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.

Muni Bond Basics for Investors: Know the Benefits & Risks

Originally published: March 26, 2020

Municipal bonds, aka munis, may not come to investors’ minds every day. But muni bonds are at work all around us, providing funds to build roads, bridges, parks, schools, and other things vital to our everyday lives that may yet be taken for granted. Two-thirds of infrastructure projects in the United States are funded by muni bonds, according to the Municipal Securities Rulemaking Board.

Tax-free muni bonds may be appealing for many investors, and muni bonds in general can be a valuable tool for a long-term portfolio strategy, according to Roza Shamailov, senior manager, fixed income trading and syndicate at TD Ameritrade. Investors should also be aware of a few caveats and potential downsides of muni bonds. Let’s look at a few muni bond pointers for investors.

What is a Muni Bond?

Muni bonds are interest-bearing debt obligations sold by a state, county, city, or other government agency or authority to finance public capital projects. In addition to schools, roads, and bridges, these projects may include hospitals, jails, stadiums, and low-income housing.

Similar to Treasuries and other types of bonds, munis are considered debt securities. They’re tradable financial instruments with predefined principal amounts, interest, and maturities. Munis are also considered fixed-income securities, meaning investors receive periodic interest payments (typically every six months) of a nonvariable amount until the bond matures. There are two main types of municipal bonds: general obligation bonds and revenue bonds. A general obligation bond is paid back through the unlimited taxing power of a state or local government. A revenue bond is paid back through the project’s ability to raise revenue and pay off debt, which typically makes this type of muni higher risk than a general obligation bond.

There’s also a third type of muni called a private activity bond. It’s sold on behalf of a municipality but for the benefit of a private entity such as a sports team. Each bond offering comes with its own set of riders, clauses, and potentially unique risks, which are all spelled out in the prospectus.

How Big is the Muni Bond Market?

In dollar terms, the muni bond market is a relative pipsqueak compared to its Treasury and corporate counterparts, but muni numbers are nothing to sneeze at. In 2018, the U.S. muni bond market had a total value of $3.8 trillion and about $11.6 billion worth of munis were traded each day, according to the Municipal Securities Rulemaking Board.

By comparison, the corporate debt market totaled $9.2 trillion in 2018 and about $31.2 billion in corporate bonds traded each day.

What Do Muni Bonds Yield, and How Has the Market Performed?

Muni bond rates vary depending on the creditworthiness of the entity selling the bonds. The most creditworthy muni bond issuers—those with the lowest risk of default—pay lower rates than the less creditworthy, which carry a greater risk of default. An AAA-rated muni bond—the highest possible rating—pays a lower rate than an A-rated muni.

As of late December 2019, U.S. yields for 5-year and 10-year muni bonds averaged about 1.15% and 1.5%, respectively, according to Bloomberg data. By comparison, 5-year and 10-year Treasuries yielded 1.73% and 1.92%, respectively.

As for returns, muni bonds in recent years had a solid, if unspectacular, performance in the broader market scheme of things. The S&P Municipal Bond Index, which reflects the performance of more than 200,000 bonds, had posted a return of about 7.2% for the year through late December 2019. The S&P 500 Index, which represents the U.S. stock market, was up 28% for the year.

Over the long term, muni bond returns also lagged the S&P 500 and did only a little better than the rate of inflation. The S&P Municipal Bond Index posted an average annualized five-year return of 3.6% and an average 10-year return of 4.4%. (Yields and other information on specific muni bonds can be found by using the TD Ameritrade Bond Wizard).By comparison, the corporate debt market totaled $9.2 trillion in 2018 and about $31.2 billion in corporate bonds traded each day.

What Are the Tax Benefits of Muni Bonds and Other Tax Implications of Muni Bonds?

Interest earned on corporate or Treasury bonds is taxable, but that’s not the case for most muni bonds. For investors, “the main advantage of investing in municipal bonds is earning tax-free interest,” Shamailov said.

When comparing municipal bonds to other investments, she suggested investors consider “taxable equivalent yield,” also called the after-tax yield.

The after-tax yield accounts for tax consequences incurred by either a capital gain or ordinary income, and because the interest on most municipal bonds is excluded from federal income taxes, the tax savings to the investor vary depending on an investor’s tax bracket and the yield on the bond.

