More investors want to put their money where their values are

Aspyre Wealth Partners® Principal, Lucas Bucl, CFP®, was featured on KCUR 89.3’s Up To Date on December 20, 2021

“People increasingly want to consider environmental, social, and governance (ESG) factors when investing”

• Using a socially conscious set of standards to evaluate and select where to put their money has more investors using ESG criteria.
• Buying shares in companies with values similar to theirs affords investors a way to engage as socially responsible stakeholders.

Once thought to be narrowing your chances at a decent return on investment, funds with an ESG focus are showing competitive returns and have even outperformed their non-ESG peers. The Smart Money Experts review ESG investing and how to go about adding these types of funds to your portfolio. The show features Lucas Bucl, principal and director, Investment Management at Aspyre Wealth Partners® and Sandi Weaver, founder, Weaver Financial

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Below is a transcription of the KCUR 89.3 radio broadcast where SK is Steve Kraske, LB is Lucas Bucl, and SW is Sandi Weaver.

SK: And welcome back. This is Up To Date on KCUR 89.3. I’m Steve Kraske. Investors these days are more discerning than ever when it comes to where they place their money. Among the factors that have emerged in recent years are those concerning companies’ commitment to the environment, social issues like working conditions, and how ethically a company is run. This has come about because current issues like climate change and diversity have led more investors to think about supporting and investing in companies that align with their values. Now we’ll look at what it means to invest with an ESG mindset and whether those decisions can help or hurt investment returns.

With us once again are the Smart Money Experts and they are Lucas Bucl, CFP®, the director of Investment Management at Aspyre Wealth Partners®. Lucas, good to see you again. Welcome back.

LB: Good morning. Thanks for having me.

SK: Sandi Weaver, CFP® is also here. She’s the founder of Weaver Financial. Sandi, Good morning to you.

SW: Morning, Steve

SK: The information presented by our guests is for informational purposes only. Please consult with a professional prior to making any big financial decisions.

Let’s turn to a quick development in the news as we often do with our Smart Money team. Lucas, the recently announced Consumer Price Index is really high. Inflation continues to run awfully hot.

LB: Yeah, we’re the most recent inflation reading for November was 6.8% year over year. So that’s, that’s definitely hot. And you know, it’s well documented. There are supply chain issues, and there’s the restart from the pandemic that’s driving that. But I think the headline from last week was the Federal Reserve is starting to take action. So they announced they’re going to kind of accelerate some of their stimulus reduction and then also starting to signal that they’re going to raise interest rates 2 maybe 3 times next year.

SK: That could help maybe combat inflation, Sandi, but slow the economy in general. How concerned are your own customers, your own clients, as they look at the year ahead when it comes to inflation?

SW: They’re pretty concerned because I’ve had some emails and calls about almost everybody has noticed prices going up either in the grocery store.

SK: Oh really? Have they?

SW: Yeah.

SK: Is that right?

SW: Yeah. Or for raw materials, especially the business owners. You know, they’ve noticed that. And wages are not keeping pace with the inflation numbers that we’re seeing coming out. Wages are about 4.6%. Then, inflation is about 6.8(%).

SK: So, that’s a problem.

SW: Yeah. It’s a problem. It means we’re falling behind. So, next year when the Fed raises rates, we’ll have to see how the economy takes that and if we can still keep the steam up for the economy.

SK: Okay, so I’ll be watching inflation as this new year 2022 comes about. Let’s turn to our main topic today, which is what exactly is E S G investing? That’s the acronym referred to in the opening ESG stands for environmental, social and governance. Lucas, tell us a little bit more about it.

LB: Yeah. So it really is a kind of an investment construct where investors are using criteria that are, you know, focused on environmental, social or governance to select investments. It’s not just looking at, you know, pure return numbers calculations like that. They’re also considering those other factors when making those choices and evaluations.

SK: And this is a new trend with you and your team.

LB: It is. I mean, it’s been around for a while, but I would say in terms of kind of coming into the mainstream and really becoming more popular. It’s definitely been I would say in the last three or four years.

SK: How often do you hear from your own clients Sandi?

SW: About a third of my clients do ESG but I’ve been doing it and encouraging it for a long time. Of course it’s their decision. It was much more difficult because of the lack of research, you know, but Morningstar research has lots of good sustainability ratings. So advisors can provide that now.

SK: Let’s talk about what each of these numbers stands for. I think it’ll be obvious for some of them. But “E”, Lucas, is for the environment. Maybe that goes without saying.

LB: Climate change is definitely a topic that’s front and center for a lot of folks these days. So that clearly gets included there. But things like pollution, waste, sustainable farming, you know, there’s a lot of different things that feed into that environmental category. So climate change, for sure, but also a lot of other things.

SK: And in this case “S” doesn’t stand for Sandi. It stands for Social. Ware we talking about there?

