4 WAYS ESG INVESTING CAN MAKE A DIFFERENCE

There is a common misconception that green investing, and ESG investing are done simply so that an investor can pat themselves on the back and feel good.  That it is all about appearances, but it doesn’t really cause any sort of change.  Balanced Capital is a big believer of green investing, and not just because we think it is something that can help you sleep better sat night.  I believe that it can make a difference, it can effect change, and it can help you better reach your financial goals.  In this article I will outline the four main reasons, ESG investing is something you need to consider.

Walk the Walk

This concept is very self-evident in other areas but tends to be lost when it comes to investing.  The idea is simple.  You would not campaign for change, and promote environmental awareness, only to get in your V8 truck, and drive home.  Doing something like that would cause you to instantly lose credibility. 

Most individuals who are passionate about green initiatives do their best to live their lives in accordance with what they believe.  They carpool, they recycle, they have solar panels etc.  All of these things go a long way in helping the planet and creating awareness.

Unfortunately, and usually through no fault of their own, these same people leave a gaping hole in their life when it comes to being sustainable.  They never take the time to think about the impact their investments are having. 

Some of the most common financial advice to a beginning investor is to simply buy an index fund.  I will give full credit here, it’s good advice.  BUT, if you are someone who goes to great lengths to reduce your personal carbon footprint, investing in an index may not be the best thing for you.  The reason being, simple index funds, the most common of which is the S&P 500, have huge carbon footprints.  The S&P 500 produces over 6 million kilotons of CO2.  That’s over 13 trillion pounds.  I don’t say that to shame anyone who owns the S&P 500 index, but simply to point out that owning that index does not line up with someone who composts all of their food waste and rides a bike to work.

ESG investing and in particular, green investing, give you a chance to take back control, and limit the carbon exposure of your investments.  It is not an easy process, but if done right, the results can be worth it.  The Balanced Capital Green Series, cuts the overall carbon footprint of the S&P 500 by over 80%.

Have a Voice

This only really applies to investors who take a direct indexing approach.  Direct indexing is the concept of owning shares of stock that make up an index rather than buying the index fund.  Our green series consists of 100 stocks selected for their financial and environmental merits.  It is a much more time consuming process than simply buying an index, but for the environmentally minded investor it is vital for two reasons.

The first, is simply having the final say in what companies you own.  Direct indexing allows you to see your own parameters and criteria for investment selection where you can set rules like; no fossil fuels, no weapons, and in the top 20% of green companies.

The second reason to implement your green investing strategy though direct indexing is that owning actual shares of stock gives you voting rights.  That means that once a year you will get an email informing you that you have some voting to do.  While admittedly, your seat at the table and your voting power is tiny, you have your chance to be heard on issues that you care about.  These votes are called proxy votes.

In these proxy votes you will have your chance to vote on many issues some of which will be directly related to how the company plans to treat the environment. You will also see votes about diversity and inclusion, and many other topics that give you a chance to push the companies in the right direction.

Balanced Capital encourages investors in the Green Series to read the proxy vote notifications they get in their email, and make their voices heard. If enough little guys join together, they can make a difference. Just ask a gamestop investor.

Influence Change

Have you ever heard the saying “vote with your wallet”? The idea behind the phrase if that if you don’t like the way a company is doing business you have the power to do something about it by taking your business, and your dollars elsewhere. The same would be true if you think a company is doing great things which you support. You can support them by patronizing them and “voting with your wallet”. While doing this on an individual level may seem insignificant, the overall impact can be absolutely enormous. We live in what is very much a supply and demand economy, and consumers (like us) have total power. If enough of us demand products that are sustainably sourced, business will be forced to offer them. If we collectively stop buying goods and services from companies we don’t agree with, they will have two choices, adapt, or die.

Socially responsible investing, and green investing can take that concept even further. The average CEO in the United States is paid in two ways. Salary, and performance based pay. Performance based pay can be tied too many different metrics. Revenue, profit margin, sales growth, expense reduction just to name a few. But no metric is more important than the all powerful share price. Because many CEOs and other top level executives get a sizable chunk of their pay in the form of stock and stock options, they have an extremely vested interested in keeping the price of their companies stock high.

For this case let’s use the stock of the imaginary company Envirokiller INC. Now let’s say Envirokiller just recently announced a new project to start drilling for oil in Yosemite National Park. I think most of us would agree that this would be a bad thing (shout out to John Muir). We would have some choices for what we wanted to do about it. We could decide to go and protest at Envirokiller’s headquarter. Not a bad idea. Might get some media attention. May get a few politicians sympathetic to the cause. We could also attempt a sit in at the park. Again probably some good media attention.

Not to cheapen the first two choices because both are noble causes, but I would point out that there is a third option, and it may be more effective. It goes back to that old phrase “vote with your wallet”. What do you suppose would happen to the stock price of Envirokiller if droves of investors decided that this project in Yosemite was the last straw, and they decided to vote. In this case they would vote by deciding to sell their shares of the company.

If you have ever taken an economics class this will remind you of the first lesson; supply and demand. If there is suddenly a massive supply of a good (shares of Envirokiller) and at the same time the demand (people wanting to buy Envirokiller) has declined what happens to the price of that good? As expected the price of the stock would likely fall, and if enough people “voted” it would fall significantly.

If the CEO of Envirokiller is like most CEO’s he probably watched the price of the stock falling and realized two things; he just took a big pay cut, and he may not have a job for much longer. Faced with that start reality, the poor CEO is faced with a choice we mentioned previously, adapt or die. If that CEO enjoys his handsome pay package, and the corporate jet, there is a good chance that project to tear up Yosemite might get scrapped.

Now, this example was an extremely simple, and extremely dramatic scenario. In real like it won’t be this cut and dry. But the concept still hold. Sustainable investing, and socially responsible investing give you, and every investor the opportunity to vote with your wallet. While our individual efforts may not result in much, or any change, together we have the power to effect real progress, and green investing is a great place to start..

Get Ahead of the Curve

If you have stuck with me this far, I am about to let you in on the biggest secret of the article.  ESG investing is booming.  The market for sustainable investing funds and indexes is currently one of the hottest markets in all of finance.  An area that was once thought of as a fringe category for altruistic investors is quickly gaining steam for one BIG reason.  ESG investments are performing very well.

Even the big boys are taking notice.  Blackrock CEO Larry Fink has gone on record multiple times stating that sustainable investing is likely to outperform the traditional market.  While neither he, nor I can ever guarantee performance when it comes to investing, the results are starting to pile up in favor of companies who have strong ESG and environmental initiatives. 

It’s a pretty simple concept really, as more and more consumers have demanded better business practices from companies, those that have responded are starting to show an advantage. They are simply giving customers what they want, and customers want companies that behave responsibly.  What more impressive and what is really tipping the scales, is that customers are increasingly willing to pay more, for goods and services in whose practices they agree with. 

But that is just the tip of the iceberg.  Governments around the world are rolling out increasing environmental regulation, and incentives for companies to do better.  The firms that already have their owns standards and practices in place will not need to invest any additional time or money into making their business sustainable, because they already did it.  They can simply continue forward with business as usual, while their competitors are left struggling to adapt and update their systems.  That represent quite a competitive advantage.  Competitive advantage tends to lead to profits.  Profits are usually a good thing for investors.  Like you.