For example, an investor in the 35% federal tax bracket considering a muni bond with a 3% yield would have to earn 4.61% on a taxable investment to equate to the 3% tax-free investment.

In this example, the taxable equivalent yield “is being factored using only the federal income tax exemptions,” Shamailov said. “State and local exemption would push the taxable equivalent yields on municipals higher, which would improve the appeal to investors in lower tax brackets.”

In other words, muni bonds aren’t free lunch. Investors should understand the potential tax implications before they dive into the muni market.

What Are the Risks of Investing in Muni Bonds?

The primary risk in muni bonds is an issuer default—for example if a city or other government body goes bankrupt or otherwise can’t pay its debts. That’s a relatively rare occurrence in the muni bond market.

In 2018, the default rate for investment-grade municipal bonds was 0.18% compared to 1.74% for investment-grade corporate bonds, according to the Municipal Securities Rulemaking Board.

Other risks include opportunity cost, meaning muni returns could be lower than what you might have received if you invested in something with a higher risk/return factor. And, although certain muni bonds are exempt from federal, state, and local taxes, interest income may still be subject to the alternative minimum tax (AMT).

Muni interest income could also negatively affect Social Security benefits because the IRS considers those payments as income when calculating taxes on Social Security benefits.

Are Muni Bonds More Appropriate for Some Types of Investors?

“Historically, tax-exempt muni bonds have been favored by investors in higher tax brackets,” Shamailov said. “But investors in lower tax brackets can also reap the benefits of munis.”

Again, the interest earned on munis is exempt from federal income tax and, in many cases, is also exempt from state and local taxes for investors residing in the state where the bond was purchased. Tax-free munis may also appeal to investors in retirement or approaching retirement.

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.

The Sustainable Finance Podcast: Sustainable Finance Knowledge for Financial Advisors

I launched The Sustainable Finance Podcast (SFP) in May of 2018 based on the same choices I made as a mid-career financial advisor that doubled my practice revenue over five years by integrating sustainable and ESG investment strategies into client portfolios. Those choices also motivated me to write 49 sustainable finance leadership articles for FA Magazine over a four-year period, beginning in 2014 after I sold my practice.

My favorite podcast programs are conversations that reveal the personal passion of the subject matter expert guest for any one or more of the UN SDGs. I figure that since 191 UN member countries agreed in 2015 on the most important global issues facing humanity, we should keep the conversation alive and well. And my One for All Pledge is: Clean Water and Sanitation – SDG #6.

In 2018 I saw the SFP digital media platform as my next best opportunity to promote this once-in-a-generation business building opportunity for motivated RIAs and advisory practices. The timing was also perfect to support Paul Ellis Consulting’s co-sponsorship of the 2018 Sustainable Investing Conference at the United Nations, which focused on introducing the UN Sustainable Development Goals (SDGs) to members of the U.S. Registered Investment Advisor (RIA) industry.

We recently posted Episode 70 and the Sustainable Finance Podcast (SFP) subscriber base is over 5,000 across several distribution networks. I’m now seizing opportunities to write about SFP conversation topics for investment industry publications, joining and moderating ESG conference panels and having podcast conversations with senior UN officials and corporate CEOs. Public and private sector thought leaders are eager to tell their business critical and public policy ESG integration stories to the SFP investor and advisor audience.

I’m proud to say that 51% of SFP thought leader conversations are with women advisors, portfolio managers and sustainable finance analysts. And I believe that the gender composition of the financial services industry is gradually shifting in favor of women advisors to women clients as the largest intergenerational wealth transfer in history gains momentum over the next decade.

The other major financial services industry trend I see rapidly growing and eventually becoming dominate is digital communications, marketing and service delivery. Financial advisors and asset managers in Europe will be paying a government regulated price for their carbon footprint by year-end 2020. And I expect that the same will be true in the U.S. and Asia before too long, as the Baby Boomer industry cohort transitions to retirement. I believe the Next-Gen industry cohorts will build core business models that provide commercial solutions to an environmental or social challenge and contribute measurable progress toward one or more of the United Nations Sustainable Development Goals (“SDGs”).

Basics of Estate Planning

Originally published: February 9, 2020

No one can predict the future, but one thing is for sure: If we leave unanswered questions about how to handle our affairs after we pass, life for our loved ones could become much more difficult. That’s why formalizing your wishes in an estate plan is an important aspect of financial planning that shouldn’t wait.