SW: That is more the DEI front. It is diversity, inclusion, community engagement. Alcohol, tobacco production, gambling, pornography, child labor, those are companies sort of on the forefront of those kinds of issues and in playing to those as they go through their choices. Exactly what does their board of directors look like? Is it all white males? Or is it you know, females and males? Do they have minorities on their board? Because that’s been proven to have a better business approach if you have more diversity in your board of directors? Also, what does your management team look like? What does the workforce of the company look like? People want to support those companies that are trying to reach those goals.

SK: The “E” in ESG, Lucas, stands for governance meaning….

LB:  That’s going to be corporate governance, governance policy. So leadership management policies, workforce relations, a big one recently is cyber risk. So if you’ve got companies that are protecting their customers data, they’re going to get a lower government score.

SK: So some of it is the risk management protection of customer data. And you’re saying, Sandi, there is data out there that will help an investor navigate each of these letters, the E the s and the G.

SW: Yes, Morningstar research which gives a lot of data points on exchange traded funds and mutual fund types of investments. That now is very pronounced, you can easily get that. There’s sustainability Accounting Standards Board which rates companies you have to sustain a lead analytics comm. That’s another way that companies are rated. So a lot of different sources for data if you want to watch out where you’re investing.

SK: Why would somebody want to invest this way, Lucas? What are what are you hearing from your own clients in terms of why they’re so committed to going this way?

LB: I really think it’s been an awakening about getting their money and their investments in line with their values. So, you know, I used to get clients that are coming in this would be you know, a decade ago and say, you know, I really don’t like big oil. How much big oil stocks do I own? I’d be able to run some numbers and kind of give them that feedback. And there’s always just a little bit of an unsettled feeling that, you know, I have certain values that I want to support. And yet when I’m investing, I’m investing in some of those companies that I disagree with how they handle things. And so that’s, that’s really the root of it is is trying to get the values in line with your investments. So you feel good about how you’re investing your money in the companies that you’re supporting.

SK: And a lot of people feel really strongly about this, Sandi?

SW: Oh, yeah. I’ve had a client who’s a nurse practitioner. She’s very adamant. She spends eight hours a day trying to save people. So she does not want to invest in companies that are making cigarettes or guns.

SK: Interesting. Which only makes sense.

SW: Sure.

SK: Sure. Well, I guess the billion-dollar question here in so many ways, Lucas, is when you invest this way, does that hurt the level of return you can get on the investments that you’re making? What’s the latest research out there saying on that front?

LB: Well, I think it’s probably good to start in the conventional wisdom is if you limit the scope and options that you have to choose from, you’re going to limit returns in some way. And I think that’s just been taken for granted. I think the more recent data on that with ESG investing in particular is starting to challenge that mindset. So you know there’s lots of studies out there – some of which conflict. But a lot of it has to do with the data that’s being looked at. Maybe who’s charging the study, that kind of thing. But I think my read on it, especially with the aggregate of the data, is that ESG investing, you know, can be a driver of performance and actually help out performance in some cases. But definitely, I think the more recent returns have shown that ESG investing is definitely competitive with more traditional investing.

SK: How concerned are your clients, Sandi, when they come in to talk to you about ESG? That they’re going to have to take a hit if they invest that way?

 

SW: They’re not. Because the way we do it is, I ask them how much of their dollars, what percent, do they want invested ESG? So a lot of them choose, some of them choose, 30%. And at that level, I agree with Lucas there is no performance degradation. They will earn, that portfolio will earn about as much as the regular portfolios that we have, you know. If they go beyond that, if they go to 50% then there may be some performance degradation. They won’t earn as much as a regular portfolio but it will be pretty small. Anything over 50%, you’ll start to see your returns get hurt. And you can quantify that with data. You can say, you know, you’re going to earn 2% less or 5% less if we go this far.

SK: Yeah.

SW: You know, that helps them make their decision.

SK: How much confidence do you have in the ratings for Morningstar and other outlets in terms of when they say that a certain company is doing so much when it comes to ESG? Are they in fact there or who’s making these determinations? Because aren’t some of these determinations? subjective?

SW: Yeah, called greenwashing. Yeah.

SK: It’s called greenwashing?

SW: Yes. I’m pretty confident, you know, in Morningstar’s data. I use that the most. I’m pretty confident in that. PIMCO also. But your major investment companies like PIMCO or BlackRock, they’re doing a lot of research to dig in underneath to see the same thing. So, I think it’s pretty, you can have a fair amount of confidence if a company has good ESG ratings, that they’re doing pretty well.

SK: Do you feel the same way. Lucas?

LB: I do and I think it’s something that’s continuing to evolve and get better. So the analytics are getting a lot better it just in the last couple years. Also the amount of products and funds that are available to investors now are so much more than there were, even three or four years ago. The costs are coming down substantially, which is helping the performance. So I think this space is evolving quickly.

