What We’re Thinking

This week’s Life with Money is our second installment on ESG investing.

Last time we discussed various definitions and reasons why people might opt to invest in this way. One key takeaway was that “sustainable investing” is a general umbrella term, whereas Environmental, Social, and Governance (ESG) investing uses data to measure the sustainability of a company (both financial and in terms of global impact).

Today we cover how to invest according to ESG (environmental/social/governance) principles.

Originally, sustainable investing focused on including or excluding companies from a portfolio depending on whether they aligned with the investor’s values and interests (think: nixing gun-related assets). The level of customization and detailed analysis required to screen and select companies often meant that sustainable investing funds had higher expenses than traditional funds, and much higher than index funds.

These higher fees, along with the loss of diversification from highlighting or eliminating certain sectors, meant that many of these funds had lower returns compared to their traditional equivalents. Adding insult to injury, “greenwashing” has been an issue, with companies and fund sponsors trying to make their investment funds and strategies appear more impactful and good for the planet than they actually are.

More recently, a few developments are changing the ESG investing landscape. A recent push to standardize how ESG data is measured and compared, including new SEC disclosure requirements for companies, helps address the current lack of universal standards and combat greenwashing. Without standardization, choosing how to sustainably invest is like comparing apples and oranges. How can investors tell if one measurement of ‘diversity’ or ‘clean energy’ is the same as the next?

Second, the increasing popularity of ESG investing has led to more fund options and ways to invest (including within many workplace retirement plans). New developments in regulations, machine learning, and big data have already begun to offer more cost-efficient, effective, and automated ways to apply ESG data to sustainable investment funds.

So how does ESG investing work? Here are a few options to consider:

Stocks vs bonds: Whether it’s mutual funds or exchange-traded funds (ETFs), the ESG investing space has long been dominated by stocks. According to the Forum for Sustainable & Responsible Investment (US SIF), about one in four dollars (that’s $12 of $46 trillion in 2018) of total US assets under management are invested using sustainable investment strategies, and (according to Morningstar) ESG bond funds account for less than one-fifth of total ESG fund assets.

Increasingly, there are more sustainable fixed income investment options, particularly as credit rating agencies incorporate more ESG data in their research and ratings to assess risk. As new infrastructure is needed to address global environmental and social issues, the sustainable bond market is expected to continue growing.

Passive vs active: Active sustainable investing involves picking stocks, sectors, or mutual funds that align with investor and/or fund goals. It can involve using ESG data to handpick investments that are predicted to do well or choosing to exercise active ownership through direct engagement (e.g. proxy voting) with companies on ESG topics.

By contrast, passive sustainable investment options often use quantitative ESG data to group investments into indexes that meet a particular sustainability goal and achieve investment results comparable to the segments of the stock market in which they choose to invest. Passive sustainable investing has increased in popularity over the years due to the cost and tax advantages that give them a built-in edge over active sustainable investments. During the last few years, net flows into passive ESG funds have outpaced those into active ones. (The US SIF reports that in 2019, net flows into passive ESG funds totaled $12.7 billion compared to $8.7 billion into active funds).

PPA uses a passive, indexed approach to managing investment portfolios overall, and this extends to helping interested clients invest according to ESG principles.

Broad vs narrow: ESG investing can be as broad as buying all of the stocks that meet certain ESG criteria within a certain area, such as the US stock market or international (both developed and developing country) markets.

Other sustainable funds tout a primary, or “sector,” focus, such as climate change or gender equity, which might appeal to clients with interests in a particular aspect of ESG. Examples of ESG sector funds include SPDR’s Gender Diversity Index (SHE), which seeks out companies that employ women in high-level leadership roles, and New Alternatives Fund (NALFX), an actively-managed fund that focuses on global alternative energy and the environment.

Whatever the scope, investors should look beyond a fund’s name or primary focus to learn about its approach and whether it aligns with their values.

There is a lot to take in when it comes to ESG investing, but here are some key takeaways:

• Start by reflecting on your issues: What are your motivations and priorities for sustainable investing? How do they align with your financial goals and needs?
• Be aware of how sustainable investing is measured, but recognize that the system is imperfect and there are trade-offs.
• Remember that, as a consumer, there are many other things you can do to live your values in a way that delivers a positive return beyond your portfolio. Perhaps that’s volunteering your time, pursuing philanthropic interests, or choosing to support certain causes through the businesses you frequent or the goods you buy.

Please feel free to reach out to your advisor if you have an interest in or questions about ESG investing.

