Do you want your investments to align with your personal values? If so, you may be interested in socially responsible investing!
In this episode of Agent of Wealth Podcast, Marc Bautis explains socially responsible investing and how to use environmental, social, and governance (ESG) investments in your portfolio.
In this episode, you will learn:
- The major drivers of ESG investing.
- How to use your investments to influence change.
- Which large companies are participating in socially responsible investing.
- How ESG investments can help your company grow and gain popularity.
- And more!
Tune in now to learn about socially responsible investing and how to use ESG investments in your portfolio!
Resources:
Bautis Financial
Hello and welcome to the Agent of Wealth with Marc Bautis of Bautis Financial. Today we’re talking about using ESG investments to ensure your values are aligned to what’s inside your portfolio.
Aric: It’s a wonderful day and I’m excited to talk about ESG investments. What does the acronym ESG stand for?
Marc: ESG is a type of strategy that focuses on investing in your values around the Environment, Social, and Governance. But before we actually dive into what that is and why it may or may not make sense let’s just take a step back and talk a little bit about investing in general.
For a lot of people investing is about generating alpha, or beating the market or a benchmark. But ultimately when it comes down to it we’re really trying to use these investments as a driver to be able to hit our financial goals.
But then what if you could if you could have your values align with your investments. ESG is a way that you could do that and I thought it would be a great topic to talk about today.
Aric: Yeah I love values based investing. I had not heard the term ESG before so this is new to me and I’m excited to dive into it. Where should we start today with this?
Marc: Some of the other names for ESG is Socially Responsible Investing and Sustainable Investing.
How To Influence Change
There are three main ways that we can influence change with respect to our values.
- We can donate money to a cause, charity, or even political candidate that we think is aligned with what our beliefs and values are
- The second way we can influence change is by protesting. A protest can be as simple as using a member owned credit union rather than you know a big private bank that may have created fake accounts for their clients. Or obviously we know protesting can take a different form to where it can be much more aggressive.
- The third way is through our investments. Now you can actually say well I don’t want to invest in that particular bank or all banks. You can essentially screen out or screen in any value you have to make sure that your investments align to it.
Aric: Yeah well that’s fantastic and I think it is so easy for us. Well not necessarily so easy because we have to do a little bit of research on our own. But it’s easier to do this with our wallet. And I don’t know where that would fall on your in the three categories you were talking about but if I’m driving down the street I have choices of where to shop right and I can say OK I don’t want to shop there you know because they do certain things that I don’t like maybe it’s a mechanic that you know has ripped off a few people you know ripped off some of your friends or they’ve got some advertising that seems like a bait and switch. They just don’t seem real honest. I’m not going to give my money to that company to change my oil or change a struts on my car or whatever. I’m going to find a different mechanic that I would rather spend my money with. That is doing good things right.
Marc: That’s true and an example that came up recently was there was a gas station that during a recent hurricane that we had who raised the price of gas and people were saying they were price gouging. And now people said you know what. I’m never going to go to that gas station again. So that’s exactly what you’re saying about how you can influence change with our with our wallet. But most people don’t realize that you can actually do it with your investments too.
Now you can actually align with other investors with these same values. That little amount that you thought was in the in your IRA that wouldn’t have a difference. Now all of a sudden you’re part of a billion dollar fund that actually can influence change. That’s one of the drivers and we’ll talk about a couple more drivers of ESG investing. Now people are feeling that they can actually make a make a difference with this.
Aric: Just imagine if everyone took their investments out of a company that had some labor issues. There may be some sketchy labor abuse because they are in some other country using children and paying them just absolutely garbage wages. Can you imagine what would happen if every investor said I’m not going to stand for that. I know they’re not in our country. I know that it’s not directly in my neighborhood but that’s still wrong. And they took all their investments out of that company. What would that say to that company. Do you think that they may change their labor practices based on that?
ESG Investing could take on any area that you have a value with. Another one that we are finding very popular is with companies and what they do with their client’s data. We give all our data to all of these different companies and who knows what they do with it. And we’re finding out that it’s being sold all over the place and people don’t like that. So you have the ability to vote with our investments on what they do with our data.
The E stands for environment which could take into account things like climate change, water scarcity, pollution and waste, clean-tech renewable energy. This is where ESG Investing started probably 20 years ago. But it’s gotten more and more broader over time In the social area you have your labor policies, your relations, product liability. A company may put out a product that caused harm. An example that we can look at is Monsanto where people don’t like the fact that they’re genetically growing this or growing that and you don’t want to invest in that type of company. You can say I don’t want to invest in Monsanto stock and if you have a portfolio of just individual stocks it’s very easy then to say OK we won’t purchase Monsanto stock. But if you are using mutual funds or ETF’s as your investing vehicle Monsanto is part of these larger indexes and it’s naturally just going to get into those funds. ESG investing or ESG specific funds allow us to filter out those types of investments. It may be a Monsanto, or maybe you don’t want an Exxon or Chevron or oil company in your portfolio. Now we have the ability to actually filter those out.
