Vol. 44 - Throwback Episode: An Introduction to Responsible Investing
We are running this throwback episode as a sort of summary or refresher of the past ten episodes we had with our guest CFP, Marie Thomasson of Modern Assets. This gives us a better understanding of the collective way of doing impact investing and changing our mindset from being just investors, to those who can impact change while doing so. We cover:
The history of Socially Responsible/Sustainable Investing
How climate change sparked ESG investing
Fees and returns in ESG portfolios
Why the fees are higher
Transition to Impact Investing
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TRANSCRIPT:
Naseema McElroy: [00:00:00] All right, nurses on fire. We are back and we have a special treat. We have a new certified financial planner, Marie Thomason. Hey Marie.
Marie Thomasson: [00:00:13] Hi Naseema. Thank you so much for having me.
Naseema McElroy: [00:00:16] I am so honored for you to be here. So please share with the people a little bit about your background, what you
Marie Thomasson: [00:00:23] do. Sure. So I am a financial planner who, who works with, women with progressive values.
So, big emphasis on, things that don't usually come into the financial realm, but I belive that you can't really separate economics from your finances. And so , that's kind of what we're talking about today too, with responsible investing.
Naseema McElroy: [00:00:49] Yes, and I just barely brushed the surface of socially responsible investing. And so I am looking forward to deep diving into the subject with you. Cause I know you have some gems and some really practical tools for people.
Marie Thomasson: [00:01:02] people. Yeah, absolutely. So, what, think one of the hardest things about responsible investing is one there's like all these acronyms and there's so much information, but a lot of it can be really hard to put into action.
so usually when there's, you know, when you're overwhelmed with information, but not nothing actionable, then, then it's really easy to do nothing. Cause you don't even know, what to do, where to start, where you have the most impact.
Naseema McElroy: [00:01:33] Yes. It is super hard. And I think like the concept, it is really new to people, especially by audience, because most people are just really new to investing in general.
And so to know that. First of all, there's so many options out there, but to know that their dollars can actually make an impact while helping them build their wealth, I think is like mind blowing to a lot of people.
Marie Thomasson: [00:01:59] Yeah. And I mean, generally speaking the whole idea of responsible investing or whatever you want to call it , is actually pretty new.
So what I wanted to start with today, because we're going to do series on this, Is just to give kind of a general overview of what. Socially responsible or sustainable investing is like where it came from and how it originated and where it is today. And then what we'll do is as we go through each, of the, the next, podcasts is we'll discuss one actionable idea that I've broken out between spend, save, and invest and easy, medium hard.
So every week we'll talk about something new. but I think that it's really important to just step back a little bit before we do that and have a little context because, it is new. It's like all of a sudden, you know, I remember my kids are 10 and I remember posting pictures to like blogger or something through my email.
And then all of a sudden it's like Instagram and you're like, where did this come from? Right. Like, that's kind of what. Socially responsible investing is it's like, wait, wait a minute. I think that, you know, it actually has a really hit interesting history. And so just knowing and understanding where it came from, I think will give you a lot of perspective and it'll make all the acronyms sort of like, make sense.
Naseema McElroy: [00:03:27] All right. Let's hear about this history. And I love that analogy by the way.
Marie Thomasson: [00:03:33] Yeah. Like, thank God I don't have to, to, you know, like post through my email anymore. It was, yeah, it was insane. And then having to transfer all the photos over, it was like, a whole other issue, but that, that could be a whole conversation.
So. but it's equally painful. Like , responsible investing is equally painful, right? Like we're in the 2010 iteration still. When you think about it. , and so there's a lot that needs to be done in terms of, technology and availability and actionability, and you know, government oversight, regulation, like this is a complete shit show for lack of a better word.
So. really this all started in the sixties and it came about, and the original term for it was socially responsible investing. And it's because people were pissed at this is, this is when people were getting. Really upset. and that there's so many parallels to what's going on today. but people being upset about the Vietnam war about apartheid in South Africa, and they were like, hell no, I'm not going to invest in companies , that are, supporting apartheid in South Africa , that are proving writing, defense and, and weapons.
You know, , for the Vietnam war that are killing our soldiers for, for any of this war. And so what happened is you ended up with this group of activists, investors that sprang out of this larger activism, that's really what happened. So just like today, we've got, you know, the social justice and BLM movement, which is.
It has probably moved sustainable investing forward, like sadly enough, like a decade, right. Just because of what's going on. And so, and, and this is what happened back in the sixties. This is how it came about because the way our economic system was created and the way capitalism works, it was never intended.