It’s never too early to begin thinking about your legacy. To get the process started, consider the following basic steps:

  1. Prepare a will. Your will is a legal document that spells out your wishes about who will inherit specific assets after your death. A properly drafted will can play a critical role in minimizing your estate’s exposure to taxes. If you should die without a legally binding will in place, courts may end up making decisions about who benefits from your estate, regardless of your best intentions. Be sure to review your will regularly.
  1. Consider a living trust. Explore living trust options if you have concerns regarding estate taxes, privacy, lawsuits or creditors. You might also establish a living trust if you want to specify how assets are distributed to heirs, to help prevent mishandling of an inheritance.
  1. Name your beneficiaries. Certain assets such as retirement plans (401(k)s, 403(b)s, etc.), IRAs, bank accounts and insurance policies allow you to designate beneficiaries. These forms take precedence over designations contained in a will. For this reason, it is important to update your beneficiaries when things change. Marriage, divorce, a move, birth of a child or death in the family are common life events that can trigger beneficiary updates.
  1. Assign a power of attorney. A power of attorney is a legal document that assigns the right to manage your affairs if circumstances arise that prevent you from doing so. Each state has its own specific rules to establish this legal arrangement. Designating a person to be a “durable” power of attorney means they can act as your agent, making medical and/or financial decisions for you when needed.
  1. Gather important information. Create a folder to house critical documents about your assets and obligations. This should include a copy of your will, deeds to property, car titles and other documents that show ownership of your assets. List all accounts where money is held, sources of income, bills and outstanding debts. Also list names, addresses, phone numbers and email addresses for anyone your next of kin may need to contact. Don’t forget to include user names, passwords and even answers to security questions to allow your survivors to access online accounts as well as your cell phone, voice mail and email accounts. Consider storing key materials in a safe deposit box, home safe or with a trusted adviser.

Preparing your estate is one of the most thoughtful things you can do for your loved ones. Be sure to consult with an attorney for assistance in creating the necessary documentation for your plan. Your financial adviser can review your estate goals to assure that your legacy intentions are consistent with your overall financial strategy.

Gregory A. Chona is a financial adviser with Ameriprise Financial Services in Crown Point.

Blackrock CEO Larry Fink – Climate Crisis will reshape Finance

Originally published: January 14, 2020

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance,” Laurence D. Fink, the chief of BlackRock, wrote in his annual letter.Credit…Damon Winter/The New York Times

Laurence D. Fink, the founder and chief executive of BlackRock, announced Tuesday that his firm would make investment decisions with environmental sustainability as a core goal.

BlackRock is the world’s largest asset manager with nearly $7 trillion in investments, and this move will fundamentally shift its investing policy — and could reshape how corporate America does business and put pressure on other large money managers to follow suit.

Mr. Fink’s annual letter to the chief executives of the world’s largest companies is closely watched, and in the 2020 edition he said BlackRock would begin to exit certain investments that “present a high sustainability-related risk,” such as those in coal producers. His intent is to encourage every company, not just energy firms, to rethink their carbon footprints.

“Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Mr. Fink wrote in the letter, which was obtained by The New York Times. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

The firm, he wrote, would also introduce new funds that shun fossil fuel-oriented stocks, move more aggressively to vote against management teams that are not making progress on sustainability, and press companies to disclose plans “for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized.”

Mr. Fink has not always been the first to address social issues, but his annual letter — such as his dictum two years ago that companies needed to have a purpose beyond profits — has the influence to change the conversations inside boardrooms around the globe.

And now Mr. Fink is sounding an alarm on a crisis that he believes is the most profound in his 40 years in finance. “Even if only a fraction of the science is right today, this is a much more structural, long-term crisis,” he wrote.

A longtime Democrat, Mr. Fink insisted in an interview that the decision was strictly business. “We are fiduciaries,” he said. “Politics isn’t part of this.”

BlackRock itself has come under criticism from both industry and environmental groups for being behind on pushing these issues. Just last month, a British hedge fund manager, Christopher Hohn, said that it was “appalling” of BlackRock not to require companies to disclose their sustainability efforts, and that the firm’s previous efforts had been “full of greenwash.”

Climate activists staged several protests outside BlackRock’s offices last year, and Mr. Fink himself has received letters from members of Congress urging more action on climate-related investing. According to Ceres and FundVotes, a unit of Morningstar, BlackRock had among the worst voting records on climate issues.