Many of PPA’s clients have short-term funding needs. The reasons vary: Some people require infusions of cash between pay checks, including those paid once a month, once a quarter, or only after completed transactions. Others need cash to make a down payment on a new house before their current house is sold. Still others want to finance renovation work on a house without taking on new or additional long-term debt.

Lines of credit (LOCs) are a useful tool in these situations. In general, LOCs are a pool of cash available to borrow, secured, or “collateralized”, by an asset. LOCs typically have adjustable interest rates, with payments required only on amounts borrowed at any point in time. Repayment is flexible, with no pre-payment penalties or fees (other than interest) to borrow again. There are also limited situations where the interest paid on an LOC could be deductible (details should be discussed with an accountant).

A common LOC for homeowners is the home equity line of credit (HELOC). These are secured by a home, typically in conjunction with a mortgage. Lenders analyze whether a borrower can afford a HELOC in a process called “underwriting.” This takes time and usually involves expenses in the thousands of dollars depending on the size of the HELOC.

An alternative to a HELOC is a line secured by the value of the assets in a brokerage account (retirement account assets cannot be used as collateral). As many PPA clients know, Schwab refers to these LOCs as Pledged Asset Lines, or PALs. These lines are especially useful for people with financial assets who don’t own homes, or whose homes already have debt levels that won’t allow for a HELOC.

Another advantage of PALs is their relatively low cost: they typically require less underwriting than HELOCs, with no associated closing costs or other expenses. PAL rates include a fixed component that varies based on the amount of collateral securing the line, and a variable component based on a short-term rate such as 30-day LIBOR (London Interbank Offering Rate) or, more recently, SOFR (Secured Overnight Financing Rate).

Through the beginning of 2022, PALs were not only flexible but also inexpensive. Short-term rates like LIBOR and SOFR were close to zero, so the only interest expense was the fixed part of the PAL. As interest rates have risen along with the US Federal Reserve’s efforts to combat inflation, LIBOR and SOFR are now in the high 3% range, making the total annual cost for many PALs between 5-6.5%. This still compares favorably with most longer-term fixed rate mortgages, which have hovered around 7% in recent months. But the adjustable rate on PALs could rise further if short-term rates continue to increase.

In summary, PALs and other LOCs secured by brokerage accounts can be very helpful in managing short-term cash needs. But rising interest rates have made them significantly more expensive than they were just 6-9 months ago. Please feel free to contact your PPA advisor to discuss managing a current PAL or obtaining a new one.

This week’s Life with Money features PPA advisor Samantha Ngooi exploring sustainable investing. This is a substantial, important, and somewhat complex topic – so our discussion will extend across a few installments of Life with Money.

In today’s part one, we provide broad definitions of various relevant terms and discuss why someone might want to invest this way. In upcoming parts, we will delve further into how the various investments work and what PPA suggests clients might look for in potential sustainable investments.

Enjoy, and please be in touch with follow-up thoughts or questions.

Sustainable investing takes into consideration a company or investment’s environmental and social impact, often with the goal of positive change for the world and a long-term financial gain for the investor.

With a history dating back centuries, this approach to investing has recently exploded into an alphabet soup of terms and definitions, often used interchangeably. While we use sustainable investing as an umbrella term, here are some definitions to help clarify (recognizing this is just the tip of the iceberg):

• Socially-Responsible Investing (SRI):  this term has historical roots in investing and divesting according to religious, ethical, or moral values. SRI traditionally focused on divesting from undesirable industries (e.g., guns, alcohol, etc.) but now focuses on investing in a way that expresses values (these may belong to investors, fund managers, or a specific theme).
• Environmental, Social, and Governance (ESG):  this is a system for measuring the sustainability of a company or investment based on its environmental, social, and governance policies and data. Environmental issues can touch on resource conservation and waste, while social aspects look at a company’s impact on internal and external stakeholders (e.g., workplace safety and ethical supply chains). Governance measures a company’s leadership and accountability to shareholders (e.g., how diverse is the board). The key takeaway is that ESG data is often combined with traditional financial metrics to pick or eliminate certain companies in ESG investment options, such as mutual funds and exchange-traded funds (ETFs).
• Impact investing: often used to describe private investments in and lending to companies that have the intention to do good.

Other terms you may have heard before are green, ethical, or values-based investing. With so many definitions and not much agreement on how to apply them, it’s important to look more closely at these investments to make sure they really do align with your intentions and values. We’ll address these details in one of our next Life with Money installments.

