Socially Responsible Investing Grows Up

Come gather round people wherever you roam

And admit that the waters around you have grown

And accept it that soon you’ll be drenched to the bone

If your time to you is worth savin’, then you better start swimmin’ or you’ll sink like a stone

For the times they are a changin’ …Bob Dylan

Welcome to the first issue of The Socially Inspired Investor Digest . We couldn’t be more excited. The editors, curators and contributors hope you will find in here each month a practical approach toward socially inspired investing. If we do our job correctly, we will demonstrate that personal investing today has evolved to a point where investors can “vote their dollars” in a more personal and socially responsible way, without having to necessarily compromise investment returns.

In fact as we will come to see, a strong argument is being built by well-respected authorities that given the business risk of certain “old school” industries such as tobacco, coal and others, steering clear of these may actually enhance long term returns in a quantitative way. It’s a trend that has already impacted the way many trusts, non-profits, governmental entities invest and more recently as well, many company retirement plans.

You may be very surprised how much this has already impacted professional money management. Consider that multiple studies show that over a quarter of all professionally managed money is now screened in one way or another for socially responsible factors. According to companies like McKinsey, RBC Global Asset Management, Market Watch and Morningstar.

But yet, to the average consumer this approach may seem to be indulging personal values at the expense of returns. Not true. Study after study shows that long term performance need not be diminished if the investment approach is done properly1. And, as we develop the appetite for this new way of investing, the financial community is now providing many options to consider.

Also, in the inaugural issue, beyond our original content, you will also find ESGID respected curated content which we believe will help you understand how others are evaluating the challenge. It is truly empowering to see the extent worldwide communities are coming together in a massive effort to align smart investing with world sustainability.

Our work is not as journeyman as you may think. For decades now the concept of socially inspired investing has been evolving and perhaps we are now at a tipping point where we can both look backward quantitatively and forward qualitatively in deciding how to invest our money. In this inaugural issue we spend some time on a topic we have named, Socially Responsible Investing Grows Up, a discussion on the ways ESG oriented investing (Environment, Social and Governance) has been evolving. We try to help you to begin to build a working knowledge so you can responsibly build a responsible, socially inspired investment strategy.

To be sure targeting socially inspired investing still requires a proper and sound investment foundation. Fundamentals of good investments must be understood and applied. The Socially Inspired Investor digest dedicates its first ever, SPOTLIGHT on our very own, Stewardship Personal Values PortfoliosSM, an asset allocation approach that also filters for areas of concern that many investors have without compromising portfolio returns.

Our mission here at the Socially Inspired Investor digest is to present practical education and insights to help our readers develop their socially inspired investment portfolio and ultimately make ESG an important part of your investment strategy. The times truly are a changing and if you so choose to challenge your investments to be both effective and socially inspired, we hope THE SOCIALLY INSPIRED INVESTOR digest and the companion podcast The Socially Inspired Investor turn out to be a great way to start.

So, is socially inspired investing smart investing? We believe it certainly can but first must be fundamentally sound. To be sure now more than ever, It’s your money and your choice. Stay with us as we continue to shepherd you through the choices to consider. It’s by no means perfect but the framework for those that desire to be socially inspired investors is rapidly developing.

Seasons of Advice Wealth Management, Stewardship Personal Values PortfoliosSM

Originally published: March 25, 2020

QUESTIONQuestions by:
The Socially Inspired Investor Digest

ANSWERInterview with:
Charles Hamowy, CFP®, CPA/PFS – CEO Saad Tahir – SVP & Partner – Investments & Operations Seasons of Advice Wealth Management, LLC.

QUESTIONWhat inspired you to start the Stewardship Personal Values Portfolios? Or rather, what event or series of events lead to the creation of these portfolios?

ANSWERCH: In February a couple of years ago, I think we will all remember a horrific shooting at the Marjory Stoneman school in Parkland Florida. Now certainly there had been other terrible mass shootings but for some reason it seemed we had reached a tipping point. Almost immediately I started to receive calls. All from clients with whom we have worked on behalf for decades. But now asking a question they’ve never asked before, am I investing in gun companies. The truth is pretty much all mainstream index funds do include gun companies. It dawned on me that for whatever reason the time had come that we need to be more accountable to not just returns, which are extremely critical but also the values that people have. And it’s not only guns. People have strong feelings about the environment and even the way companies treat their employees. We knew it would be hard but partnering with companies like Morningstar and others, we were able to build an investment strategy that not only focused on risk balanced returns, but also gave our clients a way to vote their investment dollars to reflect their personal values. This became the Stewardship way of investing. For the future we believe this kind of filtering will result in better performance in the long run.

QUESTIONDescribe your approach on how you filter investments for the Stewardship Personal Values Portfolios?

