show that there is no noticeable underperformance associated with socially responsible investing.

 

In fact, I believe the data shows that there is a possibility for increased performance through positive behavioral decisions, more stable emotions during tough markets and because socially responsible investments may tend to be invested into more growth oriented investment sectors.  

 

However, I am also a believer that whether you choose investment option A, B or C, you will likely end up at the same finish line with similar results. 

 

Like we learned with the “return gap”, investor behavior tends to even the playing field between many different investment philosophies. 

 

 



 

According to a Vanguard Study on Advisor Alpha, the value a financial planner provides is not so much in investment decision but much more so in the other “non investment” aspects of financial planning.

 

Behavioral coaching, proper asset allocation and retirement income strategies can add up to 1.5% of net return to an investor.  

If you really want want to invest with your values, you need to make a commitment to do so. Find a socially minded financial planner and get started. This will most likely be your point of highest failure.

 

For many, the idea of finding and choosing someone to guide them financially ends with no action. Add to this that there are a relatively small amount of financial planners who focus on socially responsible investments (and an even smaller amount who do it effectively).  This is a recipe for good intentions with zero results. 


 




 

Finally, talk to your employers benefit specialist about getting socially responsible investments added to your employer plan.  Talk to other employees and ask them to do the same. Your retirement plans investment committee will not take action to add socially responsible investments unless they hear the need, loud and consistently from you! 

Why we believe in our model 

I believe the #1 downfall (of all financial advice) is that the results of your decisions are largely intangible.

Socially responsible investmenting does have some flaws.  

You have different values than everyone else. Meaning, unless you have a completely customized portfolio, any socially responsible investment portfolio is not going be perfectly aligned with your values

 

The impact made from socially responsible investments is very difficult to measure. Unfortunately for now, you will mostly be limited to anecdotal evidence that you are making a difference with your socially responsible investments. 


 



 

Meaning, you get virtually zero “reward” or gratification for making good financial decisions.

 

We are emotional beings. 

Our emotions drive many of our decisions. 

 

I believe that if we can combine positive and inspiring emotions with our investments by seeing a TANGIBLE IMPACT ON THE WORLD, 

we can make better financial decisions. 

These financial decisions can leave us with more wealth and more financial independence.

More wealth leaves us with more ability to change the world. 


Our solution starts with the Impact Trifecta

 

1)  We charge you less than the industry average

2) We have socially responsible investments as an option alongside traditional investments

3)  We donate 20%* of our revenue to a few awesome nonprofits.

 

*Full disclosure – we are not donating 20% of our entire revenue right now. We are transitioning the current financial planning practice to this donation business model.

Thank you for reading... 

Questions, comments and feedback are appreciated.  

Resources:

Comprehensive Investment List 

SRI Basics 

As You Sow - Learn more about shareholder advocacy

Fossil Free Funds - Enter your investment ticker to see your exposure to fossil fuels. 

Morningstar Sustainability - everything you want to know about sustainable investing. 

 
 

1  Jon Hale, Ph.D., CFA (2018). Sustainable Funds U.S. Landscape Report, Morningstar

 

2 Morgan Stanley 2017, Sustainable Signals, New Data From the Individual Investor

 

3 CFP Professional Demographics 12/31/2018

 

4 US Bureau of Labor Statistics, Fun Facts about Millennials 3/2018

 

5 Bureau of Transportation statistics, Sales of Hybrid Vehicles in United States 

 

6 Blackrock, 2018, Sustainable investing: A ‘why not’ moment 

 

7 Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment

 

8 Constance Guestke, CNBC (2017) The truth is finally starting to emerge about socially responsible investing

 

9 Jina Penn-Tracy (2018) Caring about the world makes you a better investor 

 

10 Bloomberg, ESG Data 

 

11 Patty Oey, Morningstar Research Services (2018) Fund Fee Study: Investors Saved More Than $4 Billion in 2017

 

12 USSIF (2018) Report on US Sustainable, Responsible and Impact Investing Trends

 

13 Green Century Funds (2018) Shareholder Advocacy 

 

14 Vanguard Research (2016) Putting a value on your value: Quantifying Vanguards Advisor Alpha

 

15 Bob Veres (2017) 2017 Planning Professional Fee Survey 

 

16 We donate 20% of the revenue on any New clients. We are using any new revenue received to offset the implementation of this new fee and donation model for our existing clients. 

 

17 USSIF 2018 Report on US Sustainable, Responsible and Impact Investing Trends