For decades, socially responsible investing was brushed off
as a strategy used by so-called left-wing tree huggers who were financially
naïve and sacrificed returns for their altruistic beliefs.
But its updated version — environmental, social and
governance investing (ESG) — which emerged in 2005, has not only gained more
respect; it is generating broad excitement.
The strategy “isn’t a granola proposition anymore.” It can
reduce portfolio risk and reap “comparable, if not better returns over the long
term,” argues Haleh Moddasser, a managing partner at Stearns Financial Group,
in an interview with ThinkAdvisor.
The senior advisor maintains that ESG investing, also called
sustainable investing, is clearly appropriate for women, who often have strong
feelings about making the world a better place. However, most women ages 55 to
75 don’t even know about ESG, according to a survey of boomer women Moddasser
conducted in 2019.
To raise awareness, she has written a book examining the
strategy: “Women on Top: Women, Wealth & Social Change” (Amazon.com-2020).
ESG investing, which is focused on corporations’
environmental, social and governance ratings, has boomed in the last year and a
half.
Indeed, the coronavirus pandemic and protests against racism
gave impetus to ESG’s rise as it skewed investors’ focus from the environmental
— mainly climate change — to ESG’s social aspects.
During the second quarter of this year, ESG fund flows
continued at a record pace, according to Morningstar. In the United States,
they totaled $10.4 billion, which nearly equaled Q1 flows. For the first half,
they amounted to $20.9 billion; the annual record of $21.4 billion net flows
set in 2019 was four times the previous record for a year.
Raymond James Financial, which in 2018 established a
Sustainable Investing Advisory Council, continues to see “growing interest in
sustainable investing, particularly among … higher-net-worth clients, women and
millennials,” Kim Jenson, private client group chief operating officer, said in
a statement.
Moreover, as Research Affiliates’ partners John West and Ari
Polychronopoulos write in a July 2020 paper, “ESG could be a powerful theme as
new owners of capital — in particular, women and millennials — prioritize ESG
in their portfolios over the next two decades.”
In the interview, Moddasser, a CPA previously with
PricewaterhouseCoopers, discusses both ESG stocks and the pros and cons of ESG
bonds, plus the potential bad impact on millennials of the controversial ESG
provision in the Labor Department’s proposed new guide for 401(k) plan
fiduciaries should the rule be finalized.
ThinkAdvisor recently interviewed Moddasser, on the phone
from North Carolina. The managing partner of Stearns’ Chapel Hill office
unpacks what she calls ESG’s “modern iteration,” which debunks the criticism
that investors who have a preference for environmental, social and governance
funds means they’re thinking “more with their hearts than their brains.”
Here are highlights:
THINKADVISOR: How has ESG investing, formerly called
socially responsible investing, changed?
HALEH MODDASSER: This isn’t a granola proposition anymore.
The modern iteration of socially responsible investing is different: It doesn’t
exclude entire asset classes, and there are so many options available that the
price points have really come down to make it competitive. When you invest with
an ESG lens, you’re potentially reducing risk while getting comparable, if not
better, returns over the long term.
Please explain how ESG reduces risk.
Even BlackRock has acknowledged that adding an ESG factor to
normal fundamental analysis of any security reduces portfolio risk. For
example, if you had an ESG factor in the analysis of Volkswagen stock, you
would have sold it before their [2015] emissions scandal.
In your 2019 survey of about 500 boomer women concerning
ESG, you found they were primarily interested in gun control, gender equality
and climate change. Does that align with ESG preferences now?
For the first time ever, the “S” — for Social — in ESG has
become dominant [for both male and female investors], as opposed to “E,” the
environmental, particularly climate change. I think this is because of the
pandemic and the systemic racism that’s been exposed. ESG has become more about
the corporate role toward stakeholders, not just shareholders.
Why have so many financial advisors been lukewarm about ESG
investing?
ESG is viewed as being soft, touch-feely. Before 2005, the
thinking was that investors in socially responsible investing, as it was
called, were investing more with their hearts than their brains, that they were
tree-hugging, bleeding-heart liberals who had no sense of money and finance and
that they were sacrificing returns — that ESG wasn’t good investing.
Was this true?
It wasn’t completely off-base. Many times people did take a
haircut on returns; expense ratios were high because there weren’t many funds.
