I’ve been reading The Economist for about 15 years. It’s where I go to get a deeper, more thoughtful look on current events from around the world. It’s also where I find stories relevant to my personal and work life. A great example of this is an article I read a few years back noting the library in Cheyenne, Wyoming was one of the top 5 libraries in the US. This obscure, timely article surfaced a few weeks before our family moved to Cheyenne, and I love libraries so this was helpful when I knew nothing about Wyoming.
Another article that stuck with me was an article on Sustainable Investing. The article came out maybe 14 years ago, right at the beginning of when this concept became a more widely-publicized notion.
The basic premise of the article was that as humans, we make tradeoffs with every decision we make.
Take for example, your food shopping. Do you stock up at the farmer’s market for your produce every Saturday, or do you hit up a grocery store a few times a week? Which is better?
Your first answer might be “obviously it’s the farmer’s market,” — but think a moment longer.
Did you have to drive farther to get to the farmer’s market?
How about all those farmers that drove into town to sell their produce?
Were the carbon emissions from the drive a fair tradeoff for buying local?
The answer is that it depends on what’s important to you.
Our individual daily decisions are made generally on a micro scale in regards to what is important to us…our values.
To use some economic definitions; when we start to add our values into our actual investments, we’re taking a micro-scale decision and placing it within a macro scale context. It doesn’t work because we then want to fully eliminate what doesn’t align within our personal values.
These days, our society is so interconnected, it’s impossible not to interact with certain companies or industries within our everyday lives. Just think of the TV in your house. What brand is it? Guessing if you dig too deep into the company, you might not agree with the values of other brands the company owns. One more step down the rabbit hole and you think about the companies providing the streaming services on those same TVs… do you see the picture? We are very connected literally.
The same holds true when we take a step closer to our investments and start dissecting companies to see if they align with our values.
If you’re investing with your values as the most important factor, then your returns on those investments will most likely lower.
This is because the cost of operating a portfolio with such parameters will be expensive: computers and algorithms can run through the data about companies and the actual investments, but there’s generally a higher management cost in regards to the specificity of companies to be eliminated. Remember: there is an expense ratio for funds you invest in, and the higher the cost, the lower your returns.
Not long after reading the Economist article, I received an email with an article about some new funds the DFA (Dimensional Fund Advisors) were putting together called ESG (Environmental, Social, and Governance) funds. These are funds that have criteria to screen investments based on corporate policies and to encourage companies to act responsibly.
To understand ESG investing it helps to look at the chart below to see Sustainable Investing as a spectrum.
You can see that ESG has a primary focus on financial goals, but it uses an “Environmental, Social, and Governance” lens to make decisions.
DFA explained how they implemented that lens to create ESG funds. They don’t fully eliminate companies from their funds, who have a larger carbon footprint, like an oil company; instead, they’d give it a smaller representation, making room for more companies that are improving their environment footprint, or social issues a larger representation within the fund.
It’s a sliding scale; if a company is doing better within the ESG parameters, the advisor would purchase more shares; therefore, more is being invested into that company allowing for expansion and development within their company. However the opposite happens, too; if the company is not progressing in its efforts within the ESG parameters, DFA sells shares of that company and purchases new shares of another company who is doing better.
What I appreciate about ESG funds is that while they’re encouraging companies to do better, this is a long term approach.
In my last blog, I talked about Mosaic’s investment philosophy and how when we put money into investment funds, we generally have a long-term time horizon. This is what determines our asset allocation. ESG funds are trying to encourage companies to change their behaviors and policies for the better, a gradual process that takes time. Companies who have a long-term outlook are what you want when investing. You want that company to stick around, grow, and innovate. This is the ultimate purpose of an investment.
I’ve highly oversimplified how it all works, but hopefully this gives you a high-level understanding. Basically, the funds are just trying to encourage companies to do better and move forward no matter how small.
The concept of ESG investing has really exploded recently because people are starting to pay more attention to what they are involved in within all areas of their life. There’s definitely a demand within younger investors demanding to have a say in how companies are operating. We are concerned about the environment, we are concerned about how employees are treated, and we want to encourage companies to have good policies in place. People are looking for accountability and transparency within company leadership, within their employers and companies they interact with.
Mosaic has ways to invest in ESG funds with DFA, and it’s an option for you if you’re interested. More and more companies are developing ESG funds, so we’ll help you sift through the noise to balance funds that make sense for you and help you balance them with the daily decisions you make as a family. Mosaic works to help you put your financial pieces together, and ESG can be a part of that.
Suggested reading: Your Essential Guide to Sustainable Investing by Sam Adams and Larry Swedroe: A great easyish to understand read on everything related to sustainable investing.
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The opinions expressed herein are those of Anna Nelson and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements cannot be guaranteed. This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Anna Nelson assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. Anna Nelson is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
