ESG Investing

American Friends Service Committee, Atlanta, Georgia, Undated, fall 1986?

Before we get into this, I want to make some things as clear as possible.  First, I am not an investment professional.  I am not going to give you specific investment advice.  What I am doing here is telling my story that you may or may not find instructive.  Your financial situation is unlikely to be the same as mine. But I do feel safe in saying that you should do your research, become an educated investor, so that you know why you are doing what you’re doing with your retirement savings.

Over the last several years, I’ve become sensitized to the impacts our government and economy has on the environment.  In particular, I’ve become horrified how our state Legislature is beholden to oil and gas interests and continually hands out subsidies and favorable treatment to an industry sector that routinely does not return the love, i.e., screws up our landscape and health at every opportunity.  It seems like the history of Pennsylvania repeats.  First we chop down all the forests and erode our soils.  Then we dig out the coal and leave flooded mines and mine spoil. Then we drill for oil (160 years ago) and leave uncapped wells, poisoned land, and petrochemical spills. Now, it’s fracking and we face a future of abandoned and badly managed well pads, spewing methane into the atmosphere.  But, I digress.

In some states, public pension funds are divesting from fossil fuel companies.  These decisions are driven by public outcry over environmental pollution and a warming planet caused by CO2.  There is also a sense that these companies are going to fare poorly in the decarbonized future and may be losing concerns in the long run.  In the news a few weeks ago, Exxon wrote down the value of its natural gas properties by something like $17-20b, which even for a behemoth like Exxon is real money.

Unlike other state Pension systems, like CalPERS, the Oregon Investment Council, the Washington State Investment Board, and the New York City Pension Funds, our state pension fund, PSERS, does not have a policy with regard to social investing, commonly known as ESG (Environmental, Social and Governance).  Given its existence as a political football and alternatively controlled and manhandled by the Legislature, it was unlikely that PSERS would adopt an ESG philosophy.  

It gets worse.  Our good friends at the US Department of Labor feel considering the social impacts in public and private pension fund management would be wrong, somehow.  They recently finalized a rule that essentially blocks ERISA pension plans from considering ESG criteria in investment decisions. I suspect it will be reversed in the new Administration, but ESG got some troll’s attention at Labor.  To paraphrase Churchill, this Administration can always be trusted to do the wrong thing, once all other possibilities have been exhausted.

For me, the bad news was that my pension fund was likely to stay strictly in the Milton Friedman universe of maximized profits and zero social responsibility.  The good news was that I might have some control over other retirement funds, which are separate from the pension fund. So, if I have some control, what exactly does that mean?  More importantly, what do I want?

ESG Primer

ESG is a set of standards for evaluating a company’s operations.  According to Investopia:

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

ESG investing, therefore, is an approach to investing that takes these three criteria into account when making decisions in whom to place your money with.  The origins of ESG investing are only about 60-70 years old.  The main philosophy toward investing was and still is a focus on the bottom line, the Milton Friedman bottom line cited above. However, beginning in the 1950’s and 1960’s  other criteria than the bottom line started creeping in.  One of the most memorable was whether funds should participate in supporting Apartheid in South Africa.  In 1977, Reverend Leon Sullivan, a member of the board of General Motors, drafted a set of principles to apply economic pressure on South Africa, principles that latter become known as the Sullivan Principles.  The Principles essentially demanded that a company provide equal treatment to workers regardless of race. 

By the turn of this century, more institutions have taken a ESG approach, weighing factors for investment beyond simply bottom line.  One of the more compelling reasons for ESG investing is that a company that considers environmental, social, and governance factors in its operations might not maximize profit in the short term, but might be less susceptible to bad outcomes that can strike, such as the BP Oil Spill, or Liberty University and the Jerry Falwell scandal. ESG investing might not scrape the last dollar out of an operation, but it might be the most sustainable and profitable in the long term.

Furthermore, the risks to companies that do not plan for the upcoming climate crisis are likely to face those bad outcomes sooner than later.  Maybe, it’s something in the water, but on today’s news feeds, there’s an article on how investors are up in revolt at Exxon over it future investments, seeking a greater stake in renewable energy.

Blackrock CEO Larry Fink just stated that, “climate change has become a defining factor in companies’ long-term prospects … But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”  Now Blackrock is an investment firm, but saying Blackrock is an investment firm is like saying the New York Yankees are a baseball club.  Blackrock is the world’s largest investment manager, with $25 trillion under its control. 

