In this episode Abrin and Tyler bring on a guest, Jim Bradley, to dive into the world of ESG investing. Jim is the founder of Penobscot Financial Advisors, as well as the Chief Investment Officer. His background and dedication to sustainable investing brings a unique perspective to this hot topic in the investing world.
What is ESG?
ESG stands for Environmental, Social, and Governance investing. Jim gives listener’s a bit of a background of how ESG investing has evolved from Socially Responsible Investing “SRI” to what ESG Investing looks like today. In the past, this type of investing was centered around avoiding certain industries like tobacco, or oil companies, which would cause investors to make a decision between their conscience and their returns.
Investment Filter or Investment Strategy?
Tyler talks about his time in the industry and seeing ESG Investing being a simple overlay on a portfolio, but Jim decided to do things a bit differently at PFA. All investment selections start with an ESG analysis to make sure that these criteria, which is important to PFA but also important to its clients, is at the forefront of any investment decisions. Jim talks about how we are seeing that investors don’t necessarily need to make a decision between investing in things they care about and their returns, since we are starting to see outperformance from ESG assets vs the benchmark. Jim points to the idea that companies that are well positioned for long term sustainability tend to have better long-term outlook.
How do you grade an ESG score?
Tyler talks to the problem in the industry right now, that there is no uniform way of measuring a ESG score for a fund or an asset. This leads Jim to dig deeper on each investment selection to see if there is good diversity within the leadership of the company, or if the company is actively positioning themselves to be friendly to the economy.
Investors today will need to look a little further than an ESG score on a finance website to really know if they are putting their money into something they can believe in. Jim talks about “Greenwashing” where companies looking to take advantage of the ESG popularity of the moment, will create false or exaggerate claims about their environmental impact in hopes of driving up their stock’s value.
Voting with your Money
The crew talks about “Impact Investing”, where funds will actively pressure companies to shift to becoming more ESG friendly. This allows investors to not only avoid companies they don’t believe in, but instead take a more activist approach. Today, investors can vote with their money for companies they want to lead into the future than ever before.
Trend or Shift?
Abrin starts this discussion out by stating that he does believe there are quite a bit of trends in the ESG header, we are probably seeing a market shift towards these types of companies. We see large fund managers bringing the issue to the forefront, and large wire houses pumping money into this type of investing, which further points to the direction we seem to be heading.
Walk the Walk!
Jim not only makes ESG investing the leading factor in investment selection, but he also applies that logic to Penobscot Financial Advisors. He values increasing diversity and limiting our environmental footprint. Jim notes that for all the reasons we pick ESG friendly companies in our portfolios, are the same reasons he believes it is the best way to run a business.
Check out Jim’s blog on ESG investing HERE!
DISCLAIMER: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security.
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Abrin: Welcome to Financial Discretion Advised. I’m Abrin Berkemeyer.
Tyler: I’m Tyler Hafford. Let’s cue the music. Hey everyone, thanks for joining us. Today, we are going to cover ESG Investing, or Environmental Social Governance Investing. We’ve brought a guest on the show today, Jim Bradley. Jim is the founder of Penobscot Financial Advisors, he’s also the chief investment officer for us. You may remember Jim from our Social Security podcast, if you don’t, go back and watch it, it’s a good one. But Jim, thanks for joining us again.
Jim: Thanks for letting me come back, guys.
Tyler: I had to pay Abrin, but we got him on. Yeah. So I want to bring Jim in on this because ESG has been in the news quite a bit. Anyone following investing, probably heard or seen of this, but why don’t we start with, what is ESG? And Jim, I know you’ve been in the industry for a while, what does it mean to you, when you’re looking at this?
Jim: Good question, and like you said, Tyler, it stands for, when you hear ESG, environmental, social, and governance. So those are three criteria that we look at heavily when we’re making investment decisions. We’re looking at environmental impact, we’re looking at social positioning and we’re looking at the governance of the companies, that we’re investing in.
Tyler: Sure. And this is something that’s evolved to where we are today with it. I know just in my career, I’ve seen it be quite different from even just a few years ago, where it was just an overlay you’d put on a portfolio and you’d start to pick things out, maybe I don’t like tobacco stocks or things like that. But today, it seems to be much more robust than that.