In recent years, many companies and investors have committed to focusing on the environmental impact of business, but none of the largest investors in the country have been willing to make it a central component of their investment strategy.

In that context, Mr. Fink’s move is a watershed — one that could spur a national conversation among financiers and policymakers. However, it’s also possible that some of the most ardent climate activists will see it as falling short.

Even so, the new approach may put pressure on the other large money managers and financial firms in the United States — Vanguard, T. Rowe Price and JPMorgan Chase, among them — to articulate more ambitious strategies around sustainability.

When 631 investors from around the world, representing some $37 trillion in assets, signed a letter last month calling on governments to step up their efforts against climate change, the biggest American firms were conspicuously absent.

BlackRock’s decision may give C.E.O.s license to change their own companies’ strategy and focus more on sustainability, even if doing so cuts into short-term profits. Such a shift could also provide cover for banks and other financial institutions that finance carbon-emitting businesses to change their own policies.

Had Mr. Fink moved a decade ago to pull BlackRock’s funds out of companies that contribute to climate change, his clients would have been well served. In the past 10 years, through Friday, companies in the S&P 500 energy sector had gained just 2 percent in total. In the same period, the broader S&P 500 nearly tripled.

In an interview, Mr. Fink said the decision developed from conversations with “business leaders and how they’re thinking about it, talking to different scientists, reading different research.” Mr. Fink asked BlackRock to research the economic impacts of climate change; it found that they are already appearing in a meaningful way in the form of higher insurance premiums, for fires and floods, and expects cities to have to pay more for their bonds.

Wherever he goes, he said, he is bombarded with climate questions from investors, often to the exclusion of issues that until recently were once considered more important. “Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” he wrote in his letter.

He wrote that he anticipated a major shift, much sooner than many might imagine, in the way money will be allocated.

“This dynamic will accelerate as the next generation takes the helm of government and business,” he wrote. “As trillions of dollars shift to millennials over the next few decades, as they become C.E.O.s and C.I.O.s, as they become the policymakers and heads of state, they will further reshape the world’s approach to sustainability.”

While BlackRock makes its green push, the Trump administration is going in the opposite direction, repealing and weakening laws aimed at protecting the environment and promoting sustainability. Indeed, Mr. Fink’s effort appeared to be another example of the private sector pressing on issues that the White House has abandoned.

Still, Mr. Fink made plain that while he intends for the firm to consider climate risks, he would not pursue an across-the-board sale of energy companies that produce fossil fuels. Because of its sheer size, BlackRock will remain one of the world’s largest investors in fossil-fuel companies.

“Despite recent rapid advances in technology, the science does not yet exist to replace many of today’s essential uses of hydrocarbons,” he wrote. “We need to be mindful of the economic, scientific, social and political realities of the energy transition.”

BlackRock manages money for countries across the globe as well as states and municipalities across the nation. It could face opposition for its new stance in areas that benefit from fossil fuels, like countries in the Middle East or states where oil has become a significant part of their economies.

Mr. Fink said that because much of the money BlackRock manages is invested in passive index funds like those that track the S&P 500, the firm was unable to simply sell shares in companies that it felt were not focused on sustainability. But he did say that the firm could do so in what are known as “actively managed funds,” in which BlackRock can choose which stocks are included.

BlackRock also plans to offer new passive funds — including target-date funds that are based on a person’s age and are meant to be used to prepare for retirement — that will not include fossil fuel companies. Investors will be able to choose these instead of more traditional funds. To the extent that fossil fuel companies are in an index, BlackRock plans to push them to consider their eventual transitionto renewable energy. Mr. Fink said the company would vote against them if they are not moving fast enough.

“We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” he wrote.

Green Bonds Now In Focus For ESG Portfolios

Originally published: March 20, 2019

When it comes to ESG (Environmental, Social and Governance) investing, stocks get the limelight, the ringing bells and the breathless media coverage. Yet, it’s the boring old bonds that are the vehicles that underpin economic development and infrastructure throughout the world. The ESG world is now turning its attention to the newest fixed income investment: green bonds.