To account for people's well being. It it's always about the bottom line. Like that is literally the definition of capitalism is the shareholder's best interest. So that's all fine and good when everyone's a shareholder. But when you look , and you look at the demographics and you're like, well, you know, only the top 10% of Americans, you know, are.
We are really lucky enough to be shareholders. then you know, who do we care about here? so anyways, so let me just go back before I get on my, on my pulpit there, but, So socially responsible investing, it was really kind of what they call a negative screen. So like, no, I'm not going to invest in any company that is contributing to war or violence or tobacco or alcohol.
this is where the, religious based values came into play in a big way. Like, no, I do not want to support, birth control, right? Like the Catholic church also trending. These days for like very infamous reasons. And so it was very much like, hell no, we're not investing in those companies. So take those companies out of my portfolio and I will take whatever is left.
So this is very much like somebody who's willing to die on the sword because you were willing to lose diversification, lose return from companies that are probably killing it by killing people. Right and say like, no, , like , I'm not about this. And so that, that's where it got it started.
Naseema McElroy: [00:07:25] So let me just, let me just ask you a question.
Why wouldn't people then just take their money out of the market.
Marie Thomasson: [00:07:33] Okay. So this goes kind of back to like just basic personal finance one Oh one, which is where, you know, it's really tough because if you don't invest in the market, you're going to get killed by inflation.
, and purchasing power. And specifically I work primarily with women. Women are, typically have really much better savers than men. a little more risk aware. I like to call it as opposed to risk averse, because we're not the ones who are like going all in on crypto and losing our houses. , and yet it's the silent killer , is inflation.
If you don't invest, then you are likely to live a very unhappy, retirement or whatever you want to call it because you were not keeping up your ability , to buy a loaf of bread. so this is, you know, it's like a double edged sword. You're damned if you do, you're damned if you don't. and so this is where activists, even if you take a lower return, you're still doing much better than doing nothing.
And anyways, even if you have your money in a bank, what does that bank doing with your money? Right? Like. This is a tangled web, and we're really only going to scratch the surface. you know, at least in , this first go round, , we can go down , the rabbit hole, but, , this is one of the big challenges is like one question leads to another and leads to another.
And so, , the socially responsible investing, it was just, you know, kind of doing his thing. It was like this edge hippy dippy movement, right? Like not a lot of people did it. And your typical, you know, bank advisor or financial advisors like, Whoa, no, you know, like you're going to lose, you're going to lose 2% return.
Why would you ever do that? Because also keep in mind who's working at banks who are financial advisors, it's the top 10%, right? Like why would they go against their own best interest? so that kind of just chugged along and it was very much a fringe thing. And then now starting to get into, , a little bit closer into like our life lifetimes.
The 1990s is the first time like climate change ever became like a word. Right. I think it was Clinton who, who kind of started that. , and incidentally, moving on to the next phase of sustainable investing, which is called the ESG, which stands for environmental, social governance and its different aspects.
So, you know, climate change, environmental, like people usually get that, right. So it makes a lot of sense. , don't ruin our planet. And then you have these other metrics, social metrics, like, you know, how well are people paid? How many people are getting hurt on the job. and then, actual, overall governance, like who's on the board, you know, it's the 1%, and that's what it was , when this all started.
And this idea of ESG came about in 2005. And it was, , it was basically of a, an evolution of this climate change debate. So suddenly you go from the social responsibility, like, you know, no guns, no birth control, that sort of thing to all of a sudden, people were like, Oh, Oh, like, you know, climate change, we need to think about this.
So ESG investing , it didn't really take off until, the, great resection. And the reason for that is because 2008, 2009, you know, if you weren't invested in it, you still know what happened from it. Right? Like , markets were down, everything was down, people lost their houses.
Like it was, it was just a bad time. And what happened at that time is that these. Socially responsible portfolios. they were just like, , they were awful. So the returns on them were just terrible. And so now you've got a bunch of portfolios managers like these guys in the ivory towers who are like, well, we need to package this a little bit better because we need better returns.
because we need people buying these things. This ESG is really where you got the lipstick on the pig packaging coming in because, the recovery 2010, 2011, The driver of the market recovery came from fracking. I don't know if you remember this, but like those returns that was like shale , when they were, fracking for shale and Texas and North Dakota, and it was all over.
And, and there's all these news about like, the railroads and the tankers exploding and, and whatnot. And that's where the driver of returns were coming from. So you can bet. That somebody with a socially responsible portfolio was like, no, except now those portfolios have awful returns. So they, they shifted their marketing.
