Financial advisor specializing in Sustainable, Responsible and Impact Investing. Founder of the Rutgers Undergraduate Philosophy Journal. for more details and disclosures, please see www.commoninterestsfinancial.com
It's been a few months since Gabe and I posted here, but my firm has just published our first Impact Report, and I wanted to come back to this forum to show you what we've been working on. This report tells the story of the impact our clients chose to create through their investments, the advocacy of my firm specifically, and how we're trying to create change both in the financial industry as a whole, and as a business. here's a link: https://www.commoninterestsfinancial.com/2018-impact-report/
it is incredibly naive to think that index funds don't have to do due diligence. you're simply shifting the diligence from the manager to the index provider and their methodology. what index does the index fund track? how it it composed? what's the difference between a market cap weighted index and a factor based index? Morningstar has over 2,200 ETFs in it's database (which isn't a perfect way to count - it leaves out a lot and there's overlap with actively managed ETFs, which I don't like - but it's a good place to start).
leading with questions about ESG analysis actually SAVES us a significant amount of time in due diligence, by focusing our efforts on funds that we'd actually use. I screen out a lot of providers who can't answer basic questions from the PRI about ESG integration. Again, I fundamentally believe that ESG analysis improves the security selection process, both in terms of active and passive managers, and can lead to superior risk-adjusted returns.
worth noting that this is an asymmetric process: there are only a handful of reputable (in my opinion) ESG data providers. Once I've familiarized myself with their methodology, I only need to keep up with what they're doing (and select continuing education opportunities to stay on top of the evolution of the industry) and I can get a good feeling for how managers treat this data in conversations with them.
It is, admittedly, very hard for me to compare our DD process with other firms, as we've developed it ourselves, and everyone treats diligence differently. I would suspect (but have no evidence) that some advisors do minimal diligence and pick funds based on which wholesaler brings them the best gifts or pays the biggest commissions. would you think this is a better way to approach manager selection?
in my view, foundations should be doing ESG investing from a risk management perspective, not an impact perspective. Foundations should examine Impact Investing for a portion of their endowments as both a risk mitigation factor and from an impact standpoint. it's important to differentiate the two approaches. see my blog post on the topic.
the time I spend reviewing ESG methodologies is part of our Due Diligence process. I think it is fairly uncontroversial to state that any investor should have a Due Diligence process, and should, at a minimum, read and understand the prospectus of an investment and have a discussion with the portfolio manager.
I would welcome the opportunity to show you the portfolios I build, and talk about our manager selection process in more depth. Here's my scheduling link: Let's find a time. I have a lot to say about your last point, none of which compliance would be happy about if I wrote in a public forum.
One thing that compliance was very clear on is that I'm not allowed to discuss specific investments in a public forum. I'm sorry I won't be able to respond to your first point here other than to say that this is why I spend so much time looking at methodologies behind ESG ratings and the way mangers apply them.
The core of our argument is that your last point makes a critical category error: while donating to effective charities will almost certainly generate higher impact, there is a a HUGE amount of capital that cannot be given away (due to being earmarked to funding retirement or other goals), and that impact investing and ESG are tools to have some impact where otherwise your investments could be funding actual harms.
To the point about our involvement with the PRI and other working groups: our argument here is our marginal impact is significantly higher given this involvement. I hope to have an impact report completed soon with more details.
Thank you for the reply! I'm excited to have this discussion publicly, and I'm looking forward to hearing what Hauke has to say.
1. Thank you for the clarification on this point. This is one of the primary reasons we posted this response.
2. If there's any way I can help get you better data on shareholder advocacy, or connect you to resources, my schedule will always be open to you.
3. This is where I believe that you are materially wrong on the facts. To your first point: I argue that even thinking theoretically, an investor who cares only about profit does not want as many options as possible, they want as many options as possible that have the highest probability of high returns. My argument is mainly that the markets have mis-priced the risk of (especially climate-related) ESG issues. If you're not yet aware of the Task Force on Climate Related Financial Disclosure, I would check them out. Here's a longer read on linkedin.