And the investments were exclusionary [negative screening; e.g, tobacco
companies].
In your book, you cite a 2018 Calvert Research &
Management survey that found 26% of male financial advisors were not using ESG
criteria and would not consider doing so. Your thoughts?
Contrast that with 53% of women advisors that are using ESG
and offering it to their clients, and that the vast majority of the remaining
47% would consider using it. But of course, that’s 53% of only 20% of total
financial advisors — because women make up only one in five. [All that] is why
women [clients] don’t know about ESG.
Why would ESG appeal to female investors?
As a cohort, women really care about the greater good. Women
give more charitably and more often, and are more interested in legacy and
leaving the world a better place for their children. So it makes sense that they
would have more interest in ESG — it can make things better.
Your survey found that most boomer women “let their husbands
take the investing lead” even though 13% of the women feel they’re better
investors. Please explain.
That’s probably the most shocking finding of my study. In my
practice, women clients are worried about becoming bag ladies and feel insecure
and scared but think of themselves as better investors than men, too, since
they know that men get lower returns because they trade more often, are more
emotional investors and follow herd-like mentality.
How does that compare with what characterizes female
investors?
They have the right temperament and are more interested in
long-term security than short-term returns. As a result, they earn better
returns. What’s so shocking is that women know this but still let their male
advisor or husband “sell” them on investment strategies that don’t feel quite
right to them.
In June, the Labor Department proposed updated guidelines
for 401(k) plan fiduciaries. What do you think of the provision regarding ESG
factors?
By [essentially] saying that it’s OK to invest in ESG as
long as you don’t sacrifice financial returns, the DOL [in effect] banned ESG
from 401(k) plans. This is supremely important because the ESG movement is
driven by millennials, who don’t have investable assets outside of their
401(k)s. So they stand to lose the most. If this proposal goes through, they’ll
effectively lose the opportunity to invest their assets in accordance with
their values.
What’s the DOL’s rationale in restricting ESG that way?
Their completely unfounded rationale is that ERISA
[Employment Retirement Income Security Act] law states that if companies are
looking at something other than profit motivation when they create a 401(k)
options list, they’re not following ERISA guidelines — and if you’re looking at
ESG, you’re not looking at profit motivation. That’s 100% not true. ESG
performs as well, if not better, over the long term.
What do you think could be behind the DOL’s stance on ESG?
There’s speculation that it’s the administration’s attempt
to prevent ESG from harming the oil industry since many ESG funds don’t have
allocations to oil companies.
Do you recommend investing in ESG through mutual funds and
exchange-traded funds?
Yes, this is a phenomenal strategy for the retail investor.
I really like this option because most individual investors, unlike pension
funds and endowments, don’t have enough money to move the needle — even if
they’ve got $5 million. However, if they pool their assets with other
like-minded people in an ESG fund that specifically targets a cause they’re
interested in, they can.
What’s your take on ESG investing through bonds?
Bonds aren’t as mature as the ESG stock base, and it’s a lot
more complicated to invest in ESG this way. The focus on ESG has been on
stocks; so that’s a lot further along in terms of standardization and agency
ratings. In the bond space, there isn’t even one agency that rates them. But it
appears that Moody’s and S&P [Global Ratings] are making some progress in
that regard.
Are there any positives to ESG bond investing?
Because the bond market is substantially larger than the
stock market, the potential to utilize bonds for ESG is much greater. There are
tons of opportunities: municipal bonds, government bonds, government bonds of
foreign countries. The idea that you could use your wealth to impact politics
in another country, for example, is really mind-blowing.
Another provocative finding from your study is that “few
women feel rich,” even if they are rich. Please elaborate.
I have a client who has $110 million, and she’s worried
about becoming a bag lady. It doesn’t matter how much money women have — they
continually worry because they can’t predict the future. Women live longer than
men, and 95% of women die alone [widowed or single]. They don’t know how long
they’re going to live or if they’ll get Alzheimer’s or have a stroke. So
they’re worried that they won’t have enough to sustain themselves for the rest
of their lives.
Why would ESG be a good investing strategy for them?
Though women are motivated to do good in the world and give
to charity, their actions lag. They give, but they give in smaller quantities
[than men] because they fear financial insecurity. That’s why ESG investing is
brilliant for women: We’re not asking them to give their money away. We’re only
asking them to invest in accordance with their values.
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