For decades, socially responsible investing was brushed off as a strategy used by so-called left-wing tree huggers who were financially naïve and sacrificed returns for their altruistic beliefs.
But its updated version — environmental, social and governance investing (ESG) — which emerged in 2005, has not only gained more respect; it is generating broad excitement.
The strategy “isn’t a granola proposition anymore.” It can reduce portfolio risk and reap “comparable, if not better returns over the long term,” argues Haleh Moddasser, a managing partner at Stearns Financial Group, in an interview with ThinkAdvisor.
The senior advisor maintains that ESG investing, also called sustainable investing, is clearly appropriate for women, who often have strong feelings about making the world a better place. However, most women ages 55 to 75 don’t even know about ESG, according to a survey of boomer women Moddasser conducted in 2019.
To raise awareness, she has written a book examining the strategy: “Women on Top: Women, Wealth & Social Change” (Amazon.com-2020).
ESG investing, which is focused on corporations’ environmental, social and governance ratings, has boomed in the last year and a half.
Indeed, the coronavirus pandemic and protests against racism gave impetus to ESG’s rise as it skewed investors’ focus from the environmental — mainly climate change — to ESG’s social aspects.
During the second quarter of this year, ESG fund flows continued at a record pace, according to Morningstar. In the United States, they totaled $10.4 billion, which nearly equaled Q1 flows. For the first half, they amounted to $20.9 billion; the annual record of $21.4 billion net flows set in 2019 was four times the previous record for a year.
Raymond James Financial, which in 2018 established a Sustainable Investing Advisory Council, continues to see “growing interest in sustainable investing, particularly among … higher-net-worth clients, women and millennials,” Kim Jenson, private client group chief operating officer, said in a statement.
Moreover, as Research Affiliates’ partners John West and Ari Polychronopoulos write in a July 2020 paper, “ESG could be a powerful theme as new owners of capital — in particular, women and millennials — prioritize ESG in their portfolios over the next two decades.”
In the interview, Moddasser, a CPA previously with PricewaterhouseCoopers, discusses both ESG stocks and the pros and cons of ESG bonds, plus the potential bad impact on millennials of the controversial ESG provision in the Labor Department’s proposed new guide for 401(k) plan fiduciaries should the rule be finalized.
ThinkAdvisor recently interviewed Moddasser, on the phone from North Carolina. The managing partner of Stearns’ Chapel Hill office unpacks what she calls ESG’s “modern iteration,” which debunks the criticism that investors who have a preference for environmental, social and governance funds means they’re thinking “more with their hearts than their brains.”
Here are highlights:
THINKADVISOR: How has ESG investing, formerly called socially responsible investing, changed?
HALEH MODDASSER: This isn’t a granola proposition anymore. The modern iteration of socially responsible investing is different: It doesn’t exclude entire asset classes, and there are so many options available that the price points have really come down to make it competitive. When you invest with an ESG lens, you’re potentially reducing risk while getting comparable, if not better, returns over the long term.
Please explain how ESG reduces risk.
Even BlackRock has acknowledged that adding an ESG factor to normal fundamental analysis of any security reduces portfolio risk. For example, if you had an ESG factor in the analysis of Volkswagen stock, you would have sold it before their  emissions scandal.
In your 2019 survey of about 500 boomer women concerning ESG, you found they were primarily interested in gun control, gender equality and climate change. Does that align with ESG preferences now?
For the first time ever, the “S” — for Social — in ESG has become dominant [for both male and female investors], as opposed to “E,” the environmental, particularly climate change. I think this is because of the pandemic and the systemic racism that’s been exposed. ESG has become more about the corporate role toward stakeholders, not just shareholders.
Why have so many financial advisors been lukewarm about ESG investing?
ESG is viewed as being soft, touch-feely. Before 2005, the thinking was that investors in socially responsible investing, as it was called, were investing more with their hearts than their brains, that they were tree-hugging, bleeding-heart liberals who had no sense of money and finance and that they were sacrificing returns — that ESG wasn’t good investing.
Was this true?
It wasn’t completely off-base. Many times people did take a haircut on returns; expense ratios were high because there weren’t many funds. And the investments were exclusionary [negative screening; e.g, tobacco companies].
