Stephanie McCullough (00:06):

Welcome to Take Back Retirement, the show for women 50 and better, facing a financial future on their own. I’m Stephanie McCullough, and along with my fellow financial planner, Kevin Gaines, we’re going to tackle the myths and mysteries of “Retirement,” so you can make wise decisions toward a sustainable financial future. Through conversations and interviews, you’ll get the information and motivation you need, to move forward with confidence. And we’ll be sure to have some fun along the way. We’re so glad you’re here. Let’s dive in.

Stephanie McCullough (00:40):

“We focus on sustainability, not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.” This is a quote by Larry Fink, the CEO of BlackRock. And it gets to the heart of what we’re going to talk about today.

Stephanie McCullough (01:02):

Coming to you semi-live from the beautiful Westlakes Office Park in suburban Philadelphia, this is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group. Say hello, Kevin.

Kevin Gaines (01:13):

Hello, Kevin.

Stephanie McCullough (01:15):

So if any of you tuned into our last episode, episode 34.

Kevin Gaines (01:19):

And how could you not?

Stephanie McCullough (01:20):

How could you not? Please don’t tell us that you didn’t. With the inimitable Liz Simmie. You know that we took a deep dive into the perspective of an investment manager, someone who takes other people’s money under their wing and invests it for them. And someone who’s got this perspective on the world that this terminology that we’re going to use today, ESG, is just good investing. And that’s the perspective that Larry Fink, the CEO of BlackRock, a big mutual fund company, also takes. So we thought we should back up a little bit and give you kind of the 101 on ESG according to TBR, Take Back Retirement. Just to dive too much into the alphabet soup.

Kevin Gaines (02:04):

So Stephanie, let me ask you a question.

Stephanie McCullough (02:07):

Yeah.

Kevin Gaines (02:07):

Because we’ve never really talked about investing before.

Stephanie McCullough (02:11):

Mm-hmm.

Kevin Gaines (02:12):

We spend a lot of time talking about concepts and things of how to set yourself up to have the retirement life that you want. Why are we delving into investments or this particular investment topic? Or to put another way, why is TBR talking ESG?

Stephanie McCullough (02:31):

So ESG, environmental, social and governance, is a perspective on investing. And it’s honestly become kind of a hot topic. It’s become more in the public eye, from my perspective, as someone who’s been interested in it for a long time. There’s more studies coming out, more articles that’s showing a majority of women want to invest this way. A majority of name your generation, depending on the study that you’re looking at, feel like they want to invest their money in line with their values.

Stephanie McCullough (03:06):

And really when we talk about “Take Back” in our title of our podcast is all about empowering you, so that you can be intentional and align the life you want to live with your money. And then the “Retirement” part is like whatever that phase of life means to you. It doesn’t mean sitting on a rocking chair the rest of your life. But really when you think about that big picture, it’s making sure that you are living in alignment with what’s most important to you.

Stephanie McCullough (03:34):

And since we’re financial planners, we’re talking about lining up your money with the things that is most important to you. ESG investing, values-aligned investing, impact investing is a way to align your investments with the things that you value in the world. That’s one way to look at it. But I know, Kevin, you kind of have a different perspective on ESG. So why don’t you fill us in? As more of a, I would say, traditional investment guy.

Kevin Gaines (04:04):

Here’s a quick little history on ESG, which is 30, call it 20, 30 years ago.

Stephanie McCullough (04:11):

Oh, longer – 50s.

Kevin Gaines (04:14):

50s. ESG back then it was called SRI, socially responsible investing. It was very negative. It wasn’t “we want to invest in these companies,” it’s “we don’t want to invest in those companies.” And it turned a lot of people off for a couple reasons. It may have not have actually aligned with their own personal values. But because it was exclusionary, you skipped certain sectors and industries, which at any given time could be the better performing industries.

Kevin Gaines (04:53):

So there was this perception back then with these negative screens that you were going to not necessarily automatically underperform the broader market, but you definitely set yourself up for times when you were going to underperform just because you were in the wrong sectors, or not in the right sectors, to phrase another way. And that actually led to a philosophy. And Stephanie, I remember us talking about this 20 years ago, and me saying this very philosophy, which is…

Stephanie McCullough (05:23):

Mm-hmm.