Thank you also for pointing out that IGM poll. I will be sharing that with my colleagues. The orthodox view within the community of economists would seem to agree with you, but if you dig into the responses, a significant number of them are based on intuition, and are ignoring (or are unaware of) recent data.
Purely coincidentally, at the same time we posted this article, Morningstar (a purveyor of financial analysis for the uninitiated) published its' annual Sustainable Funds US Landscape Report, which includes the statistic on page 4 that "Despite significant market headwinds, sustainable funds pulled in nearly $5.5 billion in net flows in 2018". Please see the whole report for methodology, as it's quite important.
Finally to your last point in this section, I don't have an answer for you. I believe that socially neutral investors can and should only do SRI, although they should take a different approach to SRI from an investor who has a specific thematic focus (see my blog post on this topic for more).
4. This one is tricky to answer while staying on the right side of the rules that say I'm not supposed to talk about specific investments in this answer. Yes, achievements in the field are incremental, but compared to what? What we're trying to do here is apply pressure and build on each success to drive the movement forward. remember that we're still in the early days of the mainstreaming of SRI. Just look at the trends!
Your last point is the reason I became involved in the SRI industry, so I'll re-state it here because it's so important: what marginal difference will an individual investor make by getting involved in these efforts? My answer (and I suspect Gabe would agree, but don't speak for him) is that on their own, not a whole heck of a lot. My business is based on the premise that while individually, each of our financial impact is small, by forming a community and working together we can magnify the impact of our work.
This is why my firm (which for the record has 2 advisors, an office manager and my dog as our chief morale officer - we're SMALL by industry standards) became a signatory of the United Nations-supported Principles for Responsible Investment. Through our membership in this organization, we have the same seat at the table as the world's largest asset managers. I have personally sat in meetings with Swedish pension fund managers working on sustainable seafood initiatives because a client expressed interest and asked that we try to make an impact on this particular issue. Small investors, by choosing who they work with and how, can punch WAY above their weight class. I would be more than happy to give you a tour of the initiatives currently underway. I think you'll be surprised what we're working on, and how much behind the scenes dialogue occurs that isn't accounted for.
Thanks for a well thought through response! I agree that the vast majority of "SRI" funds aren't engaging with their portfolio companies in meaningful ways. In fact, since I joined the industry in 2013, there has been a boom in providers claiming to be "sustainable". The hardest part of what I do these days is sifting through the pitches to find investment firms that are taking this seriously and not just "greenwashing" as we call it.
That said, the trend is real and important, and there's another part of it that's worth considering: while there are indeed a limited number of engagements in any given year, the funds that want to be seen as sustainable often follow the leaders in the space into engagements, so while a small number of firms lead engagements, the 'hangers on' magnify the assets behind these proposals. I personally believe that EA minded individuals should look for asymmetric ways to spend their time, where by working on an issue, you can attract more capital/investors/time/energy/effort/utility. I also believe that the trends we're seeing in the SRI industry are the first wave, as firms develop their capabilities and learn what their investors want. as time goes on, I believe we'll see more funds voting their proxies in response to advocacy campaigns (although - this is my personal belief and I could very well be wrong)
I'd direct you to the post I made on my (very new - please be kind) blog on the recent USSIF trends report, which has some additional graphics about WHY asset managers are acting this way (self-reported data) that supports this belief.
Hi all, Max Mintz here (Gabe's co-author). I'm blown away by the quality of your responses so far. This is everything Gabe and I hoped to achieve with this post. I will endeavor to respond meaningfully to these comments, but as I am an investment advisor, I am bound by a set of rules I have to follow when posting in a public forum, so I have to ask that if anyone would like to discuss specific investments or investment strategies, please email me directly at [email protected] (or schedule an appointment through my website) and I'll be more than happy to discuss what I can't talk about publicly.