Basically. They repackaged. These, like idealistic portfolios into something they call ESG. And basically it went from being like, no, I'm not going to invest in a company that is supplying guns, you know, for, for war to being like, well, we're going to pick the best in class. So like best in class really needs like the best of the worst, because why is Exxon.
In an ESG portfolio? Well, Exxon is an ESG portfolio because of marketing. That's why, because somebody's got to make their money. And so it's basically like, , this is where shareholder advocacy, you know, really started to bloom. and I will say that that enough time has passed that. I think, despite I don't, I think that because like unintended consequences.
To be honest, all the shareholder advocacy and the spotlight on companies and what they're doing, I think it has less to do with ESG portfolios and more to do with social media and people being able to actually understand what companies are up to and what they're doing, but suddenly now, well you have this platform.
very democratic platform. Like no matter who you are or how much money you have, you can start talking shit about like Nike or Exxon or, you know, whomever it is. Right. And so, just, I think just because of the times ESG portfolios started to become more relevant. So when you look at ESG portfolios today, yes, they're, they're better.
But there's, they've still got Halliburton in it. Like, you know, that's the defense contractor. They still have the Exxon in there and they're like, well, you know, they give their employees 401ks. And like three weeks of vacation. So there you go, , it's better than, than the schmuck that, you know, like Amazon, for example, that's got people like sweating and in, warehouses making $11 an hour.
And so, you know, maybe Amazon's not in, in that class, but they probably are like, they probably are in there somewhere because they are doing something. Okay. and that's kind of, that's kind of the screen for ESG. So, ESG is really, really popular and I'm, and I'm not saying all of this to say, you shouldn't do it, but it's like, that's like the that's like the bare minimum that portfolio should be at.
Like it's literally the bare minimum. And today there's no reason not to invest in ESG portfolios because companies that are actually looking at, . You know, shocker to all of us, the women on the board have higher returns like duh, you know, we already know that, they're probably gonna do better, because the, you know, the companies maybe not completely overran with, you know, sociopath CEOs, And so those companies are actually doing much better and because sustainability is, is becoming a thing focus.
And so now, now, and this was not the case 10 years ago. ESG portfolios or looking through the sustainability lens, those companies are actually, very competitive. And again, I, not, those companies really is just, you know, the oftentimes like the best, best in class or best of the worst, is what it is.
So, that's like, you know, that's just kind of baseline, if you say on average you get, you know, let's call it an 8% return. I think historically, you know, people use like a 9% return, but it, it seems a little high, especially right now. And let's say inflation is 2%. So you back that out because that's not really, , money that you're earning, you're just like keeping up.
so a 6% return for a conventional portfolio nowadays, like ESG portfolios , are matching that. You know, on a, a real return basis, which means after inflation. Yeah. So there's, basically no reason not to invest in an ESG portfolio. and a lot of ESG, and it depends on the asset class.
So this gets a little bit into, Into the technical details, but, you know, asset classes, just referring to it, like, are you this like mega cap company, like Amazon, or are you a small little, you know, relatively nimble company like Lulu lemon, you know, how fast can you pivot? Small companies, Amazon 20 years ago, it was a small company, had huge monster returns.
Now, Amazon of today, they're never going to see that same type of return again. Right? So , it's a matter of always being diversified. But if you look at a diversified portfolio with, you know, let's call it vanilla or conventional portfolios, ETFs mutual funds companies, it's going to, it's going to match.
an ESG portfolio and an ESG portfolio, quite frankly, over the next 10 years, I would not be surprised if it started to beat the conventional, because companies , that are looking at ways to be sustainable. Oftentimes they're cutting costs too. Right? So. They're cutting costs. You know, people care, people talk about it.
People are willing to pay more money, , for a company that they know, like, you know, maybe I don't have to throw this thing out in two years because they, designed it to, to, explode. So, there's, there's really no big difference. So, and that's why I I'm very, adamant about ESG, just being kind of the baseline.
So for the fees, however, the fees are, there's more fees for an ESG portfolio. You can't get around it. So
Naseema McElroy: [00:18:38] because it's more actively managed because they have to actually go in and make sure that those companies are complying. So you're getting what you pay for
Marie Thomasson: [00:18:45] you, literally, you get what you pay for.
So there is no way around it. , and, we've been brainwashed to, you know, the Vanguard, Bogle, passive investing. There's nothing wrong with this. Like, there's nothing fundamentally wrong with this approach, but if you care, then you have to pay you, you you're going to have to pay because somebody has to do the work to sit there and sift through the company's 10 Ks have conversations with investor relations to do their due diligence.