Green bonds are specifically earmarked to be used for climate and environmental projects. They are generally asset-linked and backed by the issuer’s balance sheet and are also referred to as climate bonds. Geared to encourage sustainability, energy efficiency, clean transportation, sustainable water management and other environmental projects, green bonds have become more relevant for ESG investors.

Bonds are in many ways more critical than stocks. Companies and governments borrow money cheaply for factories, dams, highways and all types of big ticket projects that fuel growth and expansion. Bonds are then paid back over a long-term horizon, generally decades. On the other side of the ledger are the pension funds, insurance companies and individuals that crave the steady interest payments and asset security commonly associated with fixed income investments.

It’s in this sweet spot that green bonds are sprouting to fund everything from solar and wind projects to resiliency and sustainability projects. And much like individual investors in ESG portfolios get to “do well by doing good,” governments are finding that impact-focused bonds, as opposed to traditional bonds, may lower borrowing costs. The Massachusetts Bay Transportation Authority recently issued used green bonds to build a $60 million seawall to protect a key bus facility and purchase 150 hybrid buses to retire diesel vehicles.

Just this month, the mayor of New York proposed to extend and fortify the southern tip of Manhattan. The fear behind the proposal? Another storm like Sandy could devastate the Financial District, the economic heart of New York and the leading worldwide financial center. The project has an estimated cost of $10 billion. While the mayor has indicated that he would like federal government assistance, the money will most likely come from bond mutual funds, ETFs and private institutions via the issuance of green bonds.

While in existence for only two decades, the green bond market had an estimated value of $200 billion in 2017, a trifling amount compared to the global bond market estimated at more than $100 trillion. The green bond market is growing rapidly, however, and becoming more accepted as the world grapples with sea level rise and an ever more urgent commitment to decarbonization.

China is a case in point. Moody’s estimates China issued $32.9 billion in green bonds in 2017. The country is also expected to spend $600 billion over the next decade to meet government commitments on climate change and environmental pollution, according to the London-based group Principles for Responsible Investment, an investor initiative between the United Nations Environment Programme Finance Initiative and UN Global Compact.

The World Bank is also a major issuer of green bonds and is focusing on funding low and carbon-free sources of electricity in the developing world such as the Rampur Hydropower Project in Northern India.

While some analysts fear greenwashing—tinting any project as climate or environmentally-based —a green infrastructure bond must meet the requirements of the independent Fair Trade-like organization, Climate Bonds Standard and Certification Scheme. This institute ensures that projects funded by green bonds are “consistent” with the 2 degrees Celsius warming limit in the Paris Agreement.

Going forward, many analysts believe that umbrella designation green bonds will fade as companies and governments issue bonds with more specific intents. Already, “sustainability” bonds focusing on natural resources are developing a foothold in the market. The International Capital Market Association is also advocating “social bonds” with proceeds used to fund “new and existing projects with positive social outcomes.”

The ever-widening definition of what makes a green bond green parallels many of the same concerns about the ESG trend. Green bonds pose the same risks in the marketplace as any other vanilla bond and perhaps more so. With such a small marketplace, liquidity, particularly for municipals, and sometimes esoteric projects can heighten risks.[1]

Both the Climate Bonds Standard and Certification Scheme and the ICMA say their guidelines will promote transparency, disclosure and reporting, increase the overall market and better the world.

Let stocks be glamorous. Let bonds suffer the stereotype of being boring. But blend both securities together to build a well-crafted, balanced ESG portfolio.

What’s in Your ESG Parts I & II

Originally published: April 26, 2019

When it comes to socially responsible investing or what is now being widely adopted as ESG – Environmental, Social and Governance, ask yourself if you really care about all of these categories equally? The methodology that almost all ESG evaluators use to identify and score, or rate, potential ESG investments generally relies on averages within each of these components.

Scoring is useful if you care about overall adherence to ESG but this may not mean what you think it does. 

So far, the investment community has decided investors need to be interested in all these things if you want to invest in a sustainable way. Be aware though that ESG standards alone do not necessarily reflect specific values or concerns, or what we refer to as areas of concern. And good luck trying to find a filtering system that can. At least for now that data is mostly available at an institutional level.

This becomes an interesting conversation when deciding on which investment approach you should choose. Are you looking for an average representation of all three E, S and G? Or are you primarily concerned about specific areas such as global warming, controversial weapons, or gender issues? Defining the values you wish to include in your investment strategy can result in many different approaches.

