Crayon Conversations: Responsible Investing

Investing

4 Nov

Crayon Conversations is our chance to hear from the experts in the field, dive deep into their area of knowledge and ask our own questions. Sign up here to find out about our upcoming conversations.

In this conversation, Chelsea Traver, the co-founder of Evergreen Advice, shares how we can choose investments that generate financial returns and shape the kind of world our children will grow up in.

Chelsea is a Registered Investment Advisor and a Chartered Financial Analyst, and she is certified by the Responsible Investment Association of Australasia.

This conversation has been edited for length and clarity. Watch the original recording here.

Steph: Chelsea, can you share how you got into responsible investing and why it's so important to you?

I've worked in the finance industry for over 10 years. I began diving into the responsible investing rabbit hole in my last position. My team managed about $500 million for individuals, trusts and charities, and my specialization was creating and maintaining responsible portfolios. My now business partner Mike and I set the responsible investment philosophy, decided how the funds were used and explained all of this to our clients.

I saw how responsible investing can be done well - and not so well. This drove me to become a passionate advocate for getting it right and improving in the future.

Personally, investing responsibly is important because climate change is one of the greatest issues the world is facing right now. And while investing responsibly alone isn't going to make the sweeping changes we need, it’s a step in the right direction. It can be part of the pressure on companies to do better.

Steph: For those of us who are new to this area, what's a good starting definition of responsible investing? I've seen quite a few floating around!

A very simple definition of Responsible Investing is that it seeks to consider both a financial return and social or environmental good, and it's designed to make positive change. This is the boilerplate definition.

What's tricky is that responsible investing means different things to different people. Climate change might be at the top of their list of concerns for some people, whereas for others, it might be animal welfare. Generally speaking, a fund looking to invest responsibly is trying to make positive changes and have strong financial returns.

Steph: The finance industry loves jargon - that's something new investors find challenging to grapple with. And when it comes to responsible investing, there are a lot of different terms that are thrown around. Can you run us through the spectrum of impact?

It can be confusing, especially because fund managers don't use one standard definition. Traditional investing is at one end of the spectrum of impact, where only financial returns are considered. At the other end is philanthropy, where no financial return is needed and social impact is the only consideration. Most responsible fund managers sit somewhere in the middle. We use the spectrum of impact to evaluate how ethical a fund actually is.

If a fund manager says that they use ESG, it means that they consider the environmental, social and governance issues when making investment decisions. For example, they might look at a company’s resource use, employee relations, and any human rights issues in their supply chains. The key thing to note is that just because a manager evaluates companies using an ESG lens doesn't mean they have to do anything with this information. That's why we have ESG next to traditional investing on the spectrum.

As you move more towards the impact side, you find fund managers that specifically seek investments with better environmental or social performance or even target key sustainability areas, such as clean energy.

It is a personal decision about where you want your investments to be on that spectrum. The next step is then to do your research. You can't just rely on the name of the fund to tell you if a fund is actually investing ethically because a manager might label a fund as “sustainable”, “socially responsible”, or “ethical”, but those terms don't necessarily mean anything concrete.

Steph: You touched on financial returns earlier - how has the responsible investment industry performed compared to traditional investing?

Numerous studies show that responsible investment strategies have generally performed on par with traditional investing and, in some cases, have outperformed. Keep in mind that there have been periods where ethical investment funds perform differently from traditional investing. This last year is a good example: oil prices went up, so traditional investments did much better than ethical investments that avoid fossil fuels.

I would be cautious about saying investing ethically can get you much better returns. But it's fair to say that you don't have to give up returns to invest responsibly.

Steph: That's exciting to hear because many parents want to do good while also funding future opportunities for their children.

It's a big decision you’re making to invest for someone else, so you want to make sure you're doing right by them and by the world.

Steph: You mentioned that it can be hard to know what a fund actually does under the hood. Some fund managers have been accused of greenwashing - what is this? And as an investor at home, how can I ensure that my money is actually going towards the things I care about and not just to someone who only talks about it?
It is a big issue, especially since investing ethically is a significant business these days. Greenwashing means a fund overstates its green features or maybe even mislabels itself as green. For example, if a fund only excluded tobacco and nuclear weapon companies, would you consider that a green fund? Probably not. Investors are understandably concerned that some fund managers are just jumping on the green bandwagon without actually investing in a way that contributes towards sustainability or change. Investors are looking for more.

