SHOW NOTES: 2021-02-25 MiM

LAST WEEK’S QUESTION: If you were born after 1960, what does Social Security consider your Full Retirement Age to be for benefits? Is it age 62 or age 67?

ANSWER: Age 67!

HOST: There is a lot of buzz out there on your topic today, which is about Socially Responsible Investing. Can you help us understand exactly what this type of investing is all about?

KLAAS FINANCIAL: Yes, so today we would like to take some time and explore one area of investing that many people are already currently engaged in, and others who are curious about what this type of investing really is all about.

To be clear, this type of investing is not new. You can go back to the mid 1700’s where some of the earliest promoters of socially responsible investing (SRI) such as John Wesley (one of the founders of the Methodist Church (Methodism)) outlined to others that your use of money should be “Not to hurt your neighbor through the use of business practices,” and to avoid industries like tanning and chemical production which could harm the health of workers. There was also the suggestion that investors should avoid companies associated with “sinful” practices such as guns, liquor, and tobacco.

The modern area of SRI evolved in the 1960s with investors leaning towards companies that were sensitive in addressing equality for women, and civil rights and labor issues. Since the late 1990’s SRI has been seen to be more involved in looking towards promoting environmentally sustainable development.

So fast forward to today, we have seen sustainable investing to have become more popular.

Practitioners of sustainable investing can be found throughout the United States and amongst various types of organizations. Some examples are:

  • Individuals who invest—as part of their savings or retirement plans—in mutual funds that specialize in seeking companies with good labor and environmental practices.
  • Credit unions and community development banks that have a specific mission of serving low- and middle-income communities.
  • Hospitals and medical schools that refuse to invest in tobacco companies.
  • Foundations that support community development loan funds and other high social impact investments in line with their missions.
  • Religious institutions that file shareholder resolutions to urge companies in their portfolios to meet strong ethical and governance standards.

Hence, Socially Responsible Investing (SRI) is an investing strategy that aims to generate BOTH social change and positive financial returns for an investor. Investments may include companies making a positive sustainable or social impact and excluding those making a negative one. Other names for SRI include sustainable investing, ethical investing, or value-based investing.

Investors who are interested in SRI may select investments based on a company’s revenue sources and business practices that align with their values. An example of a person who is passionate about the environment, may be inclined to invest in wind and solar companies; or if you care about supporting the advancement of women, you may have some funds that invest in women-owned companies. Someone investing in this way may either actively eliminate or select their investments according to specific ethical guidelines. Obviously since everyone has different values, each investor will define SRI in various ways.

The bottom line though is many more investors today do want to see their monies go towards stocks/funds that are both profitable and reflective of their social values.

HOST: What are some other strategies we may hear about in this area of investing?

KLAAS FINANCIAL: Yes, another area would be ESG investing which stands specifically for Environmental, Social and Governance. This type of investing looks at a company’s stance on environmental, social and governance practices, alongside more traditional financial measures.

More specifically, it looks at how a company’s practices in each of these areas may help to drive returns of a company, vs. diminish them. For example, looking at common ESG factors would include Environmental factors, such as a look at Energy consumption, Pollution, Climate change, waste production etc.; looking at Social Factors may include a company’s track record with Human rights, community engagement, health and safety, employee relations, whereas Governance may look at the Quality of management, conflicts of interest, executive compensation etc. within in a company.

According to the Forum for Sustainable and Responsible Investment’s 2020 trends report, assets under management for (Environment, Social and Governance) ESG investment that includes both institutional and retail grew 42% to $17.1 trillion so far this year, up from $12 trillion in 2018. Sustainable investment now represents 33% of the $51.4 trillion in total U.S. assets now under professional management.

What you should know:

  • For those persons choosing to invest in sustainable investments they should be aware that there could be lower returns. While the data on this type of investing shows varying degrees in terms of performance, generally, we do see that ESG underperforms normal investments. Why?
    • Sustainable investing does cost more to implement. While costs have come down significantly, there is still a noticeable increase compared to non-ESG investments.
    • Sustainable investing might exclude an investment that performs really well in a normal portfolio. However, it might also exclude an investment that loses value.

Similar to SRI, there is also Impact investing which also takes social and environmental effects into consideration. However, the difference is that impact investments are only made in companies, organizations or funds where the main purpose is to achieve positive impacts, alongside a financial return.

Another important segment of ESG is community investing, which seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas. These investments go directly towards organizations that have a track record of social responsibility through helping the community and have been unable to garner funds from banks and other financial institutions.

Bottom line is about half of investors currently own responsible investments, and according to a recent survey conducted by TIAA, many of those same investors would be willing to convert their entire portfolio to be responsible. The desire to invest ethically is especially pronounced among Millennials according to the same study.

HOST: So how many different types of funds or investments are currently out there available to investors in this ESG space? And how is this type of investing affecting our investments in our retirement accounts through our employer?

KLAAS FINANCIAL: In 2020, according to the US SIF (Sustainable Investment Foundation) there were 718 mutual funds and 94 ETFs with ESG funds.

Also, interesting to note is that in late October of 2020, the U.S. Department of Labor released a new regulation that may limit or eliminate socially responsible investing. The new rule was revised to remove explicit references to Environmental, social and governance factors. It goes on and now mandates that fiduciaries of retirement plans should choose investment strategies based entirely on how those strategies affect financial performance. Hence, for many individuals, they may wish to research Social Responsible Investing opportunities outside of their retirement plans at work; and towards their own individual investment or IRA accounts.