Like this is all, very much active management. And so, a lot of people who are like, you know, like I call myself a quasi passive asset manager, like I would love to be passive, but you can't be passive unless you don't care. Like, that's just what it is. Right. So, you know, if you don't care, great, be passive, like nothing wrong with that.
But if you care, you see, you can't be passive. relate this to basically life generally. but everything that's going on today, you know, you can't, you can't be passive, so you're going to pay more. But, and
Naseema McElroy: [00:19:59] I say that the easiest way to get to somebody's pockets or to change somebody's opinion is to hit them where the money is, like hit them right.
In their pockets. Like you have to. And so investing is your tool in order to do that, because now you're a shareholder in these companies. So yeah. We can't be passive. And I feel like a lot of us are passionate about issues, but we don't know how to affect change. And I felt like this is a major way that we can do that.
Marie Thomasson: [00:20:27] It's a major way. And you have to remember that, U S GDP it's like, basically like the paycheck of the United States, right? Like we're paying taxes and everything. 70% of it comes from consumer, like. As consumers collectively, we have all the power, we can change the dynamic, we can totally do it, but you just have to have enough people, you know, on board and, and you have, and you, you know, depending on where you're at, you have to make it easy.
Because it's a struggle living in the United States, it's 100% a struggle. And so, you know, I, I feel like the system is kind of stacked against the average American, you know, when we talk about freedom in the U S really what we're talking about is economic freedom. Because you don't have social safety net, you don't have social supports.
you don't have access to, you know, equal healthcare, equal education, like a lot of these things. And so, you know, like how are you going to worry about like sustainable investing when you're just trying to get through the day? so if you have the means. If you have the means to invest, if you, if you have the privilege to be listening to this and be able to take action on it, it is like your moral obligation to do this.
That's what I think, like, not everybody has this privilege. So if you don't like, let's have a conversation,
Naseema McElroy: [00:22:04] no, I get it. I get it. But I know. Like for me personally, like I haven't, because I don't understand it yet. Right. And so that's why I'm so juiced about us having a series because now we get to have a deep dive.
We can all understand it and we don't have any more excuses.
Marie Thomasson: [00:22:23] Yes. No more excuses. And so recently, like the hot, you know, word is impact investing. So it, you know, like you hear about impact investing and it's all about social justice, social equity, you know, all these things, you know, environmentalism, economic inequality, gender inequality, like looking through those lens and it really it's taking us back to the socially responsible.
It's taken us back to the sixties. Right. you had people who were protesting in the street over the Vietnam war. And now we have people protesting in the street over, social inequalities that have just become, I had in the last, you know, 40, 50 years. So it's only gotten worse. And so now it's, , again, it we've come to that point where.
You're part of the solution or you're part of the problem. And so impact investing is just like a new way and they kind of break it apart a little bit more, a new way of looking at socially responsible investing. So we've, we've come full circle. There's there's a lot of parallels.
Alright, so just to, wrap it up, you know, we started with socially responsible investing that began in the sixties, as a reaction to things like the Vietnam war and, apartheid in South Africa and it sort of morphed as. The environment became a big deal. And people started thinking about climate change and today there's really no reason to not invest, at the very least according to sustainable investing principles with, with ESG.
a lot of common wisdom will say, you know, just invest the market and then give money where you can. That's all fine and good, but you know, half the West coast is on fire. So how much good did that actually do us? So, it is not enough to, to be philanthropic and that's a good thing, but we have to invest our values.
We, you know, we have to use, the environment as a baseline. There's no reason not to, it costs a little more, but just like you said, You get what you pay for and, , on an apples for apples basis, the returns are the same, if not, increasingly better than a conventional portfolios. So, , we've really come full circle to, with impact investing.
And basically social responsible investing through these very well-defined lenses nowadays of gender race. Economic inequality and, , sexual preferences, you name it. So, it's, it's an absolute, you know, it's a moral imperative and if you're not doing it,
Naseema McElroy: [00:25:18] yes, yes, yes. I love it. Why?
Because you can't say that you don't know now just like I can't say no. And so, yeah, this is great. This is great.
Marie Thomasson: [00:25:27] well, you know, the why now? So now we got it again to the how.
Naseema McElroy: [00:25:31] So that's what we'll be talking about on the next episode, we're going to find out how we can start investing responsibly or impact investing now.
Marie Thomasson: [00:25:42] Absolutely. I can't wait.
Hey there I’m Naseema
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