Jim: You bet. I mean, back about 30 years ago, there was the seeds of today’s quote, unquote, socially responsible investing in that, as you mentioned. There were companies that started up back in the days of the Vietnam War, where they didn’t want to have investment in, quote, unquote, the war industry. They didn’t want to be invested in firearms and that type of thing.
Jim: Other people came around with their definition of what they thought socially responsible was, whether it was not investing in tobacco or not investing in alcohol companies and that type of thing.
Jim: And that kind of exclusionary stance took hold for people who also held similar objectives. And back in the day, it was looked at as being something where yeah, you can invest for financial reasons, but you can also invest with a social conscience. However, the two were at loggerheads with one another in a lot of ways. The conventional wisdom was, you can do better by not eliminating things-
Jim: … from your portfolio, than you can by eliminating.
Tyler: Yeah. Yeah. And that was, even when I started in the industry, it would always be that trade off. “How much of my return am I going to give up if I want to invest in something that I care about?” And Jim, you lead the investment here at Penobscot Financial Advisors, being the chief investment officer. You’re doing it a little differently than the afterthought. Right? You decided that we want to make this where we started, when we’re picking out investment selections.
Jim: Yeah, you’re right. So socially responsible investing has matured, I guess you could say, to a point where, as far as the industry goes, it’s no longer this, nice to have. It’s something that’s absolutely core to the investment industry, as a whole and certainly to us, as a firm, when we’re making investment decisions. We take advantage of resources that help us to measure certain things. One of the problems with socially responsible investing in the past, was that everybody had different definitions of what social responsible is.
Jim: Abrin, you might think you want to not hold alcohol stocks in your portfolio, but Tyler might think a good bourbon company is a really good thing for the world and I would agree.
Tyler: And you obviously, haven’t met Abrin, though.
Jim: That was purely hypothetical.
Abrin: No, we’re going to put disclaimers at the end of this.
Jim: But fortunately, what’s come along over time, are some generally adhered to principles, not of things that we want to exclude from portfolios, but things that we actually look to seek out in companies, around those three major criteria. Around how they handle their environmental responsibility, around how they are, from a social standpoint, with all of their stakeholders, their communities, their employees, and their shareholders, as well. And then from a governance standpoint, how are they set up to deliver a better outcome by not being just stale, pale, and male, and actually having some diversity at the top of the organization and in it’s driving.
Jim: And helping to frame that, the United Nations has come up with something they call, SDGs or Sustainable Development Goals. Where they’ve identified 17 key areas around poverty and clean water and gender equity and that type thing. And in order for us to, as an industry, start thinking a little bit more in line with something that we can all agree on, that needs to be put forward.
Tyler: Yeah. And that seems to be what is missing at the moment. Right? I know that when we’re looking at investment selection, we’re digging a little deeper than, on an ESG score, we find out on a company or a fund. But there is no uniformity to, what is a good ESG score and how do you come to that? And those types of things. And I know that a lot of folks listening to us are investing on their own or want to make ESG a focus. I think you got to do a little more digging than, what’s the finance score on this company?
Abrin: You’re sure right. Yeah. There’s beginning to become more than a handful of organizations out there, whose role is to help you to assess how responsible a company’s being, along those areas and we certainly use them. I mean, they’re helpful to have around.
Abrin: We’re unique in our space, because we actually take a lot of that ESG vetting of companies and do it internally, when we’re selecting stocks.
Abrin: Especially for our domestic equities sleeve, our US stocks sleeve. And as you guys know, that gets thrown around for a big part of, we take the financial stuff and we look at companies that are returning well on their capital assets and priced reasonably and being responsible from a financial standpoint. But we’re starting there, to get a universe, that then we can start to pick up our, “Okay, which companies in this area, are we most comfortable with, based upon our values, based upon what we see are our client’s values?
Abrin: And we can get pretty creative with that. We can take a look at how a company is viewed by its employees, by going through Glassdoor or something like that. We can actually, go in and take a look at the board of directors of the company and see first of all, how many of them are independent directors? Does it look like a typical, old fashioned, old white guy, board or directors, or is there a diversity on the board and that type of thing? And really get creative about, how we actually think about a company in our universe should be? Is it creating a product or service that we actually think is beneficial for people?