You know, one of the things that you kind of hit on though is it’s subjective, right? And it’s definitely something that if an investor really wants to pursue this, they need to kind of understand what they’re looking for. And then go out and seek it. Because it’s, you know, on its face, it’s you know, it’s nice to have an ESG label, but you really have to dig in a little deeper to understand exactly what that means for you and the company that you’re looking to invest with.

SK: What kind of dialogue are we seeing between companies and rating services like Morningstar? When it comes to, “Hey, Morningstar, you’re not giving me ESG Goldstar” (whatever the criteria might be) and we think we deserve it, but you haven’t given it to me.”

SW: You know, I don’t know the answer to that.

SK: I imagine there’s some of that going on out there.

SW: I’m sure there is.

SK: Yes

SW: Because you can have shades of grey. So let’s say that you’re a chemical company, and you’re dumping chemicals. Well, you may from an ESG perspective say, “Do you want the chemical company that has the best anti-dumping that makes sure they take care of their waste in the best manner possible?” Or do you simply want to ban all chemical companies? You know, where’s that gray line? Where do you settle that?

SK: Okay, let’s turn to some of the criteria for ESG investing. Because there I’ve read there’s no real standard criteria here for ESG investing. Lucas, tell me about that.

LB: Right. So you really are depending on, you know, the fund company, or the rating service to kind of build the blocks for you. And so, you know, when somebody says they have an environmentally conscious fund, what exactly does that mean? Some of them are almost exclusively focused on climate change and climate change and fossil fuels. And that might be important to some, but you know, if you care about polluting, for example, like Sandi was talking about. You know, you might unknowingly be buying an environmentally conscious fund that doesn’t have any sort of a screen or focus on pollution. So you really do have to kind of pop the hood a little bit and dig in.

Another thing that I think is interesting is you can have conflicts with a socially conscious fund. So like in Sandi’s example, if you have a chemical company that might be doing a good job in terms of managing their, their chemical waste, you know, but maybe they have a board that’s not diverse at all, and they have constant problems with their labor force. Is that a good ESG company or not? Well, the answer is it’s it’s mixed.

SK: Are there a bunch of boards out there that still are stuck in having a lack of diversity? On makeup motherboards? In this day and age? You think that time would have long come and gone?

LB: I certainly know there still are. But I think it’s become much more focused and aware. I think there’s a lot less than there were, but I think that’s something that’s continuing to get better but we’re still not in a perfect spot.

SK: Are you seeing the same thing, Sandi?

SW: Oh, yeah, I think that is the DTI focus on boards of directors. Has, we’re not even halfway through that progression.

SK: Is that right?

SW: Yeah, that’s my best guess. And then, then the next step is what is your management look like? That’s further back up the road. You know what I mean? That’s still has it, you know, moved that much either.

SK: That’s interesting. By the way you describe the focus on environmental concerns, Lucas, this begins to explain to me in a way why the cost of these funds might be a little higher. Because you have to take a really deep dive into some of these issues to understand where a company is coming from.

LB: Exactly. I think I think you’re right on there. Although Sandi rattled off some of the rating services that are really doing good work in this space, and that’s allowing the funds to kind of leverage on top of that, and drive the cost down.

SK: Okay, so if your concern is more social issues, Sandi, what kinds of things are you looking at? Give me a list there.

SW: DEI, of course, diversity and inclusion is one of those. You’re also trying to avoid companies that are involved with gambling. Companies that are involved with weapons. Pornography. Anything to do with child labor. So for example, you wouldn’t want to buy a company, you know, selling clothing or manufacturing clothing that’s using child labor in some third world country. You know, for example, you would avoid that. Or you might have abortion issues, you know. A medical company that’s involved in that are making devices.

SK: Or the way their company skews politically in terms of how leaders donate money. You get into that?

SW: Yeah, you can. Yes, and that that’s one of them too.

SK: Okay. And then Governance. The the “G” in ESG. Lucas, what kinds of things does that include?

LB: So one of the things that I think is, you know, transparency and ethics and values, so really kind of looking in and seeing what the what the practices are. Whether that comes down to hiring, or just kind of living and having corporate policies that are consistent with, you know, strong ethics, you know, workplace safety, in relations with labor, I think is an important one. So are they constantly, you know, warring with labor, are they you regularly having layoffs and those things. So, you know, focus on leadership, government, governance and management of the company and how they relate with their employees and their their community.

SK: And Sandi, as you were saying a little bit ago, you know, sometimes the criteria involved here, can can wind up conflicting with itself so you’re into green energy. Does that mean you would never invest in a big oil company that is rated as the cleanest big oil company that’s out there? I can see all this stuff getting confusing really quickly.