It's been a few months since Gabe and I posted here, but my firm has just published our first Impact Report, and I wanted to come back to this forum to show you what we've been working on. This report tells the story of the impact our clients chose to create through their investments, the advocacy of my firm specifically, and how we're trying to create change both in the financial industry as a whole, and as a business. here's a link: https://www.commoninterestsfinancial.com/2018-impact-report/
it is incredibly naive to think that index funds don't have to do due diligence. you're simply shifting the diligence from the manager to the index provider and their methodology. what index does the index fund track? how it it composed? what's the difference between a market cap weighted index and a factor based index? Morningstar has over 2,200 ETFs in it's database (which isn't a perfect way to count - it leaves out a lot and there's overlap with actively managed ETFs, which I don't like - but it's a good place to start).
leading with questions about ESG analysis actually SAVES us a significant amount of time in due diligence, by focusing our efforts on funds that we'd actually use. I screen out a lot of providers who can't answer basic questions from the PRI about ESG integration. Again, I fundamentally believe that ESG analysis improves the security selection process, both in terms of active and passive managers, and can lead to superior risk-adjusted returns.
worth noting that this is an asymmetric process: there are only a handful of reputable (in my opinion) ESG data providers. Once I've familiarized myself with their methodology, I only need to keep up with what they're doing (and select continuing education opportunities to stay on top of the evolution of the industry) and I can get a good feeling for how managers treat this data in conversations with them.
It is, admittedly, very hard for me to compare our DD process with other firms, as we've developed it ourselves, and everyone treats diligence differently. I would suspect (but have no evidence) that some advisors do minimal diligence and pick funds based on which wholesaler brings them the best gifts or pays the biggest commissions. would you think this is a better way to approach manager selection?
in my view, foundations should be doing ESG investing from a risk management perspective, not an impact perspective. Foundations should examine Impact Investing for a portion of their endowments as both a risk mitigation factor and from an impact standpoint. it's important to differentiate the two approaches. see my blog post on the topic.
the time I spend reviewing ESG methodologies is part of our Due Diligence process. I think it is fairly uncontroversial to state that any investor should have a Due Diligence process, and should, at a minimum, read and understand the prospectus of an investment and have a discussion with the portfolio manager.
I would welcome the opportunity to show you the portfolios I build, and talk about our manager selection process in more depth. Here's my scheduling link: Let's find a time. I have a lot to say about your last point, none of which compliance would be happy about if I wrote in a public forum.
John,
One thing that compliance was very clear on is that I'm not allowed to discuss specific investments in a public forum. I'm sorry I won't be able to respond to your first point here other than to say that this is why I spend so much time looking at methodologies behind ESG ratings and the way mangers apply them.
The core of our argument is that your last point makes a critical category error: while donating to effective charities will almost certainly generate higher impact, there is a a HUGE amount of capital that cannot be given away (due to being earmarked to funding retirement or other goals), and that impact investing and ESG are tools to have some impact where otherwise your investments could be funding actual harms.
To the point about our involvement with the PRI and other working groups: our argument here is our marginal impact is significantly higher given this involvement. I hope to have an impact report completed soon with more details.
John,
Thank you for the reply! I'm excited to have this discussion publicly, and I'm looking forward to hearing what Hauke has to say.
1. Thank you for the clarification on this point. This is one of the primary reasons we posted this response.
2. If there's any way I can help get you better data on shareholder advocacy, or connect you to resources, my schedule will always be open to you.
3. This is where I believe that you are materially wrong on the facts. To your first point: I argue that even thinking theoretically, an investor who cares only about profit does not want as many options as possible, they want as many options as possible that have the highest probability of high returns. My argument is mainly that the markets have mis-priced the risk of (especially climate-related) ESG issues. If you're not yet aware of the Task Force on Climate Related Financial Disclosure, I would check them out. Here's a longer read on linkedin.