Who is sustainable investing for and why does it matter?

ESG is one of the fastest growing parts of the financial markets, with an estimated $120 billion invested in sustainable investments in 2021 compared to $51 billion in 2020, which in turn increased tenfold from 2018 and 25-fold from 1995.

Sustainable investing is considered largely driven by Millennials and Gen Z cohorts (born between 1980-2010) and their beliefs around issues including climate change, sustainability, and social justice. But research suggests that sustainable investing appeals to a wide range of investors with various interests and motivations that extend beyond the desire to make a positive impact.

Incorporating ESG data can provide a more complete view of a company, shedding light on its health and impact beyond its balance sheet. A United Nations report from 2005 called Who Cares Wins summarizes it well:

“In a more globalized, interconnected, and competitive world, the way that environmental, social, and corporate governance issues are managed is a key part of companies’ overall management quality that’s necessary to compete successfully.”

“Companies that perform better with regard to ESG issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action, or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”

This is important for distinguishing the ideological, value-based (and therefore often politicized) motivations for sustainable investing from the desire to understand investment risks and opportunities through an analytical framework.

As mentioned above, in the next few weeks we’ll provide additional details about sustainable investing, including what investments are currently available, as well as some of the limitations of this type of investing and arguments made against the ESG trend.

This past Sunday, family and friends of Victor Levinson gathered in New York City to remember Vic and reflect on his life, work, and relationships. Reflections were shared by several of Vic’s lifelong friends; three of his grandchildren; and his three adult children (Nick, Lynn, and Tom).

Each of the reflections offered a special window onto Vic. Nick’s reflections, in particular, shined a light on the ways that Vic’s core values were, and are, embodied in Park Piedmont Advisors’ work.

What follows is a portion of Nick’s remarks. We hope you enjoy them.

• • •

I think the best way to describe Vic, both personally and professionally, is that he was always his own man, comfortable in his own skin. He was unconventional, often argumentative, contrarian to the core.There’s no better example of this than his early embrace of indexed investing. Vic had this figured out in the 1980s, when very few others had even heard of indexing. It’s now a dominant approach in the investment world.

In the everyday reporting about the ups and downs of markets, there is a frequent ambiguity that’s highly important, though easy to overlook.

Take this lead story from the front page of this past weekend’s Wall Street Journal.

“U.S. stocks slid Friday after a relatively strong jobs report, capping a roller-coaster week in which investors built up hopes for easier monetary policy—only to then give them up again …

“Stocks soared Monday and Tuesday, with the S&P 500 and Dow Jones Industrial Average logging their best two-day stretch since 2020 [but] weak data on the manufacturing sector and job openings led investors to bet that the Fed might slow its pace of interest-rate increases in the coming months.” (Emphasis added.)

The article uses the term “investors” several times, though the described behavior – making day-to-day, or even minute-to-minute, gambles on market movement – is that of traders. This is an important distinction.

What are the primary differences?

Investors make investments. Traders make trades. While the same securities markets are used for both of these activities, that doesn’t mean they’re interchangeable.

The crucial difference is the time period over which an outcome is achieved. Successful investing is a long-term process, measured over periods of years. In those timeframes, investors will experience significant up and down periods. By contrast, trading outcomes are known in a matter of moments, or minutes (think the role of the dice, or a horse race, or whether somebody makes a putt).

Long-term investors are interested in participating in the long-term economic growth of the world’s economies. This growth does not come in even amounts and may not come at all for some period of time.

However, to the extent investors have a positive view on the prospects for long-term economic growth, they can be willing to allocate at least some of their investment portfolios to risky asset classes, particularly stocks. At Park Piedmont Advisors (PPA), we manage investment portfolios only for clients who seek to achieve some long-term investment objectives.

We are investors, not traders.

The investment industry is populated by vast numbers of people and institutions who seek short-term profits from trading the very same marketable securities that investors own as investments. What characterizes this activity is that the long-term prospects for a company, or market sector, or the general economy, plays virtually no role in the trader’s decision-making, which instead is focused on whether the trade can be completed at a gain, before it turns into a loss.

In recent market movement – both intraday and day-to-day – we have seen significant volatility. This is largely the product of traders. From the perspective of investors, trading turns financial markets into a casino. Trading disregards any notion of underlying value represented by market prices. As a result, it can undermine the confidence of investors in the financial markets themselves.

So when you read, hear, or see reports in the media about the ups and downs of markets, ask yourself: is this the work of investors, or traders?