We mentioned how ESG started with the E on the environment and a lot of times it was political. But it’s it’s really grown since then where you know it doesn’t have to be. it could be a cause that you’re in to. Some people are very much into health, nutrition, and fitness. And they have come to me and said I refuse to invest in McDonald’s or Coke or Altria. And we are able to ensure that their investments do not have any of those companies in it.
How To Get Involved In ESG Investing
There is a couple of ways that someone can get involved in ESG Investing.
- They may want everything in the ESG and they don’t care. They are so interested in the overall impact of it that they insist that all their investments fall on this ESG criteria and we will cover exactly what that is.
- Some more say they’re interested in ESG but they don’t they don’t want to sacrifice performance on their investments. That’s usually the first question I get when I talk about the topic with someone. They say it would be great to invest what their values are but is my performance going to take a hit. Well we’ll talk about some of the common ESG objections and performance is obviously the first one that comes up.
Aric: You and I talked a little bit about this before the podcast but I work with a lot of groups through faith based or biblically responsible investing. The beauty of it is that most of the time you don’t have to sacrifice performance. A lot of these groups that are putting out these biblically responsible mutual funds are value based and they are doing reall, really well. And if you think about the mentality of that, the mindset is that if more people are supporting companies that are doing good for the environment, good for social responsibility, and good for all these different things that we’re talking about today how much better are those companies going to do when they have more support.
And it’s it’s almost a trickle down or ripples in a pond kind of thing. A lot of these funds do as well or outperform other funds that they would normally be in. So yeah it is definitely an objection that people bring up immediately because they don’t want to sacrifice that.
ESG Performance
Marc: I think the performance question was, was definitely valid 20 to 30 years ago because of the way ESG investing worked is that you would you would just exclude certain sectors and certain industries and all of a sudden that would have an impact on performance. But the screenings have gotten so detailed that you could screen at your cause level and it’s gotten to the point now where performance is just as good.
The studies that have come out on these ESG funds is that you are not going to sacrifice performance by, by taking an ESG approach. How we approach it was kind of what you alluded to earlier: I sit down with someone and we’ll go through what’s important to you at the specific level. We’lll go through 28 different screens or questions. Clean energy may be important to you or it may be not investing in tobacco companies.
You can always take the opposite approach too. There are some people who invest in what they call sin stocks which are the tobacco and alcohol companies, the casinos, and gambling.You’re able to do that as well. So it’s not just an avoidance type of strategy. If someone wants to include a specific category, then by all means we can we can devise a strategy for that. But you know it’s really after going through that screening exercise we create a profile of what’s important. Then we figure out what’s the best way to put a portfolio together that that aligns to what their values are. On my side so you can get a customized investment strategy that is aligned to your values and not have to sacrifice performance.
Aric: Yeah I just it’s so interesting. I’ve never heard the term sin stocks before so that makes me chuckle because I’m thinking somebody walking into your office thinking hey I would like to invest in a company that beats their workers. How do I find that company that takes all their used chemical filled water and then puts them into the bottles for children. That’s what that’s what it brings to mind. I mean obviously you’re not talking about that but it made me chuckle.
ESG Ratings
Marc: You never you never know. But the other thing you mentioned is that companies are now getting aligned with this. So that’s why we’re we’re seeing some companies think it’s going to be a competitive advantage to them because now the other driver of ESG is that is data. There’s a lot more access to data. People are analyzing companies analyzing funds they have access to. They can easily tell what a company’s carbon footprint is or what their executive composite compensation structure is. And it’s a lot easier to put a standardized score on a company or a fund. This is what companies like Morningstar are doing. They actually have a standardized rating system where you can look and see what a company’s or a fund’s ESG score is. You can make a decision based solely off that ESG score on whether you want to invest in it. You know they rate very high, very low or somewhere in the middle. You may set your own threshold that if a company or fund has an ESG score lower than 80, you won’t invest in it. And companies are now saying well what do I don’t want to be excluded. What do I have to do to get my number up. So the companies are definitely taking notice. An interesting stat is that the top three ETF’s that experienced the most inflows of money this year are all ESG funds. So it’s it’s there’s definitely money that’s going into this strategy. It’s also the institutional money too and not just your mom and pop investor. Now pensions and some big mutual funds are investing solely in ESG Funds.
Aric: I mean here’s the thing. First of all I want to just one quick comment. Morningstar is awesome. I mean it really is it’s an incredibly valuable tool. So that’s fantastic and I know that you utilize that. That’s definitely something that you can do for clients or prospects that are interested in this. So please if you are interested in what we’re talking about what Marc has presented so far today. Reach out to him and his team definitely can talk to you about that. Secondly it is definitely a movement.
Marc: And I think we’re also seeing a big driver of ESG is that some of the big fund companies are getting behind it as well. So you have your Blackrocks and Vanguard participating too. These ESG funds have trillions of dollars behind them. A company is not going to take notice if you or I try to influence change individually.
But when there is a trillion dollars asset manager trying to influence change a company is definitely going to listen or at least have that conversation with them. It’s also becoming a movement on the actual investment side. What I mean by that is one of the investment strategies that I like and adhere to is called factor investing.
