Aligning Your Investments with Your Values - Old Peak Finance

An Introduction To Sustainable and Responsible Investing:
Aligning Your Investments With Your Values

Introduction
Your investment dollars are making an impact. The companies you are invested in are creating an impact on our world. The question is, does this impact align with what you hope for our world?

One definition of economy is a system of interaction and exchange. How do we think about the way we make our money, spend our money, save our money, and invest our money as an interaction and exchange? Do we want these exchanges to be merely transactional, or do we want to interact, knowing our investments are being put to use within our value framework?

While there are many areas of interest within sustainable investing, climate risk is a driving factor for many investors. A study the Economist highlighted in February 2019 found that accounting for physical risks to corporate assets due to climate change would shave 2-3% off the total market value of over 11,000 globally listed firms¹. These risks will continue to increase as climate change worsens. Sustainable investing is not only a way to align with your values, but is a way to mitigate portfolio risk, taking into consideration material sustainability factors, such as climate change.

Definition
Sustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns, while also making a positive societal impact.

History
One would be hard pressed to find another concept as old as SRI that has evolved so much in such a short time. This investment philosophy has a long history. In Biblical times, Jewish law produced guidelines about investing ethically. Similarly, Islamic texts and traditions have prohibited interest and investing in certain industries, such as alcohol and pork. In the 18th century, the Methodists started urging followers not to invest in “sin” industries like gambling, tobacco, or alcohol. Quakers soon followed and forbid investing in slavery or war efforts.

During the 1960s and 70s a range of heightened concerns—including institutional racism, warfare, environmental degradation—were increasingly taken into consideration when investing. As a form of protest against apartheid in South Africa, investors moved money out of institutions that were complicit in the racist regime. During the period from 1985 to 1990, more than 200 U.S. companies cut all ties with South Africa, which resulted in a loss of $1 billion in direct U.S. investment². In addition, many financial institutions decided to either move or sell their units in South Africa due to investors pulling out. “World opinion counts” said the chairman of Barclays Bank³.

Today’s Landscape
Today, investors may have a range of concerns they want to ensure their investment dollars are not supporting, such as: fossil fuels, gun manufacturing, tobacco, or deforestation. Alternatively, investors may have areas of interest that they want to specifically invest in, such as: corporate gender equity, labor rights, alternative energy products, or sustainable real estate.

As of the end of 2019, one out of every three dollars under professional management in the United States—$17 trillion or more—was invested according to SRI strategies4. Not only are individuals investing with impact, but foundations, university endowments, city and state governments, and organizations are using their investment capital to align with their mission. As you can see from the graph below, the interest in this way of investing continues to grow exponentially.

2021_IntroSustainableInvesting_Graphic1

Larry Fink, the CEO of Blackrock, one of the largest global asset managers, has said that “climate risk is investment risk” and he believes “we are on the edge of a fundamental reshaping of finance” due to climate change5. Because of this, Blackrock has committed to integrating sustainability analysis into their investment process. Sustainability investing has fully moved from a niche market to the masses.

Old Peak Finance offers a comprehensive approach to sustainable investing

There are several methods we consider:
1. Negative or exclusionary screens
2. Positive or impact screens
3. ESG integration
4. Shareholder advocacy
5. Community Investing

Let us take a closer look at each of these methods.

Negative or exclusionary screens
Think of this as a values approach. Are there industries or specific companies that you do not want to support with your investment dollars?

Some examples may include:
• Fossil fuel companies in the coal, gas, and oil industries
• Gun manufacturers and retailers
• Tobacco products

First, we can help you understand what funds you currently hold. For example, we can determine what percentage of your holdings are in the fossil fuel or gun industry. Our conversations together can help us determine if you want to divest of certain funds due to their holdings, or if you are satisfied knowing only a small percentage of what you own is associated with your filters.

Positive or impact screens
Are there industries or companies that you directly want to support because of their environmental, social, or governance values?

Some examples may include:
• Clean energy initiatives
• Funds with a gender equity bias
• Sustainable real estate

While many of the direct impact funds are in the private equity space, there are still many ways we can direct your investments to make an impact in the public mutual fund or ETF universe.

Environmental, Social, and Governance (ESG) integration
ESG integration is a holistic approach that analyzes material ESG factors to determine investment decisions, along with traditional financial analysis. No sector is immediately excluded, but rather those companies with superior ESG scores are chosen above those companies who have material ESG risks.

Shareholder advocacy
Some fund managers use this strategy to engage with companies and push for change. Rather than exclude a certain company, the intention is to own a company in order to have a seat at the table and voice any concerns related to ESG factors.

This can be done in many ways, such as:
• Filing shareholder resolutions
• Voting proxies
• Participating in dialogue with company leaders

One example of a successful engagement was led by Boston Common Asset Management and Church of the Brethren Benefit Trust. They engaged in dialogue with ConocoPhillips for over eight years which resulted in ConocoPhillips revising its Human Rights Position statement to include indigenous peoples’ rights.

Community investing

By placing your cash in a community development financial institution, especially a local one, you are investing in your community and improving access to financial services to those who most need it.

