In recognition of Earth Day, let’s discuss what we at Hesperian Wealth think is a better way to support the environment as an investor. Many investors have recognized the harmful ecological byproducts of our global economy. Increasingly, they want to do something about it with their investment dollars. Unfortunately, while good at selling new funds, the conventional sustainable investment approach hardly does anything about the problem before us. It often doesn’t even do a great job of keeping irresponsible investments out of your portfolio. We focus on real impact.
For our environmentally minded clients, we look for the select few fund managers out there actually doing something about climate. Then we use those funds to build client portfolios that are much more likely to move the needle on this issue.
What Might Be in Your “Sustainable” Portfolio?
If you’ve tried to build an environmentally responsible portfolio on your own, you might be shocked to find out what it’s in your portfolio:
- You may own shares in a sustainable fund run by one big asset manager whose CEO recently said ESG investing adds nothing and removed his firm from previous net-zero commitments and an industry climate group. If the investment manager itself thinks its sustainable fund (and the climate effort in general) is BS, why are they selling it to people?
- You may own sustainable investment products from one of the three mega asset managers, all of which are severely limited in their ability to pursue the activism necessary to make a real difference (like deep engagement with company management teams, drafting and supporting shareholder proposals, and at the extreme, participating in proxy fights). Many don’t even vote in favor of a majority of environmental proposals on your behalf!
- You may own one of the many, many sustainable funds that in our opinion are merely expensive stock-picking funds in disguise.
At best, these investment options simply eliminate fossil fuel companies and a handful of other obviously noxious industries like tobacco from an index. And sometimes these new sustainable indexes can’t even do that right: One index famously removed Tesla in favor of ExxonMobil because of the peculiarities of its ranking system. Whatever you think of Elon Musk, Tesla can’t be worse than ExxonMobil, can it? What’s more, some of the companies ranked the worst by one data provider are ranked the best by another. So at their worst, these funds can make truly bizarre decisions.
What Does Hesperian Do Differently?
For us, screening out certain industries or companies by itself is not enough. Besides, some (though not all) of the companies you’d screen out are precisely the ones that need to hear an environmental message from their shareholders. If fund managers are screening some stocks out, the reason should be that, in their opinion, there’s no way to change them or they’ve exhausted their efforts to engage with management. Very few funds take this approach today.
We look for those fund managers that do. We say to them: Don’t tell us how sustainable investing might “beat the market”. Show us the impact initiatives you’re pursuing! Show us evidence you’re engaging and filing shareholder proposals if necessary! Where’s your track record of success changing corporate behavior? And be aware, we will follow up and regularly monitor your actions going forward!
Then we report back to you our clients: first, performance results, second, impact results. A dual mandate.
The Different Approaches to Building a Personal Portfolio
Our Impactful Portfolios
Democratizing Personal Screening
Managing the Potential Cost of Impact
Whenever you deviate from an index, especially for non-investment reasons, there’s a risk of performing differently (for better or worse). Not to mention, fund expenses might be higher. So we also do the work to get confident that the net-of-fee performance of whatever fund we recommend won’t stray so much from our risk and return assumptions that your financial plan will be materially impacted. This means balancing diversification/cost and impact potential. Bottom line, we’re looking out for your financial wellbeing too, so you can sponsor environmental work with your investment dollars and keep your peace of mind.
Learn More This Earth Day
Contact us to discuss impact investing and switching to a personalized portfolio that truly supports environmental initiatives and addresses the climate risks to our economic system.
Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.