Personal Finance 101: How to Invest in Your Values, While Still Building Towards Retirement
In today’s post we are going to be looking at how individuals can invest based on their personal values, while still saving money for retirement (can you say “best of both worlds”?)
Source: Forbes
Personal Finance 101: How to Invest in Your Values, While Still Building Towards Retirement
The traditional thought, when it came to investing, was that each investment has a risk-return tradeoff, where you need to be compensated with a higher return for taking on additional levels of risk (no risk, no reward baby!). This is still true, but the expansion of Environmental, Social & Governance (ESG), Impact, or Socially Responsible (SRI) funds and ETFs now provide investors with options for putting their money where their values are. Put simply – the goal is to choose investments that align with your beliefs and values, in addition to considering maximizing return for an acceptable level of risk.
Inclusion vs. Exclusion vs. Integration
In general, sustainable/SRI/ESG (called ESG from now on for the sake of simplicity) funds fall into three main categories: negative screening (exclusion), positive screening (inclusion), or integration.
The most common, and the simplest, way that investors have created ESG strategies in the past is using negative screening methods that take a benchmark index (such as the S&P 500 or Russell 3000) and then exclude any companies involved in controversial areas, such as tobacco, weapons manufacturing, gambling, pornography, or fossil fuels.
Next, we started seeing positive screening (or “best in class”) strategies gain popularity. Typically, these funds take a benchmark index and then tilt towards companies with best-in-class ESG performance (as approximated by ESG ratings) or towards specific themes, such as companies focused on solving specific social issues like climate change.
On top of these three categories, there are also strategies such as impact investing, which targets a measurable environmental or social impact and is generally project-specific, and active ownership, where funds actively engage with companies on their environmental and social impacts.
Source: State Street[1]
This is all to say: Regardless of if you want your investments to focus on battling climate change, promoting women and minorities, or excluding tobacco companies, there is a strategy for you[2].
Getting Started
Today there are a variety of mutual funds and ETFs to consider. As of the second quarter of 2021, funds focused on ESG-related issues had assets of $2.3 trillion globally[3].
The first step is identifying what your goals are. Goals can include saving for retirement, plans to buy a house, or the need to set aside money for a child’s retirement. Next, you need to assess the risk you are willing to take on and your time horizon for investing. Time horizons may vary based on goals, with the capacity to take on risk increasing with the length of time. Finally, you need to think about your investment preferences. Identify whether you want to invest in specific issues (such as clean energy or diversity in leadership) or if you’d prefer to keep the investment universe broad, with limits around investing in specific industries (such as tobacco or firearms).
Once you feel confident in your goals, risk tolerance, and investment preferences, it’s time to start doing some research. If you have a financial advisor, this is a good time to have a conversation with them. Some questions to ask may include: what do I own today, how will you assess if an investment opportunity is appropriate for my values, and is there reporting that will show me not only my returns but also the impact of my investments?
Watch Out For Greenwashing
A word of caution: as consumer preferences shift, we are seeing a variety of asset managers develop ESG strategies to market as they raise capital. In our recent post about the “Greening of the Financial Sector”, we look at whether financial institutions are improving the sustainability of their portfolios, or just using green marketing.
Some ways to determine if a fund might be using greenwashing tactics include:
1. Look at the top 10 holdings: Most funds and ETFs list out their top 10 holdings and their sector exposures on a quick fund fact sheet or website. For a positive screen, ESG integration, or impact fund: If the top 10 holdings are just generic mega-cap technology companies, this may indicate that the fund isn’t weighted towards true ESG leaders (this is not the same for a negatively screened fund, as technology names wouldn’t typically be screened out and most ETFs are market-cap weighted). Additionally, you can look to see if the sector exposure is what you would expect given the strategy you are researching (i.e. if there are a bunch of energy names in a fund that claims to screen out fossil fuels). An example of a fund fact sheet can be found here.
2. Read through the fund’s strategy: Funds will provide an overview of their investment strategy & related risks in their fund prospectus (example), product brief (example), and fact sheet (example). Look to see if the language is specific or if it’s kept more general, using lots of buzzwords.
3. Research the portfolio manager: The portfolio manager for a specific fund will be listed in the fund prospectus and/or the fact sheet. You can look up the portfolio manager or team on the company’s website or LinkedIn to obtain a bio/bios. If it doesn’t look like the fund manager has sufficient experience or knowledge about the social issues you care about, this could be a red flag.
You (hopefully) won’t have to investigate forever - Around the globe, we are seeing regulators crack down on funds that are using ESG labels to greenwash. A little over a month ago, on May 25th, the SEC issued two new sets of proposed rules: “Investment Company Names” (“Names Rule”), and “Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies” (“ESG Disclosure Rule”)[4].
Hot Tea
Movers & Shakers: Miller Hull Partnership and Woods Bagot
Source: Dezeen, Image courtesy of Woods Bagot and Miller Hull Partnership
One of the topics that we, here at The Green Tea, are very interested in is the concept of sustainable travel. We’ve all seen airlines putting out Net-Zero goals, but what about airports?
Our “Movers and Shakers” this week are the architecture firms leading the sustainable expansion of the Seattle-Tacoma International airport.
“A grand central staircase and sculptural pillar clad in locally sourced Douglas fir will be the focal point of the Miller Hull Partnership and Woods Bagot's 13,520-square-metre expansion of Seattle-Tacoma International Airport, as part of the city's Sustainable Project Framework.” - Dezeen
The expansion efforts will include solar panels on the roof, tinted windows to reduce the need for air conditioning, renewable heating systems, along with a variety of other emissions-limiting measures.
DISCLAIMER
The information in the Blog constitutes the authors’ own opinions (and any guest bloggers posting from time to time) and it should not be regarded as a description of services or opinions provided by Pickering Energy Partners LP.
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this Blog constitutes investment advice or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. You should not use this Blog to make financial decisions and we highly recommended you seek professional advice from someone who is authorized to provide investment advice.
[1] https://www.ssga.com/investment-topics/environmental-social-governance/2018/10/esg-terminology.pdf
[2] https://www.cnbc.com/2019/05/29/heres-what-to-know-before-putting-money-in-do-good-investments.html
[3] https://www.americancentury.com/insights/six-trends-in-esg-investing/
[4] https://www.natlawreview.com/article/sec-proposes-regulations-to-address-greenwashing-investment-funds