In your book, you cite a 2018 Calvert Research & Management survey that found 26% of male financial advisors were not using ESG criteria and would not consider doing so. Your thoughts?
Contrast that with 53% of women advisors that are using ESG and offering it to their clients, and that the vast majority of the remaining 47% would consider using it. But of course, that’s 53% of only 20% of total financial advisors — because women make up only one in five. [All that] is why women [clients] don’t know about ESG.
Why would ESG appeal to female investors?
As a cohort, women really care about the greater good. Women give more charitably and more often, and are more interested in legacy and leaving the world a better place for their children. So it makes sense that they would have more interest in ESG — it can make things better.
Your survey found that most boomer women “let their husbands take the investing lead” even though 13% of the women feel they’re better investors. Please explain.
That’s probably the most shocking finding of my study. In my practice, women clients are worried about becoming bag ladies and feel insecure and scared but think of themselves as better investors than men, too, since they know that men get lower returns because they trade more often, are more emotional investors and follow herd-like mentality.
How does that compare with what characterizes female investors?
They have the right temperament and are more interested in long-term security than short-term returns. As a result, they earn better returns. What’s so shocking is that women know this but still let their male advisor or husband “sell” them on investment strategies that don’t feel quite right to them.
In June, the Labor Department proposed updated guidelines for 401(k) plan fiduciaries. What do you think of the provision regarding ESG factors?
By [essentially] saying that it’s OK to invest in ESG as long as you don’t sacrifice financial returns, the DOL [in effect] banned ESG from 401(k) plans. This is supremely important because the ESG movement is driven by millennials, who don’t have investable assets outside of their 401(k)s. So they stand to lose the most. If this proposal goes through, they’ll effectively lose the opportunity to invest their assets in accordance with their values.
What’s the DOL’s rationale in restricting ESG that way?
Their completely unfounded rationale is that ERISA [Employment Retirement Income Security Act] law states that if companies are looking at something other than profit motivation when they create a 401(k) options list, they’re not following ERISA guidelines — and if you’re looking at ESG, you’re not looking at profit motivation. That’s 100% not true. ESG performs as well, if not better, over the long term.
What do you think could be behind the DOL’s stance on ESG?
There’s speculation that it’s the administration’s attempt to prevent ESG from harming the oil industry since many ESG funds don’t have allocations to oil companies.
Do you recommend investing in ESG through mutual funds and exchange-traded funds?
Yes, this is a phenomenal strategy for the retail investor. I really like this option because most individual investors, unlike pension funds and endowments, don’t have enough money to move the needle — even if they’ve got $5 million. However, if they pool their assets with other like-minded people in an ESG fund that specifically targets a cause they’re interested in, they can.
What’s your take on ESG investing through bonds?
Bonds aren’t as mature as the ESG stock base, and it’s a lot more complicated to invest in ESG this way. The focus on ESG has been on stocks; so that’s a lot further along in terms of standardization and agency ratings. In the bond space, there isn’t even one agency that rates them. But it appears that Moody’s and S&P [Global Ratings] are making some progress in that regard.
Are there any positives to ESG bond investing?
Because the bond market is substantially larger than the stock market, the potential to utilize bonds for ESG is much greater. There are tons of opportunities: municipal bonds, government bonds, government bonds of foreign countries. The idea that you could use your wealth to impact politics in another country, for example, is really mind-blowing.
Another provocative finding from your study is that “few women feel rich,” even if they are rich. Please elaborate.
I have a client who has $110 million, and she’s worried about becoming a bag lady. It doesn’t matter how much money women have — they continually worry because they can’t predict the future. Women live longer than men, and 95% of women die alone [widowed or single]. They don’t know how long they’re going to live or if they’ll get Alzheimer’s or have a stroke. So they’re worried that they won’t have enough to sustain themselves for the rest of their lives.
Why would ESG be a good investing strategy for them?
Though women are motivated to do good in the world and give to charity, their actions lag. They give, but they give in smaller quantities [than men] because they fear financial insecurity. That’s why ESG investing is brilliant for women: We’re not asking them to give their money away. We’re only asking them to invest in accordance with their values.
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