The Financial Market Authority came out with a report a few months ago on greenwashing and laid out what they expect from fund managers to make sure consumers are being appropriately treated and informed.

This is going to be a key theme in this talk, but that's why it's important to do some research to ensure your investments are measuring up to your standards. Steps you can take:

Use Mindful Money to identify the areas of concern in your investments. You can plug in your KiwiSaver or managed fund into their search tool, and it'll show the areas of concern that that fund might have (e.g., fossil fuels, weapons). You can decide if you’re okay with that.
Look at the fund manager’s website to see available reports and information. For example, if they say climate change is one of their key considerations, do they report on their carbon usage against a benchmark? Do they have a clear framework for responsible investing? Are they in the media advocating for change? These are all things that you can search for
Finally, I like external validation, such as a Mindful Money Award or certification by the Responsible Investment Association of Australasia.

Steph: And what if people invest directly in stocks? Do companies have any obligation to disclose this information?

For companies, it's a little trickier. The TCFD Reporting framework coming out in 2023 requires large organizations to report on their climate change disclosures.

Again, check the company’s website to see if it has a sustainability plan. What are they reporting on? Do they have any external validation? For example, if it's a building company, do they have any targets around highly rated buildings?

Steph: What are common mistakes you see first-time responsible investors make?

Being bogged down in analysis paralysis! I've been there. I am a detail-oriented, research-based person. I like having the numbers, facts and data before I make a decision. However, it took me over a year to make my first personal investment decision back when I had just graduated from university. I was sure there was some perfect option out there if I just searched enough, but in the end, I chose the best available option. Looking back, I gave up so much time in the market because I was going in circles.
Of course, I'm not recommending that you do no research! Instead, decide what's important to you and choose the best option from what's available. You’ve got to pull the trigger at some point. Getting started slowly but surely can be a nice way to look at it.
You don't have to do this alone. Nowadays, some advisors also offer a self-managed investment plan where they review your situation and make recommendations that you then implement and manage yourself. This tends to be less expensive than the traditional advice model, where an advisor manages your money on an ongoing basis. I mentioned this because some people like a second opinion.
Cover your bases if you’re a first-time investor. This means you have an emergency fund, and you’ve paid off your high-interest debt before looking for a fund with sustainability characteristics. And then just start - you got this.

Steph: How has the Responsible Investment Industry changed over the years, and where do you think it's going in the future?

It's evolved a lot, especially in the last few years. Previously, a manager would consider themselves ethical, even if they just had some basic exclusions. Exclusions are just the first step of responsible investing. And in terms of changing companies’ behaviour, they're actually a little counterproductive. If a fund manager excludes a company, then they're not able to engage with them on improving their business since they’re not a shareholder. Exclusions do have a place in investing, but they should only be used in actively harmful areas, such as tobacco.

We've seen a shift to funds moving their investments towards companies that are actively doing better, such as companies with genuine initiatives to reduce their carbon footprint or waste.

As I look towards the future, I see more standardization of information and transparency. This sounds dry, but the first step in doing better is knowing where you are at. Right now, some funds provide sustainability information, but it's tough to compare across funds because the benchmarks and reports differ.

The climate disclosures coming in 2023 will help with that. There is also a global focus on increased transparency, and I expect there will be global standardization of information. Of course, the data nerd in me loves that! Shining a light on dark areas is the only way to make true change.

At the Responsible Investment conference last month, an investigator gave an excellent talk on modern slavery. He spoke about how all of us, in our daily lives, benefit from modern slavery, whether that be the phones we use or the food we eat. Right now, supply chains are so opaque, with subcontractors on subcontractors and patchy audit information. The only way to find and eliminate child labour and modern slavery are to encourage companies to monitor and address their supply chains. This is why I strongly believe that more transparency is needed.

Some people don't buy fast fashion because they know that's an industry rife with modern slavery. You can do the same with your investments and try to influence from that lens as well.

Steph: You mentioned that one of the advantages of investing in a company is that you can engage with them. Can you share some examples where investors have been able to nudge a company in a better direction?