For decades the rivers that fed socially responsible investing were well stocked with an adequate array of investments considered to be socially responsible, mostly in the mutual fund world. Well known firms such as Calvert, MSCI, Ariel and TIAA were known for this. Today the bulk of ESG investing seems to be toward passively managed socially responsible index funds from firms such as Vanguard, T. Rowe Price and JP Morgan, with more and more coming out each day.  

No doubt the decision to pursue socially responsible investing is a very personal one. You may have decided that you would even allow for a slightly lower return or increase in volatility – which by the way is most definitely not a given. Kiplinger cites Morningstar analyst David Kathman who says that “There is no evidence that shows ESG or socially responsible investing helps or hurts performance.”  “Over the long term, it probably evens out,” he added. [i]

Perhaps at this point you have already found one of the many socially responsible ETF’s or mutual funds available to investors- well done, you did it! 

Well…maybe, not so much. It turns out that it is much more complicated than that.

Consider that of the tens of thousands of mutual funds and ETF investments available in the marketplace, roughly only 25% would receive an “above average or better” rating from the ESG rating firms. That’s still a tremendous amount of options for a socially responsible investor to choose from. How can you go wrong?

However, if for example you didn’t want your money to support controversial weapons, tobacco or animal testing you’d be surprised to find that a majority of these supposedly highly filtered ESG funds and ETF’s do have significant exposure to these activities. Just because one does not want to support these activities it doesn’t mean that they aren’t acceptable to the ESG rating companies.

In part 2 of What’s in your ESG? we’ll take a deeper dive into ESG certification and standards.

Special thanks to Saad Tahir for providing critical research for this article.

[i] Kiplinger 7 Great Socially Responsible Mutual Funds

What’s in your ESG?  Part 2

In Part 1 of What’s in your ESG? we reviewed some of the basics of ESG investing and options available for the ESG investor. In this Part 2, we’ll examine in greater detail the questions surrounding ESG certification and options available to the investor.

A leading consumer “seal of approval,” or another certifying standard governing ESG investing, does not yet exist. But as the demand for ESG investing continues to grow, the outcry for industry standards becomes louder. And the demand for ESG investing is definitely there, and the financial community is listening. In fact, a 2017 study by Morgan Stanley reports that over 75% of investors are interested in sustainable investing. Among women and millennials, interest in sustainable investing runs even higher, with 84% of women interested and 86% of millennials interested in ESG investing.

The need and demand for objective standards is here. But in what form will they come? Will it be marketing, driven by the underlying companies themselves (think low fat, green coloring on packaging, etc.) or will there be a one day “Gold Seal of Approval” from a trusted independent third party? Hard to say since so many of the investment criteria are subjective. What investors need is more data to make better decisions.

Although objective certification for the consumer may be just around the corner it is encouraging that a number of investment professionals have already signed on to a program sponsored by the United Nations based on their Principles for Responsible Investment (PRI). The basic certification criteria for this is primarily based on consistency and disclosure. It’s a start, and while certification is gaining momentum, it is not quite there yet to be employed for ones personalized ESG investment portfolio.

The European Federation of Financial Analysts Societies (EFFAS) may be getting closer and has defined topical areas for the reporting of ESG issues and developed Key Performance Indicators (KPIs) for use in financial analysis of corporate performance.

So, while not perfect, it’s a good start. What should you do? Should you wait until there is more readily available data? With many different stakeholders, universal certification may take many years, and only seems to be getting more complicated as time move on. But if investing based on your values is your goal, you certainly can begin to implement a strategic investment strategy today. 

If there are specific areas of concern that you want to focus on it may be best to begin with individual securities that would give you the most control. However, if you do choose individual securities be sure to prudently diversify enough in order to fill a holistic asset allocation model that can include the proper allocation of bonds (you can choose “green bonds” representing specific environmental funding) as well as equities of companies with a good sustainability record.

When considering a dive into individual securities a good way to start is to consider a particular industry. Technology companies, surprisingly enough, are generally good for the “E”. Socially responsible and Governance are more problematic though since these qualities tend to be more subjective. There are also increasing concerns over gender diversity and other related issues that are further defining Governance ratings.  

Simply accepting an industry label that a fund or a company’s investment scores well in overall ESG does not mean it necessarily is right for you, your specific values or your investment goals. We all look forward to, and welcome, more analytical tools and better ways to use them to reach our values-based investing goals. 