Kevin Gaines (05:24):

… invest in the companies that are going to make you the money. And then you can take the money and do with it whatever you want to do.

Stephanie McCullough (05:31):

Yeah, yeah.

Kevin Gaines (05:35):

I would say 20, 25 years ago there was some credibility with that argument. But with how ESG’s evolving, it’s a less powerful argument now.

Stephanie McCullough (05:45):

Yes. And we’ll dive into that. But I think you’re right, Kevin. When I started doing this work 24 years ago, that was the knock on it. Like why would you want to give up the return you could get from the oil industry, for example, tobacco and alcohol, for example? And yet, like you said, socially responsible investing has been around for a long time.

Stephanie McCullough (06:06):

One of the first investments I remember hearing about was from the company, the mutual fund company, American Funds. Very popular, very well run company. They had a fund called, they still do, called Washington Mutual Investors, which was started in 1952. Because as I understand the history in Washington, DC, there was a law saying that fiduciaries, people who by law were required to uphold the best interest of the people whose money they were looking after, right? Kevin and I are fiduciaries on our investment.

Stephanie McCullough (06:38):

But back then it was like people running pensions and trust funds and that kind of stuff. They were required by the government of the District of Columbia to avoid companies that made money from alcohol and tobacco specifically. So the Washington Mutual Investors Fund since 1952 has been avoiding those companies. So that’s what we call a negative screen. And that’s what Kevin means by this kind of exclusionary, really opting out of things.

Stephanie McCullough (07:04):

And then in my own personal history, I remember in the 1980s, people protesting on college campuses, including mine, trying to get university endowments to divest from companies that did business in South Africa, right? Trying to put pressure on the South African government to end the practices of apartheid. So again, that divestment, that’s kind of another negative screen, right? We’re going to invest in the whole world except those guys, because they’re doing something bad that we don’t like.

Stephanie McCullough (07:32):

And more recently, large investors have been pressured to move out of companies that produce or involved in fossil fuels. So those are all negative screens, right? You say, “Hey, these companies or these industries, I think they’re bad actors in the world. I don’t want to be part of it.” So even though they’re making a profit from those activities that I personally feel are harmful to the world, as a shareholder, I’m going to say, “Well, I would’ve made money if I were a shareholder of that company.” But I’m going to say, “No thank you.” That’s kind of how a negative screen works.

Stephanie McCullough (08:02):

But the evolution has kind of become from opting out of the bad actors, so to speak, to opting in to kind of the best in breed, or the good actors in various areas. So the E, S and G are three areas that a lot of people focus on in this area, environmental factors, social factors, and governance. So looking for companies that do well in environment stuff. So Kevin, tell us some of the things that might qualify in the E category. And we’ll get to the things that don’t. But let’s focus on the things that do for now.

Kevin Gaines (08:38):

Environmental, primarily going to think of companies that have what’s referred to as a low carbon footprint, meaning they don’t necessarily generate a whole lot of greenhouse gases. But also means, they’re not polluters. They’re responsible with how they manufacture or develop whatever their product is.

Stephanie McCullough (08:58):

Mm-hmm. And also, clean tech companies, companies that are innovating in like alternative energy sources, wind and solar.

Kevin Gaines (09:07):

And even companies that, fine, they’re going to generate… They’re going to have a larger carbon footprint from what they do. But then they find ways to do it responsibly, or they find ways to offset what they’re doing. Stephanie, how do you describe the S?

Stephanie McCullough (09:28):

So the S is traditionally thought of as social, right? But it’s also kind of stakeholders. It’s thinking about, do they treat their employees well? Are they involved in their community where they have their facilities and are they doing good things? Are they working with ethical suppliers? Some people look at pay disparity between the top level, the C-suite folks, and the kind of frontline employees. Those are the kind of social factors that often you look at. And then there’s the G, governance.

Kevin Gaines (09:57):

G is actually my favorite letter of the three. Are you running the company the right way? Are you doing things efficiently? Are you taking advantage of all the resources available to you and making the best use of them? So that could lead us to diversity. Think of an old line company that only hires white men. Well, if you exclude a large portion of the population, you’re missing out on a lot of potential capabilities that could be better suited than just looking at this narrow group.