Abrin: And is it something that we can look at our clients, with square jaw and say, “Hey, this is what we think is absolutely appropriate for us.”
Tyler: Right. Right. And I think that’s becoming more and more important, as we see big money managers coming out in the news, promoting this and saying, “This is something we need to pay attention to, as investors moving forward.” Because I think some of that, is causing companies to say, “Hey, look how ESG friendly we are.” When in actuality, maybe they aren’t doing that.
Tyler: They’re just trying to get onto this tagline, which requires us as investors, to do a little more digging.
Abrin: You bet. There’s a lot of what they called green-washing out there, where companies just put up… I’ve seen pesticides put out as being just wonderful, organic, healthy types of things.
Abrin: And they’re literally, put out there to kill things. So it’s interesting how things can get branded sometimes.
Tyler: Yeah. Absolutely. And we talked about it a little bit, about sacrificing returns in the past, the other podcasts you have done.
Jim: My parking meter’s expired.
Tyler: It used to be, having that discussion, all right, how much do I have to give up to vote in this way, vote my conscience, in returns? But what we’re seeing, is actually some outperformance in these companies that are putting it at the forefront.
Jim: You’re absolutely right. Yeah. I mean, go back a year before this podcast. In case you can’t remember Abrin, we were having a little bit of a dip in the market at the time. And it was interesting to watch because a lot of the socially responsible indices or ESG focused indices, were actually doing a lot better, working their way through the debacle that was going on at the time. But at the end of the day, it’s not all about just being nice or being aspirational or anything like that, certainly it is, in part.
Jim: But it’s not going to work if it doesn’t actually lead to better outcomes from an investment standpoint. We’re fiduciaries, we have to be looking out for the financial well-being of our clients.
Jim: So how do we square that with also, wanting to be ESG centric? And the answer is, it’s actually pretty easy because at the end of the day, companies that are better stewards of their environment, companies that do a better job of relating to all of their stakeholders, from employees to line workers, up to their board of directors. Companies that bring a diverse set of views, to how they conduct business and actively seek that level of diversity. Frankly, you can look at more than a handful of metrics, to see that overtime, they’re doing better.
Tyler: Yeah. Yeah. And it’s nice that folks don’t have to make that compromise anymore. And as our generation might, Abrin and my generation, starts to come into wealth and starts driving that ship a little bit in the investment world.
Abrin: He’s kind of dating you there, Jim.
Jim: I’m glad to get an opportunity to sit with you guys, from time to time.
Tyler: But this idea of voting with your money, seems to be prevalent in our generation. The idea that we want to put our money to work in companies that we think are going to be good for us, good for the environment, good for the country, moving forward. And it seems to be just much more activist, than it has been in the past when you’re thinking about investments like this.
Jim: Sure. And what you’re referring to there is, actually, under the overlying category of socially responsible investing, ESG is part of it. And then there’s also impact investing.
Jim: Which is actually, there to fulfill the objective of hitting measurable results that go beyond just financial measurements. And there’s some of that out there too, which is really important because at the end of the day, you can talk a lot and you can try to legislate a lot, but really, what’s going to create change, what’s going to create positive things for, whether it’s our environment or the social justice in this country and in the world, it comes down to, at the end of the day, following the dollar-
Jim: …where is the money? And that’s really, what’s going to be able to drive things a lot better than anything else, realistically.
Tyler: Yeah. And now Abrin, what do you think, and I’ll ask both of you this question, but trends in the industry, or do you think we’re making a shift towards this being something, just a big focal point in the investing world?
Abrin: Yeah. I think like Jim said, you’ve got to follow the money, as more people put… I mean, that’s all the market is-
Abrin: …it’s just supply and demand of money.
Abrin: Things go up when people are pumping their money into it.
Abrin: Because they see it as long-term, as things go down, when people see businesses going off the way and you’re going to have going to have losses in the future because they’re not going to be able to make it in tomorrow’s economy.
Abrin: So, you see that every day, that’s just what the market is. So, if more people are going to start pumping their money into things that are more ESG focused, then that could be the broader movement going forward-
Tyler: The shift, yeah.