The best thing you can do is ask plenty of questions and be purposeful in your selection process. Maintaining an open dialogue with your trusted financial advisor is paramount to helping one achieve their goals and objectives. This is a pathway to helping you get you closer to a more focused ESG solution while understanding that the ESG landscape is ever evolving – and that is a good thing.

Special thanks to Saad Tahir for providing critical research for this article.

Why Smart People Don’t Recognize Financial Infidelity

Originally published: January 29, 2020

I have to admit I never recognized the term “financial infidelity” until recently, but it does make sense. The expression recognizes the blindness many of us have in relationships to the spending habits of partners and the effect it has on our own finances.

Take the case of a recently widowed or divorced individual who has finally in her or his opinion met the person of her or his dreams. In all other respects the person is kind and supportive. It is difficult to believe that, where there has been honesty in other aspects of the relationship there could be a darker issue to confront — which is the issue of money. There are extreme examples of this but, frankly, the person in question might not even recognize there is a problem. Where a favored investment, activity, hobby or relationship has taken control over decision-making or where a person has just been habitually careless with paying bills, the issue can come to the fore with catastrophic effect and it can be very unexpected.

What brought this question to my attention initially was a July 2019 article in “Next Avenue,” an excellent web publication mostly for those 50+ but useful for those who are younger. The article was titled “Why Smart People Don’t Spot Financial Infidelity in Their Relationship. The question is “why don’t we?”

One suggestion in the article is that “unfortunately people often hand off financial management to a partner when they do not feel confident managing money.”

Reading between the lines you might infer that, if, in a prior relationship — whether it ended in divorce or death — your partner handled money issues and you did not develop the confidence or the motivation to become actively involved, you might again pass that job over to your new partner.

Another possibility, although not suggested by the article, is that you might regard your relationship in terms of division of responsibility. It could be expressed as something like “he handles the outside bills and investments and I handle the household” or “my wife always managed the money. She was better at it than I was.”

The article noted that financial infidelity includes among other things, “things like holding secret accounts and taking out credit cards without a partner’s knowledge” and says, “it is shockingly common.” I might add that, if your spouse becomes suddenly enamored of a certain stock to the extent of investing most or all of your funds in it or spends a great deal of time trading on line without any real direction or understanding or gambles excessively, these are obviously signs of a potential serious problem.

One suggestion in the article is that “unfortunately people often hand off financial management to a partner when they do not feel confident managing money.”

Reading between the lines you might infer that, if, in a prior relationship — whether it ended in divorce or death — your partner handled money issues and you did not develop the confidence or the motivation to become actively involved, you might again pass that job over to your new partner.

Another possibility, although not suggested by the article, is that you might regard your relationship in terms of division of responsibility. It could be expressed as something like “he handles the outside bills and investments and I handle the household” or “my wife always managed the money. She was better at it than I was.”

The article noted that financial infidelity includes among other things, “things like holding secret accounts and taking out credit cards without a partner’s knowledge” and says, “it is shockingly common.” I might add that, if your spouse becomes suddenly enamored of a certain stock to the extent of investing most or all of your funds in it or spends a great deal of time trading on line without any real direction or understanding or gambles excessively, these are obviously signs of a potential serious problem.

Here are some tips suggested by the article to combat the possibility of “financial Infidelity.”

1. Don’t let go of the financial reins. While it is noted that “it’s not uncommon for couples (married or not) to combine assets, buy property together or open joint accounts … having one partner be in charge of finances isn’t a problem. What can cause issues is when the other one doesn’t pay attention to what’s going on with their money…”

2. Learn money basics. The article relates “if one partner is more skilled (in money management) it’s even more important for the other to gain understanding of the basics of investing, debt and financial planning…” The article notes “There really are no silly questions when it comes to personal finance.”

3. Don’t be shy. This one is critical. One partner could be reluctant to bring up money and feel it could be interpreted as a lack of trust. The article notes “Trust isn’t automatic; it’s owned and built between a couple.” It recommends you insist on getting access to all joint accounts and passwords for all of your partner’s accounts and states “financial transparency between partners is imperative.”

As an elder law and estates attorney I often see problems where one person handled the funds and dies. The difficulty in locating accounts, investment advisors, passwords and other critical information on death can be a serious problem.

