Only a search for the word “environmental” turned up a brief mention of what’s called ESG investing.
Yet managing portfolios for clients that try to match investments with their values is a big part of what this firm does. And it can be “complicated,” said Stonebridge CEO and portfolio manager Bob Kincade.
Before any investor can direct a financial advisor or asset manager like Kincade on where they want their money to go, they first have to think it through. Try it. It’s not as easy as it sounds.
You might also think of ESG investing as a faddish recent development, yet Kincade can remember socially conscious investing when he got started in the profession in the late 1970s. It’s only grown since then.
ESG investing is now common, and if Morgan Stanley’s offering it, everybody is. And that’s part of the challenge for investors.
ESG investing used to be thought of as the financial equivalent of an elimination diet, where the investor or portfolio manager avoids stocks and corporate bonds that won’t be good for you.
In the past, that meant screening out the stocks of businesses like cigarette makers or coal and oil producers. More recently, though, investment managers have made sure investors also find companies they approve of, maybe companies working to slow climate change or creating more opportunities for women and people of color in corporate leadership.
Ten years ago, Kincade said, clients typically didn’t really know what they wanted. Today’s client, likely home a lot more in the past 18 months than before, has been thinking about investing with more purpose and is far better informed, too.
Kincade also makes sure Stonebridge clients understand what their preferences might mean for expected investment returns. If clients want to exclude a large swath of available investment ideas — and he mentioned a client’s discomfort with the big technology firms that boomed during the last market cycle — there could be a return penalty for that.
“We take it back to what we refer to as fundamental investing,” Kincade said. “Know your client. Know what their goals, objectives and needs are. Know the businesses that you are prospectively investing in. Know their products, their services, the teams.”
Stonebridge manages about $1.7 billion, with about 900 clients and between 1,200 and 1,500 individual accounts. Each one of those accounts ends up with a unique investment portfolio.
Kincade wasn’t describing an “ESG strategy” so much as a flexible, highly customized personal service strategy. It’s not ideological investing. It’s client service.
“Like I say to all the portfolio managers and the people I mentor, look, they can be weird conversations,” said Carol Schleif, deputy chief investment officer of the BMO Family Office, a unit of the Bank of Montréal. “But if you’re not raising the issue, all of our competitors are. Our best clients are their best prospects. Somebody is having the conversation.”
Schleif has worked with multiple generations of a single family. Older investors seem more likely to want returns maximized any way they can, to generate more money for their nonprofit giving.
“There’s still this overriding assumption that to be impactful in your portfolio means you have to give up performance,” Schleif said. “Study after study after study has shown that’s not true.”
With some Minnesota families, where they really don’t like to talk about personal values or money, Schleif has found it useful to look at the nonprofits they’ve supported with donations. She uses that history to guide decisions on what kind of investments they might want to consider.
She has also started the conversation with the 17 sustainable development goals established by the United Nations Department of Economic and Social Affairs.
For middle-class savers who don’t have access to a wealth management firm like BMO Family Office or Stonebridge, Schleif’s advice is to just start. Investors will get better at identifying good investments with some experience and likely reach a fuller understanding of what they really value, too.
It seems to me the first step is finding out what you already own. And like that client of Stonebridge uncomfortable with big tech, I went looking for Facebook Inc.
Facebook might seem mostly harmless. It doesn’t sell a product that causes cancer or exploit low-wage workers. On the other hand, it’s hard to imagine any company caring less about making the world worse.
It’s a commercial surveillance company, with a business model of selling tiny bits of its unwitting users’ data to advertisers. And while its reputation took a further beating recently in explosive articles published by the Wall Street Journal, long before those stories appeared it was clear Facebook had designed its main consumer app to keep feeding its users content that only makes them angrier and angrier.
Facebook made news by getting booted from the S&P 500 ESG Index back in 2019, got back in and then was dropped again. S&P Global currently scores Facebook at 14 on a 100-point scale of sustainability. By contrast, St. Paul-based Ecolab, Inc., usually considered a specialty chemicals company, scores a 77.
The two largest mutual fund holdings in my retirement accounts are both part of the American Funds family. It turns out that one had about 1.5% of assets in Facebook stock, as of the latest reporting period, and the other had twice as much.
Why would these funds’ managers keep a company scored a 14 by S&P Global in their portfolios? Well, there are reasons, including Facebook’s big footprint in the broad S&P 500 index, plus its 33% return last year and better than 25% return so far this year.
The lesson here is that if you don’t want your money invested in Facebook, don’t look to S&P Global or your mutual fund manager to do that for you.
It’s up to you.