Abrin: …the shift.
Abrin: I do think there’s plenty of trends within that and that would be like subcategories. I mean, you look at tax provisions, there’s right now, hybrid vehicles, electric vehicles. There’s a lot of tax credits out there that incentivize people to go out and buy those things-
Abrin: …that makes the revenue of the company that are producing those vehicles, look a lot better. What happens when those tax incentive goes away? Do people keep purchasing those?
Abrin: Or does it drop off because maybe, the tax incentive period wasn’t long enough for the overall shift to happen in the marketplace?
Abrin: So, there could be definitely, bumps along the way and things of that nature, that would be more towards the trends. But I think overall, it seems like there’s a more of a market shift in general.
Abrin: Just because you’ve got the broad majority of folks, as they move towards this way of investing, it changes the underlying decision making within the market.
Jim: I agree. I was able to get out to a Global CFA Conference a couple of years ago, out in Hong Kong. And these conferences really can be an eye-opener, as to where the industry is and where it’s going. Fully, a third of the breakout sessions at this global conference, were ESG focused.
Jim: If you look at the challenges we’ve had over the last year and how fragile human health and well-being and their economic health and well-being can be.
Jim: And then you look at something as big as climate change and trying to look at how much bigger that is, of an issue, over time. And it’s not difficult to put those two things together, as to why it’s not only a good thing, but it’s actually, existential. It’s vital that we consider those things, when we’re doing our investing.
Tyler: Yeah. Yeah. I think I agree with both of you and it goes back to following the money. When I see big money managers out promoting this or saying that it’s something we got to pay attention to. And I see wirehouses pumping tons of money into marketing around it, it tells me that this is probably not going away. This is something that is going to be with us, moving forward and I think it’s a good thing. It’s allowing people to invest with a conscience.
Tyler: I think that’s important, especially for new people getting into the market. I think if you believe in what you’re investing in, it’s a little easier to continue doing it.
Tyler: Behaviorally, I think it’s a good thing. Well, we’ll finish up here, Jim, all of this stuff, investment selection, what’s going on in the industry, all that it’s great. You decided to not just talk the talk, but walk the walk as a business owner, Penobscot Financial Advisors. The ESG filter that we’re putting on it, it doesn’t stop at the investment selection.
Jim: You’re right. And I guess it should be obvious, right? I mean, if we’re investing in companies that are leaders in these areas, environmental, social, and governance issues, not because we’re necessarily, trying to just feel good, but because we’re trying to get better returns for our shareholders.
Jim: Why in the heck, would we not want to espouse those same things? So whether it comes down to the fact that we went paperless a few years back or rethought all of the resources that we consume and try to do them more efficiently.
Jim: Or that we built out new office space, in an energy efficient way. The fact that we’re really taking big steps to be better members of our community as a whole, that we’re trying to take proactive measures to increase the diversity of our team. And not only at just the basic team level, but at the leadership level. These are all things that we’re not doing for any reason, except for the fact, that they’re just good business.
Tyler: Yeah. Yeah. Great stuff. Coming over to Penobscot Financial Advisors, it seems to be something that’s important. I’m glad you went paperless because I hate paper. But to your point, we stepped into this pandemic, everything changed in the working world. And I think, being ready to do that, kept us afloat and we didn’t really miss a beat.
Jim: It worked out well.
Tyler: Yeah. So I know that you weren’t planning for the pandemic four years ago when you went paperless, but it ended up being, like you said, just good business to be able to sustain. Well, I want to thank Jim, for coming on. Anyone who likes Jim’s opinion or just wants some more education around this stuff, Jim did a great blog on ESG. He writes a blog for the firm every Friday, we lock him in a room and he can’t come out until he produces something. But make sure to check out our Facebook and our website, tons of topics on there, some really good content. Tell your friends about us. You can find us on any pod catcher. You can see us on YouTube, spread that word, but anyone who’s maybe interested in ESG investing, please recommend this podcast to them. That’s all I got guys.
Jim: Thanks for having me guys.
Jim: I hope you’ll let me come back again sometime.
Tyler: Now, get in the room, Jim.
Abrin: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein, is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein, will prove to be correct. Thank you.