Old Peak can help you find an appropriate place to save, such as Self-Help Credit Union, where you are supporting their mission of creating and protecting ownership and economic opportunity for all. Additionally, there are fixed income products available that invest in a global portfolio of intermediaries and funds that finance mission-driven organizations, which blend financial, social, and environmental returns into one accessible product.

Common questions

Q: Will I be compromising returns by investing with my values?
• History strongly suggests this may not be the case. This perception has been debunked time and again with numerous research studies. However, any strategy that diverges from an index will vary on both the upside and the downside. While recent research has shown a pattern of outperformance of sustainable funds compared to their conventional peers, these screens may add value during some periods and detract in others. This paper will highlight a couple of significant studies, and you read more here: https://www.ussif.org/performance

• The Morgan Stanley Institute for Sustainable Investing published a report in 2019 that “compared the return and risk performance of ESG-focused mutual and exchange-traded funds (ETFs), as defined by Morningstar, against traditional counterparts from 2004 to 2018, using total returns and downside deviation.” It found that that there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” Moreover, during a period of extreme volatility, the study found “strong statistical evidence that sustainable funds are more stable”6.

• In 2015 Deutsche Asset & Wealth Management and Hamburg University conducted a meta-analysis of over 2,000 empirical studies. They found that the majority of studies show a positive correlation between ESG standards and corporate financial performance7.

• We must remember that past performance is no guarantee of future results.

Q: Does it cost more to invest with my values?
• Many actively managed sustainable funds have higher expense ratios than an index fund. You are paying for fund managers to provide research, and create a product tailored to your values, while possibly filing shareholder resolutions on your behalf.

• The good news is that with the increase in available funds and passive strategies, fee levels have decreased. In fact, out of the 313 mutual funds that Morningstar identified in 2018 as socially conscious, 45% had lower expense ratios than their category’s average8.

Q: Are not markets efficient and already pricing in climate risk?
• Possibly not. A 2020 study from the IMF found that climate change physical risk does not appear to be reflected in global equity valuations9. Some possible reasons could be lack of data, climate risk time horizons are long, or that investors are simply ignoring climate risk.

Q: How does divesting from an entire sector impact my risk profile?
• Many investors fear that divesting from a whole sector, such as energy, will decrease the investable universe and therefore increase risk. While this is a valid concern, let us look at the research. In Jeremy Grantham’s article, “The Race of Our Lives Revisited”10 he shows returns for three time periods of divestment of certain sectors compared to the S&P500. While returns vary, if you had divested of any of the listed sectors, you would have deviated from the S&P500 by only about 50 basis points, or 0.50% annually.

2021_IntroSustainableInvesting_Graphic2

Conclusion
The reality with investing is that it is risky, and outcomes are never certain. While the practice of aligning investments with values is not new, many of the SRI focused funds on the marketplace are new, and therefore have a shorter track record available to analyze. Also, there are no industry-wide standards of what truly defines a sustainable investment. All of these concerns should be taken into consideration when constructing your overall investment portfolio.

As an investor, you may ask yourself “what impact do I want my investments to have?” And as advisors, we will continually ask “what impact will your investments likely have on your overall financial plan?” We want to ensure all these factors align to advance your goals.

At Old Peak Finance, we will only recommend incorporating SRI funds if they are appropriate within the asset allocation mix that we propose for your risk profile and time horizon. Whether you want to invest 10% or 100% of your portfolio with this strategy, our recommendations will be tailored to you as an individual investor and will be aligned with your overall comprehensive financial plan.

Recommended resources
• The Forum for Sustainable and Responsible Investment: http://www.ussif.org/
• Morningstar: https://www.morningstar.com/company/esg-investing
• United Nations Principles for Responsible Investment: https://www.unpri.org/

[1]https://www.economist.com/leaders/2019/02/21/climate-change-and-the-threat-to-companies
[2] https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp
[3] https://www.nytimes.com/1986/11/25/business/barclays-pullout-the-pressure-grew.html
[4] https://www.ussif.org/sribasics
[5] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
[6] https://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf
[7] https://www.db.com/newsroom_news/2016/ghp/esg-and-financial-performance-aggregated-evidence-from-more-than-200-empirical-studies-en-11363.htm
[8] Morningstar Direct, as of 3/31/2018 cited in https://www.schwab.com/resource-center/insights/content/socially-responsible-investing-comes-age.
[9] https://www.imf.org/~/media/Files/Publications/GFSR/2020/April/English/ch5.ashx
[10] https://www.gmo.com/americas/research-library/the-race-of-our-lives-revisited/
 
 
Disclosure: The information in this presentation was obtained from sources believed to be reliable; however, the accuracy or completeness of this information is not guaranteed. This presentation message is not an offer to sell or a solicitation of any investment products or other financial product or service or an official confirmation of any transaction. It is private and intended only for the audience attending this presentation. Securities and insurance products are not FDIC-insured, are not guaranteed, may lose value, are not a bank deposits and are not insured by any federal government agency. Past performance is no guarantee of future results. Old Peak Finance LLC (“Old Peak”) is a registered investment adviser with US Securities and Exchange Commission (SEC). Old Peak will only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.
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