When you think of your most valuable assets, how much thought goes into your time?

For many of us – myself included – there is an automatic quality to time, an assumption that the rhythms of our life will, going forward, look and feel much the way they have.

September contributes to this. We live close to a college campus, and while the pandemic tinted the past two Septembers, the current back-to-school – unmasked students walking across campus in the crisp air and changing light – is familiar.

Of course, as the old song goes, it ain’t necessarily so. Our time may seem like it’s moving in predictable cycles, but that’s an illusion. Our time is finite, and precious – an extraordinarily valuable asset.

So – how best to spend it?

A wide body of social scientific research suggests that paying attention to time can help us spend that time better. And the better we spend our time, the greater a return we can get from that investment. In other words: time, like money, is an asset whose value can appreciate over time – if we spend it wisely.

Some takeaways from the research:

• Pay attention to spending time with family, friends, and people you enjoy: research indicates that “socially connecting activities … comprise the happiest parts of the day.”
• Having spare time, along with the perception of some control on how to spend it, “has been shown to have a strong and consistent effect on life satisfaction and happiness, even controlling for the actual amount of free time one has.” The research points to a benefit in increasing “discretionary time,” even if you have to pay some money to do so. Interestingly, though, research also points to a diminishing return on spare time: some is good; too much isn’t. Note how this may have implications for the traditional model of retirement.
• Think about how valuable your next hour or two might be, and how the value can extend beyond that hour: so-called “prosocial” behavior, like volunteering, tends to make people happy. Research has also found, somewhat counterintuitively, that giving away time, as with volunteering, can actually help people feel they have more time. “Focusing more on time (vs. money) seems to make individuals more self-reflective, compelling them towards behaviors that are highly aligned with their ideal self.”
• Simply being reflective about time seems to contribute to people’s happiness. That may have something to do with a recognition of time’s limited nature. “Awareness that one’s overall time in life is limited improves subjective well-being by encouraging people to find greater enjoyment in life’s ordinary pleasures and close relationships.”

I (Tom) found myself reflecting more on time a few weeks ago, in the stretch leading up to the Jewish “Days of Awe,” the period from Rosh Hashanah, the Jewish new year, through Yom Kippur, the Jewish “Day of Atonement.”

It turns out this 10-day stretch (we’re in it now) is a 3,000-year-old cognitive reframing technique. During that time span Jewish people take a break from work, gather as a community, and consider time with one another.

These “High Holidays” ask: What have you done this past year? And what can you do to improve your life, and that of others, in the year to come?

As the contemporary research emphasizes, simply considering the question can have a positive, even a transformative, impact. If time is a precious, finite asset, how will you use it?

We’ve been sending you our new Life with Money column for several weeks now. Although I (Nick) have written a few of the market updates, this is my first time contributing a more personal essay.

Some of what we’ve written has touched on religious and spiritual traditions and their approach to money. While I don’t have any organized religious practice, a walk in the woods is spiritual for me in the sense of lifting and filling my soul.

To that end, I was fortunate enough to go on a five-day backpacking trip on the Tahoe Rim Trail (TRT) this summer. (I wrote about it for our local online news site, the Piedmont Exedra.) Unfortunately, my wife Julie developed elevation sickness and had to leave the trail before completing the 50+ mile hike. She convinced me that I should continue, but I definitely felt lonely and sad without her. (We completed a different section of the TRT together in 2021.)

In this slightly melancholy state of mind, I turned at the end of each day’s hike to a short (and light, since the pack already weighed 35 pounds) book called The Dictionary of Obscure Sorrows. I heard the author, John Koenig, interviewed on NPR recently, and knew I needed to pick it up for moments like these. If you’re looking for an easy read that might make you cry and could also inspire laughter, but will definitely make you think about life, I highly recommend it.

As Koenig writes in the introduction, “This is not a book about sadness – at least, not in the modern sense of the word. The word sadness originally meant fullness, from the same Latin root … that also gave us sated and satisfaction … When we speak of sadness these days, most of the time what we really mean is despair, which is literally defined as the absence of hope. But true sadness is actually the opposite, an exuberant upwelling that reminds you how fleeting and mysterious and open-ended life can be” (page xii).

With that mindset, I devoured the definitions, all of which Koenig invented. Some have clear resonance with PPA’s work, and some are more loosely connected — and still relevant, such as:

Hubilance (page 115) – the quiet poignance of your own responsibility for someone, with a mix of pride and fear and love and responsibility—feeling a baby fall asleep on your chest, or driving at night surrounded by loved ones fast asleep, who trust you implicitly with their lives—a responsibility that wasn’t talked about or assigned to you, it was assumed to be yours without question. (From hub, the central part of the wheel that bears the weight, + jubilance.)