Across the pond, in the UK, an inquest into the death of a 9-year old girl found that illegal air pollution contributed to her death.  One wonders if those responsible will be held accountable.

And in a non-environmental cautionary tale, two members of the Sackler family are going to appear before Congress, no doubt to be grilled on their role in promoting addicting drugs like Oxycontin.  Their company, Purdue Pharma is in bankruptcy, being kept alive long enough to pay out settlements to injured parties.  I could not find out what its stock price was in 2000, but Purdue Pharma had sold $35b in Oxycontin alone by 2017 after its introduction in 1995.  I suspect investors that followed the Friedman rule were quite happy, until the stock tanked, mired in controversy.

Defunding Fossil Fuel Companies

Most of you who have read my bio know that I am retired from State Service, and no longer working for a living.  My wife, who also spent her career with the Commonwealth of Pennsylvania, and I depend on monthly pensions for income.  We are fortunate that in addition to our pensions, we set up 457b accounts – the governmental equivalents of 401k’s.  The money in those accounts are not expected to be needed for a while and at age 68, we do not need to take disbursements from them for several years.

That being said, I’ve wondered what that money is doing and whether it is doing any good beyond building a nest egg.  I am not alone.  Boomers make up 21% of the US population, but control more than half of the nation’s wealth. Unfortunately, much of that wealth is concentrated, such that the median boomer has only $144,000 saved for retirement.  Wealth inequality deserves its own column, but it will be another day.  In any case, most of us have something saved in a retirement account, doing god knows what.

Money is power, and the money tied up in these retirement accounts represents a lot of collective power.  For those of us who have control over our investments, we face choices on how that money is working.  Do we put it into casino and tobacco stocks?  Do we, like my mother and her generation, keep it in government bonds?  Do we buy unicorn futures?  Do we even know, especially since many of us have chosen algorithm-driven balanced funds or target date funds.  We let the machines do the thinking.

The Escape Hatch

(or the Trap Door depending on which way you are going)

457b funds behave much like traditional IRAs.  You put the money in pre-tax, it accrues value (hopefully). When you withdraw these funds, then you pay income tax on the growth.  They are attractive because they can grow pre-tax.  So, my 457b funds (from Pennsylvania and a smaller fund from Maryland) are safely tucked away pre-tax.  Within the Pennsylvania fund program, administered by PSERS, the Pennsylvania State Employee Retirement System, there are investment choices. Same in the Maryland MSRP, Maryland Teachers and State Employees Supplemental Retirement Plans.  Most of the Pennsylvania choices are plain vanilla, as they should be.  No unicorn futures here. There are a skein of retirement date funds, from 2025 to 2065 (at which time I would be 113).  There are several stock index funds, for small to large US companies, a bond fund, and a Stable Value Fund (read Mattress).  None of these provide ESG options.  Again, plain vanilla. But I do like vanilla.

Hiding in the corner is a Schwab Self-Directed Brokerage Account.  Huh? What’s this? They explain it is a self-directed account that lets me select from numerous mutual funds and exchange-traded funds, which aren’t offered through the regular PSERS agent.  Best of all, any funds sent to Schwab stays within the 457b fence, meaning it won’t be taxed until it is withdrawn.  Apparently, moving funds to another brokerage within this system is OK.  My PSERS managers handle the transfer to Schwab and mark it in the books as staying within the 457b.  Schwab gets the money and I direct investments in their website, but it hasn’t left the 457b. I feel like Alice looking through the looking glass.  Or maybe Groucho trying to get into the speakeasy.  In either metaphor. I am on one side of the world and this magical place exists on the other.  I wonder if they have unicorn futures?

Alice going through the looking-glass, from Through the Looking-Glass and What Alice Found There, illustrated by John Tenniel (p.11-Chapter 1)
Groucho, trying to enter the Speakeasy met by Chico, who wants the password, Horsefeathers (1932). (It’s “Swordfish,” by the way.)

On the entry door is the fine print:

The Schwab PCRA is for knowledgeable investors who acknowledge and understand the risks associated with many of the investment choices available through PCRA. PCRA is designed for individuals who seek more flexibility, increased diversification, and a greater role in managing their retirement savings.

At least that’s more warning than you get entering the speakeasy, or the casino. I am knowledgeable only to the degree that I want to explore ESG investments, or more specifically to purge my portfolio from CO2.  Usually, that and 3 bucks will get you a cup of coffee.