Stephanie McCullough (10:40):

Yeah. Lots of more talent and different perspectives. There’s a lot of studies showing that diversity leads to better decisions. But it’s also transparency in their accounting and in their books, right? Like no scandals in terms of taxes and all that kind of stuff. That’s the governance, right? A company that’s governed well.

Stephanie McCullough (11:01):

So there are still different names out there for this type of investing. You still hear people talk about socially responsible, ESG, impact investing. People might say that’s a slightly different thing, but still I’ve seen that used here. And then kind of maybe a catchall term could be kind of values-aligned investing.

Kevin Gaines (11:20):

Stephanie, of those terms, I know value aligned is your personal favorite.

Stephanie McCullough (11:25):

Yeah. Well, for people who’ve never heard of ESG, which kind of polls show that a lot of people kind of scratch their heads like, “What the heck does that mean?” And even when you list the terms, it doesn’t tell you what it means. So to me, values-aligned investing is a little bit more descriptive. That’s why I think it’s a more useful term.

Stephanie McCullough (11:44):

So really what we’re looking at and kind of what’s different from the traditional investment is that we’re kind of thinking about perhaps doing two things at once. We’re talking about our investing dollars in this. And just a little sneak preview of episode 36, we have a guest, who’s going to talk about a broader perspective on how we can align our money with our values. But that’s a little teaser for next time.

Stephanie McCullough (12:06):

Today, we’re just talking about our investing dollars, which doesn’t mean our saving dollars, or our charitable dollars, or those kind of things. It’s the things we’re investing to grow our long-term wealth and for our own financial sustainability in the future. That’s the primary purpose of our investments, right? But along the way, could they also be working to improve the world at the same time? To support things that we care about. To try to make advances in areas that are important to us.

Stephanie McCullough (12:33):

And this is kind of the interesting part about it. But it also can get a little sticky because… And this was then, again, kind of one of the pushbacks I heard at the beginning of my career. I worked with employers who had retirement plans, 401(k)s, 403(b)s. And we had some employees who wanted to put socially responsible, ESG funds as an option in the 401(k) plan.

Stephanie McCullough (12:58):

And the really easy pushback by the investment companies was, “Well, come on, you’ve got 3,000 employees. You’re never going to pick one fund that’s going to satisfy everybody’s definition of socially responsible or of values aligned, right? Because people have different priorities,” which is one of the sticky parts of investing this way.

Stephanie McCullough (13:19):

But the good news is there are more and more… I mean, really a lot more investment options available to regular old people who don’t have billions of dollars to invest, right? Regular people like you and me. There are more and more options where we can get pretty granular and pretty specific about the types of things we want to support.

Kevin Gaines (13:39):

Right. I want to say, within the last five, definitely last 10 years, this space has exploded as far as options available to the everyday investor. Now that has led to some products coming out there just slapping a label on it. But with technology, and Liz actually makes this point, which I thought was really important.

Stephanie McCullough (14:03):

In episode 34?

Kevin Gaines (14:05):

In episode 34. The data is a lot better.

Stephanie McCullough (14:07):

Mm-hmm.

Kevin Gaines (14:07):

So it’s now easier for companies to be evaluated as to how good they are when it comes to a lot of these issues that an ESG manager wants to look at. Part of the reason you did negative screens 30 years ago was because that was really the only way you could do it.

Stephanie McCullough (14:27):

Yeah.

Kevin Gaines (14:27):

There wasn’t a whole lot of reporting out there. But again, over the last couple decades, companies are reporting more, as either because they think it’s the right thing to do, or their shareholders want it, or government mandates. Let’s be honest, a lot of that stuff is out there.

Stephanie McCullough (14:44):

Yep.

Kevin Gaines (14:44):

But the net effect is it’s now easier to identify companies doing things the right way.

Stephanie McCullough (14:51):

Mm-hmm. And likewise, maybe mutual funds, because we usually use mutual funds for our clients. We can identify the funds that are picking those companies. The funds that are kind of managing in the way that our clients want to do. So that kind of answers the one pushback, which was, “Oh, how are you going to find one fund that satisfies everybody?” You don’t have to now. There’s a proliferation of funds.