4. Take time to read and understand financial documents before signing. Read what you sign and ask questions. If you do not get a satisfactory answer, do not sign.

5. Consider having a weekly financial check-in with your partner. Suggestion from me: Dinner out or takeout?

Janet Colliton, Esq. is a Certified Elder Law Attorney

Socially Responsible Investing Grows Up

Originally published: January 30, 2019

While socially responsible investing has been around for over 30 years, it is now just becoming accepted by the mainstream financial industry – an industry that relies on constant technological change. Today’s investors are much more sophisticated, have incredible tools at their fingertips, readily accessible research and a reborn passion to make a difference with their life and investment choices.

However, with an increased sensitivity to long-term financial planning needs, many are hesitant or just not willing to give up on returns or take on more perceived risk even though they want to “do-good”. The challenge then is to design socially responsible portfolios, also referred to as “sustainable,” “impact,” or “Environmental, Social and Governance (ESG) portfolios that are designed to modulate risk, while maximizing returns.

It’s not enough to assume the investment process is successful solely because an investor has found socially responsible companies to invest in. “Finding” is not the hard part; portfolio construction and maintenance is a horse of another color – and a complex one at that. In fact, managing an ESG portfolio requires the same discipline and skill as any other portfolio. The gender of the selection strategy simply does not mean that other portfolio management techniques that have evolved over time should be abandoned or minimized.

Constructing an ESG portfolio has been greatly aided by independent, unbiased and transparent corporate evaluators. MSCI, one of the leading ESG rating firms, claims that they rate over 6,500 companies that meet their acceptable ESG standards. Morningstar provides their Morningstar Sustainability Rating for thousands of mutual funds and ETF’s available to US investors.

The good news is that there are lots of ESG investment choices including household names like Amazon, American Express and McDonalds as well as many of today’s newer tech firms. There are, of course, some exceptions depending on where one stands on medical research protocols.

By the way, ESG investing is not just for millennials. It applies to all generations, even grandparents – the baby boomer generation – that has found a renewed voice for social causes that characterized their earlier years in the 60’s and 70’s. Now many see an opportunity to use their wealth to promote their social consciousness. Most recently the sight of a grandparent accompanying their grandchild to a rally protesting social injustice struck me as particularly poignant and perhaps a bond unparalleled in history.

There is no reason why ESG portfolios should not be more sophisticated, utilizing the latest techniques in portfolio construction and risk management. That means considering more diverse asset classes than are typically seen in current ESG investments and portfolios including small and mid-cap equities, and fixed income categories like high grade and international bonds. The more asset class categories, the more reliable risk models can be. Failure to optimize portfolio construction, including ESG portfolios, may result in investors experiencing a loss of value particularly thru the natural market cycles that various asset classes employ therefore lowering returns in the long run. Without the addition of an expanded ESG portfolio ones returns can be dangerously risky and volatile.

Financial advisors involved in the ESG arena need to better educate their clients on the benefits of an ESG asset class. Clients should also ask their advisors how a potential ESG portfolio will fit into an overall asset allocation plan or “strategic model portfolio.” This open dialogue will only strengthen the relationship between advisor and investor, ensuring that all parties are on the same page regarding the client’s goals and objectives.

Whether or not ESG represents an alternative asset class or merely a subset of existing asset classes is a philosophical question. It very well could mean that because of today’s socially responsible trends these types of investments may represent a better opportunity to reach ones goals, especially on the premise that “green” is good.

If, in fact, ESG investments can be grouped together as a unique category of investments, how or where would they fit in an overall investment plan needs to be thoroughly determined. Does ESG investing replace a category or is it carved-out from other investment categories? Where would this new asset class fit in the modern portfolio structure? These are just some of the questions that investment professionals and investors are pondering.

Our firm recently made the decision to develop a variety of ESG oriented investment solutions for our clients to primarily address their growing sensitivity to have more control of how their assets are deployed. We continue to see the trend of “vote my dollar” becoming stronger as ESG investing becomes more mainstream and an accepted and important asset class for investors of all sizes.

This article is created and authored by Charles Hamowy, CEO of Seasons of Advice® Wealth Management, LLC and is published and provided for informational and entertainment purposes only. The information in the article constitutes Mr. Hamowy’s own opinions and do not necessarily reflect those of Seasons of Advice® Wealth Management or Moneyinc.com

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