In recent years, there's been a strong demand from investors to see changes in the companies that they invest in. In New Zealand, we have seen the electricity companies, such as Mercury and Contact, make stronger commitments to decarbonizing than they had previously.

Companies are taking a principled approach to help mitigate climate change, but they also know that by doing this, they can attract more investors - and more investors lead to a higher share price and higher remuneration for management. It’s a win-win.

Another interesting example of engagement in New Zealand is the chemical company DGL. A few months ago, the CEO made sexist and racist remarks about My Food Bag founder Nadia Lim. Investors reacted in one of two ways. KiwiWealth, for example, announced they would not invest in the company at all (they weren't holding it at the time). Milford, a shareholder, talked to the board about how these remarks affected the company's return and engaged with them to see if they could change. When they couldn't affect change, they sold out of the company. DGL has since delisted from the NZ Stock Exchange, which is attributed to the backlash from the investment community.

Steph: When it comes to the issues funds are addressing, is it mostly broad strokes or more narrowly focused on one issue?

We take a core and satellite approach. Core positions need to be broadly diversified. We want to be invested across many different industries so that we can use that engagement vote. Questions we ask fund managers include:

Are they invested across a number of different industries?
Do they invest in companies with best-in-class environmental and social scores?
Do they have a low-carbon target?
Do they engage with companies to effect change by using their voting rights?

Satellite consists of more targeted investments that tend to be a smaller percentage of the portfolio. For example, clean energy ETFs and electronic vehicle funds. These more targeted funds are investing in one industry, so they may only give you exposure to one country or be more volatile. You want to understand this before you invest.

Steph: Aside from responsible investing considerations, what else should people check about a fund before investing?

Know your risk tolerance and time horizon. This is really important. In the last couple of years, I’ve seen people invest in a growth fund, knowing that they want to use the money for a house deposit in the next two years. In some cases, their investment has been down at the time they want to buy the property.
What fees does the fund charge?
What does the fund invest in? Are they diversified or concentrated, and what do you prefer?
Any extra services, e.g., more information and content, an app, a helpful service team.

(Chelsea and Crayon collaborated on a comprehensive fund evaluation framework here)

Steph: What are your go-to resources if people want to learn more?

Mindful Money: in addition to their tools, they have good seminars and articles.
The news: John Berry from Pathfinder writes a great column in Stuff.
Fund managers’ websites: they release content regularly.

Steph: You touched on the fact that an advisor can help you through this process. Many people haven't engaged with an investment advisor before. What does that process look like, and why might someone choose to work with an advisor?

Here’s what our process looks like:

Introductory call to make sure that I’m the right fit for you and vice versa.
Discovery meeting where I ask a bunch of questions to find out what you are looking for from your investments, what you want your life to look like and how your money can support that. The other benefit of that is getting organized - this is an underrated part of the process. A lot of people don't necessarily have a clear understanding of where their money is. I work with clients to generate a list of their assets and liabilities so they know where everything is.
Plan: I recommend a personal investment plan. From there, I can manage the investments on an ongoing basis, or you can manage them yourself.

Advisors are well suited for people who want to outsource investing, usually because they’re time-poor and this isn’t an area of interest for them. I’ve loved this stuff since I was a teenager. And investing is complicated. There are some key tenets for those who want to do it themselves, and we can help with that.

Steph: Do you see new parents as part of your clientele?

Yes! We get people who are on parental leave and want to set up an investment fund for their children. Something I hear from a few clients is that they want to have a big life - go on trips, help their child with university etc. They’ve thought about investing for a while, and having a kid is the kickstarter to invest.

Steph: What suggestions do you have for parents?

I know this is slightly controversial, but your needs come first. You may want to help your child with university or their first home deposit, but you need to make sure you have solid feet under yourself. You don't want to get into a situation where you have to work longer than you want to, or you’re worried about money.

Many people don't have specific goals, and that’s okay. Your goals will evolve as you and your children grow. The best thing you can do is figure out what direction you want to go and then take the next small step.

Watch the Recording

Now for the important legal part: Investing involves risk. You aren’t guaranteed to make money and you might lose the money you start with. The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 4 November 2022.