Stephanie McCullough (15:12):

But also, Kevin, there’s been a lot more research around that first one that we mentioned that people are saying, “But you’re giving up performance. Why would you want to do that?” There is a lot of research out there now showing that with ESG investing, not only are you not necessarily giving up performance, but in certain cases, it has outperformed. Like in 2020, our study is showing that a lot of the ESG funds outperformed the kind of regular old funds that were out there.

Kevin Gaines (15:43):

Right. To take this even further, those old studies saying how it used to underperform, they were only looking at a very small portion of ESG. But here’s a fact. ESG has been used by investment managers for several decades, except back then we called it active management.

Kevin Gaines (16:04):

Think back to the ’80s, the Fidelity Magellan Fund with Peter Lynch. Well, you went with him because he met with management. He decided, these guys, I like the product approach they’re taking. I like that they’re being efficient with our money. I look them in the eye and if they’re lying to me, I don’t want to invest with them. If they’re dumping their garbage in the river, I don’t want to invest with them. Not because I have any particular aversion to pollution. Maybe he does. Maybe he doesn’t. I don’t know the man. But because that’s setting them up for future issues with the EPA, bad publicity.

Stephanie McCullough (16:41):

Yeah, lawsuits, risks… cleanup costs.

Kevin Gaines (16:44):

So active managers, although they would never say ESG or socially responsible…

Stephanie McCullough (16:49):

Well, some would.

Kevin Gaines (16:49):

Well, some would. But this is actually what a lot of people have been doing for a long time, and you can’t say that performance was bad.

Stephanie McCullough (16:58):

Right, right. And then back to Larry Fink’s letter, he has this letter to CEOs, which is the companies that BlackRock invests in each year. And he was talking about how, especially during the pandemic, companies that had lower employee turnover, that treated their employees well, maybe had good benefits, were flexible with them. That was certainly a benefit still continues to be during this labor shortage that we’re seeing right now. So yes, that was the responsible thing to do. And at the same time, it was the good investing, the good management thing to do. So as an investor, those are the kind of companies that you want to look at.

Stephanie McCullough (17:34):

So yeah, I think it’s kind of a false dichotomy now that, “Oh, you are going to invest with your values? That’s nice. You little bleeding heart type person, you’re obviously going to not do as well as I am, because I’m going to just invest for high return.” I don’t think that’s a real debate anymore.

Kevin Gaines (17:57):

No, no.

Stephanie McCullough (17:58):

So here’s another point. We were talking about the proliferation of ESG options out there. So one of the funds that’s been around a long time that I and quite a few of my clients have invested in is a women’s leadership fund. So it really wants to invest in companies in the US and Europe mostly, who have a lot of women in leadership and have policies that support women.

Stephanie McCullough (18:20):

So my client was in this fund and we were having a meeting one time, and she was looking at the holdings of the fund. Mutual fund is a way to gather your money with other investors and buy companies in the end. So she’s like, “Wait a minute. This fund owns General Motors. I like electric cars. I don’t want internal combustion engines and fossil fuel companies in my fund. Why is this company in my fund?” I said, “Because it’s a women’s leadership fund and they have a woman CEO. And not many S&P 500 companies have a woman CEO.”

Stephanie McCullough (18:51):

So you can’t always have all of your values represented. You want to be clear on what you prioritize. And there might be some compromises in there, because you’re probably not going to find the perfect thing for all outcomes.

Kevin Gaines (19:08):

Right.

Stephanie McCullough (19:09):

But there’s another pitfall of the ESG investing. Kevin, you had a good example.

Kevin Gaines (19:12):

Yeah. We touched on it with Liz, can talk greenwashing, pinkwashing. But it’s not even just people posing or pretending. It’s also people just misinterpreting or not understanding what’s really all involved.

Stephanie McCullough (19:25):

Mm-hmm.

