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Growing the Green



— July 15, 2018

Growing the Green

  • Investing in environmentally minded companies
  • can aid the Earth while fattening your wallet.

As millennials advance in their careers and earning power, they’re keen to put their money where their values are. That would include investing in companies that advance environmental goals, such as growing solar energy, for example, or that follow ecologically sustainable practices, such as using solar energy themselves. “We need to get investment-aware and take some basic responsibility for understanding where our money’s going and whether that money is harming or hurting,” says Stephanie Gripne, Ph.D., founder and executive director of the Impact Finance Center in Denver, Colorado, a nonprofit that encourages investing for social good. According to the Morgan Stanley Institute for Sustainable Investing, a 2017 survey of 800 people by the market research firm Brunswick Insight found that 86% percent of millennial individual investors are interested in sustainable investing, slightly greater interest compared with the 75% figure for all individual investors. For purposes of this survey, sustainable investing was defined as “the practice of making investments in companies or funds which aim to achieve market-rate financial returns while pursuing positive social and/or environmental impact.”

Making Money, and a Difference

But are achieving financial returns and making a positive impact on the environment mutually exclusive? Some people used to think so, but that way of thinking has largely gone the way of DDT on our lawns and leaded gasoline in our cars. “Studies show that at the end of the day, you’ll meet or exceed those traditional market returns,” says Dave Fanger, CEO and founder of Swell, an SEC-registered investment advisor incubated by Pacific Life. Swell offers portfolios of companies in areas including clean-tech, clean water, and renewable energies. Figures indicate that sustainable investing should allow you to make at least as much money as conventional investing, and perhaps a bit more. For example, Swell’s total return (net of fees) for September 30, 2016, through March 31, 2018, was 26.95%; the S&P 500 total return was 25.51%. “Consumers are not willing to sacrifice return,” Fanger says. Gripne points to recent changes in environmental legislation as an example of how positive revenue and environmental responsibility can coexist. Noting that Washington has recently de-emphasized corporate climate-related goals, she says, “To my knowledge, not a single Fortune 500 company undid their climate commitments.” Gripne believes if it had made financial sense for these companies to roll back their carbon commitments, they would have. “When they actually manage their carbon, they find ways to reduce costs and reduce harm on the environment, which results in positive PR,” she says. “They actually save money by doing the right thing,” although such savings are hard to quantify. Gripne does mention another benefit: Reducing environmental harm “increases the morale of the company staff, shareholders and stakeholders.”

The Many Shades of Sustainable

But what does investing for sustainability actually mean? Socially responsible investing (SRI) is an even broader term that can encompass not only environmental good but also a social good. For instance, this concept would cover a company that prioritizes safe, healthy working conditions for its employees and only works with suppliers who share those values. SRI also applies to companies that invest a portion of their profits in community initiatives. SRI can also stand for sustainable, responsible and impact investing. The Forum for Sustainable and Responsible Investment (US SIF) reports that in 2016, $8.72 trillion of the $40.3 trillion in total assets under professional management in the United States fell into this category, representing 33% growth since 2014. Sustainability can have multiple meanings and facets. For instance, there’s green tech, which Jacob Shea, a partner at Structure Capital, an early-stage venture capital firm focused on the zero-waste economy, describes as “products and services that have been this mentality of ‘we want to be sustainable to the environment itself.’” Then there’s cleantech, which focuses more on energy and producing cleaner waste. Shea also looks to invest in innovative uses for excess capacity. “For us, it’s not just finding ways to reuse a building or a car,” he says. “We invest around putting people back to work. We for sure invest in a shared economy and finding things that are reused assets.” Shea points to Copia, a San Francisco-based app that redistributes excess food to people who need it (Shea is an advisor to Copia), and Feastly, an online platform that lets chefs create meals and sell tickets rather than working at a restaurant. Shea says Structure Capital has over 120 companies in its fund, including the two aforementioned startups.

Strength in Numbers

Investing in an individual company is often like putting too many eggs in one basket: If that company falters, so does your money. That’s why investment vehicles such as mutual funds—professionally managed funds that contain a collection of stocks, bonds or other securities—could spread your risk across multiple companies and provide more diversification. A growing number of investment companies allow individual investors to choose socially responsible investments and align their money with their values. Traditional brokerage companies such as E*TRADE and Charles Schwab now offer SRI options, as do newer players such as Swell, which puts together portfolios of companies around environmental issues such as zero waste, clean water, renewable energy, and green tech. “We’ve identified companies we feel that are, in their core business, deriving revenue that addresses those goals,” Fang says. Swell users can choose to invest in one portfolio or several based on their interests or investment needs. As of this writing, its Green Tech portfolio contained holdings in 56 companies, with each company ranging from 0.25% to 4.5% of the overall portfolio. Users can also drill down in Swell’s Green Tech portfolio to individual companies and view their environmental, social and governance (ESG) rating, which quantifies how publicly traded companies perform in these areas. Several third-party companies, including Bloomberg and Thomson Reuters, assign ESG ratings to companies based on metrics such as human rights policies, renewable energy use, and carbon footprint. ESG ratings can be numerical scores or letter grades depending on the service used. Gripne compares ESG ratings for companies to a consumer’s credit score. “Just as you have different credit scores, each of those companies creates an impact report for each public company,” she explains. However, many of the firms that generate ESG ratings and reports sell access to investment companies, so it may not be economical for an individual investor to access these reports in their entirety. Historically, the investment advisors who offered this service to their clients might require $10 million or more in assets under management, according to Gripne, but she says there are now some advisors who specialize in SRI and work with smaller asset sizes. “It’s really important for everybody who cares about this to ask,” she says.

Getting Started

Some online investment platforms have lower minimum asset requirements than investment advisors (and may provide information on ESG ratings as well). Swell’s initial minimum account balance is $50. Another online investing platform called Betterment has an SRI portfolio option with no balance minimum. A third option, Motif Impact Portfolios (which has options for a sustainable planet, fair labor, and good corporate behavior), requires a minimum investment of $1,000. The former two charge fees of less than 1%, while Motif charges per trade or per month for auto investing, in which the platform automatically invests the user’s money on their behalf. All three of these platforms allow users to invest through individual taxable accounts or Individual Retirement Accounts (IRAs), which are tax-advantaged. If you’re investing through an employer-provided retirement plan such as a 401(k), your options for SRI could be more limited, at least for now. According to 2016 data on defined contribution plans administered by Vanguard, only 8% of plans offered a socially responsible domestic equity fund. Gripne sees a need for better investment education and cautions that information from financial companies can come with conflicts of interest. “Are you learning it from a big institution that wants your money under management?” she asks. Still, as socially-minded investors demand more transparency regarding companies’ economic and social impacts, options for sustainable investing—and tools for evaluating these investments—are likely to become more widely available. “As you start to see more of these socially responsible funds, it’s similar to when organic food was coming out when you started to look at the ingredients,” Fanger says. “You’ve really got to take a look at what’s inside the portfolio and see for yourself. Do those companies feel right to you?”

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