ANSWERST: At Seasons of Advice, we use a proprietary scoring algorithm to filter mutual funds and ETFs through the Morningstar DIRECT platform. Using their data and additional screening through Sustainalytics, we are able to filter this list of investments further by eliminating all investments that are rated average or lower on the Sustainability Rating spectrum. This filters the list of investments down from a few thousand options, to a few hundred. We then overlay this list of investments with an additional layer of filters revolving around specific areas of concern that include controversial weapons, palm oil, thermal coal, tobacco, small arms, and animal testing, which is optional. We look to eliminate investments that have more than 5% of their assets invested in companies involved in any of these areas of concern. Once filtered for the areas of concern, we look for the best option in each of the asset class categories that are represented in our firm-wide allocation models. We compare the investment in each category to its relevant benchmark to make sure the performance is in line or better and then add the investment to our “buy” list. This filtered list of mutual funds and ETFs is also complemented with some individual stocks that score high on ESG concerns to add a little extra alpha to the portfolio.

QUESTIONWhy is this approach different than buying a singular socially conscious fund like the Vanguard FTSE Social Index Fund?

ANSWERST: That’s a great question! What singular investments like the FTSE Social Index Fund are offering you is one investment that primarily invests in stocks and comes with the risk metrics of a stock investment. Our goal with the Stewardship Personal Values Portfolios is to provide a fully asset-allocated portfolio that not only manages risk by giving you access to stocks, bonds and alternatives but further breaks out those categories. I believe this focus on a fully asset-allocated portfolio and risk management by investing in multiple asset classes is the single biggest differentiator between a pre-packaged fund like the FTSE Social Index Fund and our Stewardship Personal Values Portfolios.

QUESTIONHave you been surprised by any of the findings once you started filtering for these specific “areas of concern”?

ANSWERST: There’s been a few surprises or “aha” moments as we have continued to work on the Stewardship Personal Values Portfolios over the past couple of years. The biggest one that comes to mind is the continuous addition of investments that now have an ESG mandate. This can be seen in recent announcements by people like Larry Fink, the CEO of BlackRock, who wants to turn BlackRock into an ESG focused asset manager. Another big surprise to me personally was how performance wasn’t affected by focusing more on investments that have an ESG focus versus investments that did not. In the past, one of the biggest reasons for not investing in these ESG investments was the belief that they tend to underperform their non-ESG focused counterparts. When we began to filter investments for our Stewardship Personal Values Portfolios, we came across countless options in multiple asset classes that were either outperforming or performing in line with their non-ESG counterparts and the subsequent indices. I think as this space continues to evolve over the next few years, we’ll find ourselves being surprised less and less since ESG focused investments and investing seems to be the way the industry is headed.

QUESTIONHow does weaving personal value choices or principles into an investment portfolio strategy help or hurt performance?

ANSWERST: Based on the results we’re seeing; performance is definitely not being hurt by investing ones personal value choices or principles as part of the investment strategy. We have a number of clients who have now been invested in the Stewardship Personal Values Portfolios since the onset in late 2018 and the performance since inception is on par, if not out-performing their blended benchmarks. As we mentioned before, we continue to back-test these portfolios using Morningstar DIRECT portfolio snapshots over the last 1, 3 and 5 years. The trend appears to be that these portfolios will perform just as well if not out-perform their blended category indices. Again, this is a back-test based on data already available and no guarantee for future results but the fact that more and more investments are now being offered with an ESG mandate will only help portfolios outpace their blended benchmarks.

QUESTIONThe risks to investors of most Climate Change scenarios seem overwhelming for the next decade. How do Stewardship Personal Values Portfolios manage climate risk?

ANSWERCH: As Saad mentioned, the Stewardship portfolios only feature companies that have above average or high ratings for Environment, Social and Governance. The investors pool their money to try to influence the decision makers. By proactively filtering out activities companies that are unfriendly to the environment like thermal coal and palm oil producers, our investors are giving a clear message that they will not allow their money to fund these types of companies. Even more so, Stewardship Portfolio investors along with all the other ESG oriented investors expect the Leaders of these companies to take the efforts to respect the environment with the hopes that one day, working together, we can have an impact on climate change.

QUESTIONHow do Stewardship Personal Values Portfolios determine which responsibly managed companies are well-positioned to provide strong long-term growth?

ANSWERCH: That’s an interesting question. Well really, the Stewardship fund follows the same process the parent company uses to determine the best investments for the future. The highly successful Seasons of Advice methodology and algorithms that have been used in the mainstream investments for decades are part of the approach for the Stewardship portfolios. The goal of all the company investments is to meet or exceed benchmarks net of fees. We are very proud of our results.

QUESTIONHow do you think the Stewardship Personal Values Portfolios will evolve over time since the industry seems to be moving in the direction of “green/ethical investing”?

ANSWERCH: We are already working on Stewardship 2.0. We now have the technology for consumers to custom build a portfolio by selecting from a long list of what are called impact items. Specifically molding the investments to further customize target goals such as focusing on women’s and diversity issues as well more focused client issues.