Kevin Gaines (19:26):

For example, well, I can say that generally that aluminum can producers are considered by many ESG managers as being environmentally responsible. Because, hey, aluminum, you can recycle it and use it over and over again. Well, here’s the problem. And this is in my mind because a stock analyst that I know had an issue with one of these companies has said it’s really overvalued. And the pushback he got was… Well, the question he got was, well, why is it so overvalued? And part of his response was… Well, one of the reasons his ESG, as an investment thesis, is exploding and a lot of people are buying this company because they make aluminum cans and they’re recyclable.

Stephanie McCullough (20:12):

Well, I guess, it’s not single use plastics, right? So if you’re looking at the alternatives, it seems good.

Kevin Gaines (20:16):

Exactly. However…

Stephanie McCullough (20:17):

However.

Kevin Gaines (20:19):

And this applies to other industries as well, which again, episode 34, Liz and I, the three of us, we discussed this as well. Is the extraction of aluminum is anything but environmentally friendly.

Stephanie McCullough (20:32):

Mm-hmm.

Kevin Gaines (20:32):

The refining of aluminum, again, anything but environmentally friendly. There’s a lot of energy consumed to make these aluminum cans. And then here was the part that got me. Yeah, aluminum cans can be recycled, but nobody recycles them.

Stephanie McCullough (20:50):

Well, not nobody, but…

Kevin Gaines (20:52):

Very few. It’s…

Stephanie McCullough (20:53):

… majority, nobody.

Kevin Gaines (20:54):

I think the number he threw out was like the average aluminum can or piece of aluminum that’s turned into a can gets recycled one, one and a half times. So yes, better than a plastic bottle that you can’t recycle at all, but is it really?

Stephanie McCullough (21:12):

Still going to the landfill pretty quickly.

Kevin Gaines (21:13):

Yeah. It’s still ending up in the landfills and it’s still not decomposing. It’s not like it’s paper that can just eventually decompose.

Stephanie McCullough (21:21):

Right.

Kevin Gaines (21:21):

So just because a company does something that’s, “Hey, that should be ESG.”

Stephanie McCullough (21:28):

Mm-hmm.

Kevin Gaines (21:29):

Maybe not. It’s more than just superficial evaluations. It’s understanding what the different businesses, how they operate.

Stephanie McCullough (21:41):

Yep. So we certainly don’t want to put you off from this. If this is an area that you think you’re interested in, I think the next steps are to look at your own investments. Do you have any funds that purport to be E, S or G? Do you not? Maybe you can investigate them. If your money is mostly in a retirement plan through your work, do they have any ESG or socially responsible funds available? What are they? What are the options? And if you work with an advisor, ask them what their views are on ESG, if you haven’t had the conversation already. And see if there’s ways that you might be able to work it into your own strategy.

Stephanie McCullough (22:20):

We’d love to hear from you on this, because we’ve gotten a lot of conversation going. We’ve heard from people on all sides of the spectrum on this area. But it’s certainly an area of more conversation going forward. Like we said, sneak preview of episode 36. We have a broader ranging conversation, which I think you’ll find very interesting, with a woman who wrote a book last year kind of on this broader topic. But yeah, we’d love to hear from you. If you could, I’m going to ask you, if this is an area of interest or of special passion for you, please reach out to us on Twitter. Kevin is @2ndHalfPlan. And I’m @sofiafinancial. We’d love to hear your thoughts on this whole ESG investing area.

Kevin Gaines (23:09):

Yeah, that’s great. Yeah. We need your feedback. We want your feedback because… Hey, let us know what we should be talking about more. Not just ESG. If there’s other things you want to hear about, please let us know. And also we have a website: takebackretirement.com.

Stephanie McCullough (23:25):

That’s right. You can find all the links to all the episodes there.

Kevin Gaines (23:27):

And contact us too. So please, don’t be a stranger.

Stephanie McCullough (23:33):

All right. Thanks so much. We will talk to you next time. It’s goodbye from me.

Kevin Gaines (23:38):

And it’s goodbye from her.

Stephanie McCullough (23:42):

Be sure to subscribe to the show and please share it with your friends. Show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only, Raymond Loewy through New Math in New York. See you next time.

Disclaimer (23:57):

Investment advice offered through private advisor group, LLC, a registered investment advisor. Private advisor group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material, are for general information only and are not intended to provide specific advice, or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor, prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.