ESG: The Next Factor
Factor investing is based on analysis or a study where it concluded that certain factors will outperform the market over time. The original four factors include:
- Value: value stocks over time have outperformed growth stocks. Although this has not been the case recently
- Size: small cap stocks have performed better than large caps.
- Volatility. We look to invest in companies that are less volatile than the overall market
- Momentum: companies that are growing at a faster pace than the overall market average.
It’s being discussed now that ESG may become another type of factor where we might see outperformance in the future. Companies are going to be more in tune to it and they’re going to change their policies.
Here is an example: One of the ESG areas is how a company treats and compensate their employees. I mean it’s just a good thing to treat your employees well. But there are studies out there that conclude to provide a better service to your clients and to be more successful the number one focus should be on how you treat your employees ahead of your clients. A company is going to take notice and say maybe I should treat my employees better because that’s not only going to you know get me on this ESG filter it’ll just help better employees or is going to help my company grow. You can look at it a lot of different ways but there is a movement and some momentum behind it.
I’m starting to get more and more questions about the topic from clients. There just wasn’t that much coverage of it previously. You never used to turn on CNBC and see stories about ESG investing. But now we’re starting to see it. I’m hearing more about it. I’m seeing more articles written about it there’s more books on it. More coverage to the media and that’s how movements get started.
Aric: You know Marc as we’ve been talking about this and I’ve worked with advisers for many many years. The funny thing is that if somebody walks into an advisors office they may ask to discuss socially responsible investing. And that advisor could easily say well let me just grab this off my shelf and they have one fund. Yep I’ve got one. This is the one you want to be in. But don’t talk about what that actually even means or they don’t have the ability to tailor it to somebody’s own values. They think they are being responsible by offering a socially responsible fund. But it doesn’t seem like it should be a one size fits all approach, how do you overcome that.
Marc: There is nothing wrong with the one size fits all approach if someone wants to just have some ESG overlay in my portfolio. Then yes there are one two three funds that we could put in there and it will give them some exposure to ESG filters on it.
But for most people there are specific things they care about and frankly specific things they don’t they don’t care about. And from there that’s where we can tailor a specific portfolio whether it’s including or not including individual stocks. Funds that have gotten so specific that if you want to just include a certain subset of ESG then we can do that too. But someone might not care about clean energy or gender diversity and all they care about is cybersecurity and they don’t want to invest in any companies that have been hit with cyber security breaches or have been known to be lax with customer data. And I think that’s one of the good things about talking to someone like me is that we can actually tailor a very specific customized approach with it. So yeah you know the way I would recommend it is and what happens is we all have our investment statements and we look at it and we see these funds in there and you know it’s a lot easier to tell if we have individual stocks but we look at these funds and we don’t even know what are what we are invested in.
What Is In Your Portfolio?
One of the areas that I can help is to do an X-ray on you know a specific fund and we can look at an account statement to analyze what the underlying holdings are and actually filter out if someone refuses to invest in any oil companies. We can put together either a fund or a basket of stocks that where we ensure that no oil companies are included in them. And that’s how you get that tailored investment approach.
I offer a free consultation with anyone where we I would sit down (or over the phone) with anyone and go through their statements and underlying investments and also letting them know what their options are. They will get visibility and transparency into their investments that they never had before. We’ll go through what is important to them and we’ll see how it aligns or if it doesn’t align well you know what are their options on getting that aligned.
Aric: People do need to sit down with you and do this because when the stuff was hitting the fan literally about tobacco and this is you know quite a few years ago when it really really started to hit the fan as far as Big Tobacco being held accountable for the things that they put out there the chemicals the cancer that was happening so and so forth. One of the largest tobacco companies changed their name and they can call it branding if they want to but they don’t go by that name. They really changed it to but they changed it for the purpose of of changing their ticker symbol as well because now it people wouldn’t recognize that if it’s in a portfolio you would have no idea what that company name is but you would recognize them by the name they previously used. So maybe it’s a quote unquote I’m using air quotes that you can’t see on a podcast. It could be a coincidence but you know come on that strategic planning wants to stuff it in the fan and all of a sudden you want to change your name so people don’t recognize you in a portfolio. That’s. Obvious. Yeah. So I mean the people definitely need to seek out professional counsel to be able to go through their investments and Marc if that’s you. Which I hope it is because you you were very diligent in the research you do and the things you do for your clients. How do they reach you?
Marc: The best way is to go to my website, bautisfinancial.com. There’ll be a link on the top right hand corner that says schedule a call and have a free consultation. And we can talk about ESG investing or any type of investing topic. We we mentioned all the ESG topics but there is a fourth category of person that says I just don’t care about. Everyone’s going to fall into those four categories of where ESG is important to them and we can we can go through it and figure it out.
Aric: And just one more note on Marc and how he works with his clients. There is absolutely no judgment. If you if you call him up and say this is what I want to do or this is what I want to avoid there is no judgment there. He puts the client first and will discuss it with you and talk to you about it and help to make that happen.