SW: It does. Yeah. For example, if you take a look at what happened to Exxon this year, there was an activist group, Engine Number One. Exxon has a board of directors of 12 people. Well, when they came up to vote for board – their board directors seats on their board. Engine Number One, the activist group, garnered enough to put in three people on that 12 member board. So that’s 25% Right. So Exxon might be the best guy on the block right now. You know, before they weren’t interested in developing alternative forms of energy at all. They were just going to keep you know, digging away for fossil fuels. Well, maybe that has turned that big ship around.

SK: So these things are evolving all the time. You gotta keep an eye on all of that, Lucas?

LB: Yeah, I think that really is the evolution with ESG investing. So it started out as kind of screening out some of those negative companies that we’ve been talking about, you know, companies that participate in you know, tobacco or casino gambling or weapons makers. And really what you’re seeing now is on the continuum of really trying to make an impact with the companies that you’re investing with. So putting your money for companies that do “do good” in these areas, but also maybe even trying to change company policy by getting people on the boards that may moderate or change policy at some of these bad actors.

SK: We’re talking this morning about the practice of investing based on one’s personal values with our Smart Money Experts. Sandi, are there certain investors, you know, more inclined to pursue this type of strategy? What are you seeing as folks come in and out of your doors every day?

SW: Unfortunately for me, the younger investors tend to be more interested. Fortunately for me, though, some of the older generation still is interested in that. And that can run by those who naturally tend toward a more activist approach to life. It can also be religion, you know. You can look at Unitarians or Catholics they tend to be more rock-the-boat types, you know, so they will come in and and want to invest their dollars, at least seminar dollars, you know, with this in mind.

SK: To your point, a recent CNBC poll indicated that only 2% of my cohort, the baby boomers, factor in ESG criteria when they make these decisions.

SW: Yeah

SK: That’s not real strong. Is it?

SW: Yeah. That’s unfortunate. Yeah.

SK: Really unfortunate.

SW: Yeah

SK: What’s the hang up? Lucas, all the attention these issues are getting these days, that it wouldn’t be quite as dismal as is what you’re saying it is.

SW: You know, I don’t know. Because like I said, about a third of my clients do not, you know, with a portion of their money they do ESG. But it’s just, you know, I raised the topic and nobody takes me up. But what about you, Lucas?

LB: You know, I think a lot of my older clients were was subscribed to the idea that I’m going to make as much money as I can with my investments. And then if I want to make a social impact, I’m going to take my money and donate it to the companies that I care about. You know, the nonprofits, I’ll spend my time and my resources that way. And I think there’s an argument to be made that you know, that actually is probably if you’re looking for sheer impact, that might be a way to get more impact, especially on a granular level. But it’s not an exclusive choice. You can do both. And I think that’s what we were talking about what the performance numbers I think you can probably do both and will likely be able to in the future as well.

SK: Are you seeing some current trends when it comes to ESG investing Sandi, that you might want to point out here?

SW: Yes, it’s trending. It’s in the news a lot. The mutual fund companies and the investment companies, ETFs, like BlackRock and Pimco, they all have huge segments of ESG investments to choose from. Their websites have a big ESG presence. So the more of that you see, I think, the more we might see social change, you know, directed at our companies.

SK: Let’s go to some phone calls here. Let’s go to Ellen from Overland Park. Ellen, you’re on Up To Date.

Ellen (caller): Good Morning.

SK: Hi there

Ellen: I’m one of those boomers who about eight years ago decided I wanted to be more conscious in my investments and started switching things over. I took $33,000 out and I got Tesla, I got Costco, and I got First Solar. And every one of those has been up and down, but only growing. I could, I mean, I could sell any of those for huge profits already.

SK: You haven’t seen any hit to your bottom line then? It doesn’t sound like at all.

Ellen: Not in the slightest. I also started looking for like women-run or diversity on boards. And most of those have just, I’ve just been very lucky.

SK: Good for you, good for you. Ellen, I appreciate the phone call and keep going, okay.

Ellen: You bet.

SK: We’re going to leave our conversation there and it was a good one. I want to thank Luca Bucl, CFP®, a director of investment management over at Aspyre Wealth Partners® and Sandi Weaver, CFP®, the founder of Weaver Financial over on Mission. Boy, time went by fast. Thank you both for your time. I appreciate it. Happy holidays to both of you.

Okay, that’s it for today. You’ve been listening to Up To Date on KCUR 89.3. We’ll see you tomorrow.

 

As a Principal, and Director of Investment Management at Aspyre Wealth Partners, Lucas’ primary responsibility is the delivery of comprehensive wealth and investment management services with a focus on helping clients live well today while planning for their future. He heads the firm’s investment committee and manages the investment research and portfolio management activities for client portfolios.

Aspyre Wealth Partners helps clients Master What’s Next®, whatever phase of life they are in. For help with your unique situation, contact Lucas Bucl at LBucl@aspyrewealth.com  or (913) 345-1881.