I think any parent, spouse, or pet owner for that matter, will share this sentiment.

Thrapt (page 116) – awed at the impact someone has had on your life, feeling intimidated by how profoundly they helped shape your identity, having served as a ghostwriter of a work that nevertheless only appears under your name. (From thrapped, drawn tight, as with nautical ropes, + rapt, carried away with emotion.)

This one of course made me think of Victor, and his enormous influence on my life and on PPA.

Sonder (page 123) – the awareness that everyone has a story … You are the main character. The protagonist. The start at the center of your unfolding story. You’re surrounded by your supporting cast: friends and family hanging in your immediate orbit. Scattered a little further out, a network of acquaintances who drift in and out of contact over the years. But there in the background, faint and out of focus, are the extras. The random passersby. Each living a life as vivid and complex as your own … When your life moves on to the next scene, there’s flickers in place, wrapped in a cloud of backstory and inside jokes and characters strung together with countless other stories you’ll never be able to see. That you’ll never know exist. In which you might appear only once. As an extra … in the background. As a blur of traffic passing on the highway. As a lighted window at dusk. (From sonder, to plumb the depths.)

Koenig has said that this one is the best known of any of his definitions, and he has heard it used by others who have not read the book.

Other definitions are relevant to work, both for our clients pursuing their life goals and for our team at PPA, offering help in that process:

Elosy (page 215) – the fear of major life changes, even ones you’ve been anticipating for years; the dread of leaving behind the bright and ordinary world you know, stepping out into that liminal space before the next stage of life begins, like the dark and rattling void between adjoining metro cars. (From the Malagasy lelosy, or snail, which is a creature that carries many twists and turns wherever it goes, trying in vain to outrun them.)

This definition of course relates to retirement, buying a house, getting married, or having children. We strive to help clients define these goals and plan to accomplish them in a way that makes them seem less scary and insurmountable. The retirement illustrations we customize for each client are a prime example of this collaborative work.

Addleworth (page 71) – unable to settle the question of whether you’re doing okay in life; feeling torn between conflicting value systems and moveable goalposts, which makes you long for someone to come along and score your progress in discrete and measurable units—points, dollars, friends, followers, or a grade point average—which may not clear up where you’re going but would at least reassure you that you’re one step closer to getting there. (From addled, muddled or unclear, + worth.)

This one raises the perennial question of worth and how each person defines it. We encourage clients to understand their values first, the basic way they want to be in the world. Out of that conversation, we help identify short, medium, and long-term goals that reflect those values. These include the life stages mentioned above, but can also focus on philanthropy, or helping a family member with special needs, or world travel. We then assess whether these goals are achievable, and if so make an investment plan that maximizes the likelihood of achieving them. We consider this a more meaningful way to plan than an arbitrary scorecard, which in many ways focuses on other people rather than you.

Achenia (page 226) – the maddening sense that the world is too complex to even begin to understand, that whenever you try to answer even the most trivial question, it quickly tangles into a thicket of complications and melts into a quicksand of nuance, leaving you flailing for something solid to hold on to, struggling to come up with anything you could say that is definitely 100% true. (From achene, the fruit that contains the seed of a flowering plant, which is often confused for the seed itself.)

This feeling relates to all aspects of human life, but has great relevance to financial matters and the advice PPA provides. The stock and bond markets, interest rates, inflation, insurance, estate planning – these and related topics can be very difficult to put into context and determine how they affect your life.

It can be very humbling to consider the enormity of these subjects, and we try to bring a sense of humility to all of the work we do with clients. This includes client education, which we tailor to each of your levels of knowledge and interest. Another core part of our approach is the realization that no one knows everything about any of these topics, and no one can predict what will happen in the future.

That understanding drives our advice to invest to accomplish your goals, as opposed to aiming for a specific dollar amount or rate of return. It also directs our focus on indexed investing, which emphasizes exposure to broad parts of the financial markets, since we don’t know which ones will outperform or underperform in any short timeframe.

I enjoyed contemplating Koenig’s words and ideas, and they turned out to be great company on my walk in the woods. Please let us know if you have a favorite obscure sorrow, whether it comes from the book or you made it up on your own.

—

Read “New Words for Familiar Feelings” in the Piedmont Exedra.