I gingerly enter, and discover that it is a speakeasy, but the cocktail of the month is ESG.  Schwab, it seems, is interested in your money and in that regard is a total agnostic.  When I first bumped into this company, my initial assumption was that the originator of this eponymously named company was the Charles Schwab of Bethlehem Steel fame. That was Charles M. Schwab.  Our Schwab is Charles R., a California boy, still among us. The only irony is that I am using the company he founded to invest in things I doubt he would support.  He is a big Trump supporter and for other conservative Republican causes.  But I appreciate his agnosticism when it comes to investing.

The list of ESG funds runs to 8 pages, single spaced, two columns, and includes mutual funds and ETFs.  Many of them are mirror images of the funds in the PSERS lists, only like non-fat milk, remove the objectionable parts, whether it be fossil fuels, or tobacco, or gun manufacturers, or whatever. Sadly, I never found the unicorn futures fund.  Probably for the best.  I needed to order a cocktail with something better than rainbows.

If you are looking for specifics and numbers, I will disappoint you.  First, they aren’t relevant to this post. Secondly, as I said in the beginning, everyone’s situation is different and what works for me probably doesn’t work for you.  In any case, I took all of the money in my Maryland and Pennsylvania 457b’s and spilled it onto the table.  Had to unfold some of the bills, put the Euro’s in a separate bucket, and pick up some of the loose change that spilled onto the floor.  Once order had been restored to the table, I divided the pile in two. Half was going to stay with the existing Maryland and Pennsylvania managers; half was going to Schwab. The half that stayed was largely bonds and fixed income instruments, with low risk.  The half that was going to Schwab was the more aggressive stock funds.  Within the Schwab ESG lists, I found a a large cap stock ETF (A), a small cap stock ETF (B), something called a global clean energy ETF (C), and an international ETF (D).  I’ll spare you the specific names of the funds, but they all have desirable attributes by either including “good” companies or excluding “bad” companies.

FundFund ProfileIncludesExcludes
AUS stock companiesESG Criteriaexcludes stocks of certain companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power.companies that do not meet standards of U.N. global compact principles and companies that do not meet certain diversity criteria
BUS small cap companiesadhere to predetermined ESG, controversial business involvement and low-carbon screening criteria 
CGlobal clean energy companiesbased on the WilderHill New Energy Global Innovation Indexcompanies worldwide whose innovative technologies focus on clean energy, renewables, decarbonization, and efficiency 
DInternational small, medium, and large cap companiesScreened for certain environmental, social, and corporate governance (ESG) criteriacompanies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power.*companies that do not meet certain standards of U.N. global compact principles and companies that do not meet certain diversity criteria.* 

All in all, it took about a week to set up the Schwab accounts and transfer the funds and purchase the ETFs.  There were no extra charges in doing this, other than the ongoing charges to each fund, which would be accrued within the Maryland and Pennsylvania managers or within Schwab. I hope by now, you understand that I am not a day trader. I’ll leave the trading up to the fund managers.  In any case, I am not inclined to review these choices more than once or twice a year.  Set it and forget it. I hope to not need any of these funds for at least 3 years and possibly longer, so this is ultimately a longer term investment strategy.  I might or might not provide a performance report in 2024.

Take-Aways

  1. If you have a retirement fund or are saving in a retirement fund, you should become familiar with the basics of retirement investing and know what your goals are.
  2. If your company or the fund provides you with basic investing training or course, take it.  You should know generally why you have picked the funds you have.
  3. Now we come to the main point: Ask yourself this question.  Do I have any social responsibility in investing, or is my sole goal to maximize my profit?  Do I agree with Milton Friedman, or do I believe that companies and by extension, I, have some responsibilities to the public square that requires additional considerations?  If you need some research to be able to answer that question, you can read this article from Nerdwallet.
  4. If you do believe there is a social aspect to pension funds and investing, and you have a retirement fund that you control, then you may wish to do additional research into ESG investing and determine if there are better funds for your investments.  Better in this case, means not just returns but the ESG principles described above.  And since not all ESG funds have the identical objectives, more research is warranted.
  5. If you’ve made it this far and have a retirement fund and/or are saving toward retirement, consider yourself lucky, and smart.  A fourth of Americans have no retirement savings or pension.

Good luck, all and thank you for you patience on this one.

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