Thank you also for pointing out that IGM poll. I will be sharing that with my colleagues. The orthodox view within the community of economists would seem to agree with you, but if you dig into the responses, a significant number of them are based on intuition, and are ignoring (or are unaware of) recent data.
Purely coincidentally, at the same time we posted this article, Morningstar (a purveyor of financial analysis for the uninitiated) published its' annual Sustainable Funds US Landscape Report, which includes the statistic on page 4 that "Despite significant market headwinds, sustainable funds pulled in nearly $5.5 billion in net flows in 2018". Please see the whole report for methodology, as it's quite important.
Finally to your last point in this section, I don't have an answer for you. I believe that socially neutral investors can and should only do SRI, although they should take a different approach to SRI from an investor who has a specific thematic focus (see my blog post on this topic for more).
4. This one is tricky to answer while staying on the right side of the rules that say I'm not supposed to talk about specific investments in this answer. Yes, achievements in the field are incremental, but compared to what? What we're trying to do here is apply pressure and build on each success to drive the movement forward. remember that we're still in the early days of the mainstreaming of SRI. Just look at the trends!
Your last point is the reason I became involved in the SRI industry, so I'll re-state it here because it's so important: what marginal difference will an individual investor make by getting involved in these efforts? My answer (and I suspect Gabe would agree, but don't speak for him) is that on their own, not a whole heck of a lot. My business is based on the premise that while individually, each of our financial impact is small, by forming a community and working together we can magnify the impact of our work.
This is why my firm (which for the record has 2 advisors, an office manager and my dog as our chief morale officer - we're SMALL by industry standards) became a signatory of the United Nations-supported Principles for Responsible Investment. Through our membership in this organization, we have the same seat at the table as the world's largest asset managers. I have personally sat in meetings with Swedish pension fund managers working on sustainable seafood initiatives because a client expressed interest and asked that we try to make an impact on this particular issue. Small investors, by choosing who they work with and how, can punch WAY above their weight class. I would be more than happy to give you a tour of the initiatives currently underway. I think you'll be surprised what we're working on, and how much behind the scenes dialogue occurs that isn't accounted for.
Kit,
Thanks for a well thought through response! I agree that the vast majority of "SRI" funds aren't engaging with their portfolio companies in meaningful ways. In fact, since I joined the industry in 2013, there has been a boom in providers claiming to be "sustainable". The hardest part of what I do these days is sifting through the pitches to find investment firms that are taking this seriously and not just "greenwashing" as we call it.
That said, the trend is real and important, and there's another part of it that's worth considering: while there are indeed a limited number of engagements in any given year, the funds that want to be seen as sustainable often follow the leaders in the space into engagements, so while a small number of firms lead engagements, the 'hangers on' magnify the assets behind these proposals. I personally believe that EA minded individuals should look for asymmetric ways to spend their time, where by working on an issue, you can attract more capital/investors/time/energy/effort/utility. I also believe that the trends we're seeing in the SRI industry are the first wave, as firms develop their capabilities and learn what their investors want. as time goes on, I believe we'll see more funds voting their proxies in response to advocacy campaigns (although - this is my personal belief and I could very well be wrong)
I'd direct you to the post I made on my (very new - please be kind) blog on the recent USSIF trends report, which has some additional graphics about WHY asset managers are acting this way (self-reported data) that supports this belief.
https://www.commoninterestsfinancial.com/2018-trends-in-responsible-investing/
Hi all, Max Mintz here (Gabe's co-author). I'm blown away by the quality of your responses so far. This is everything Gabe and I hoped to achieve with this post. I will endeavor to respond meaningfully to these comments, but as I am an investment advisor, I am bound by a set of rules I have to follow when posting in a public forum, so I have to ask that if anyone would like to discuss specific investments or investment strategies, please email me directly at [email protected] (or schedule an appointment through my website) and I'll be more than happy to discuss what I can't talk about publicly.