Sara:

Welcome to Sequoia Wealth Builders, a podcast that provides tangible steps and fun discussion on how you can maximize your investments and grow your wealth. I'm your host, Sara, Advisor at Sequoia Financial Group. On today's episode, we're talking all about value based investing. I'm speaking today with Leon, who's the Chief Growth Officer of Sequoia. Thanks for joining us, Leon.

Leon:

Thanks, Sarah. Good to be here. Lots to talk about today.

Sara:

So Leon, lately we've been hearing more and more about dolphins returning in the Venice canals, the Himalayan mountains being seen from distances that we haven't been able to see since World War II. And I think people are a lot more conscious about the world that we're living in and taking care of the world. Have you been seeing that as well?

Leon:

I have, Sarah. It's been interesting. We had a giant decline in CO2 emissions during the COVID crisis and that happened basically globally. Like you said, we're seeing a lot more of things that we haven't seen in a long time. It gives rise to what I see a lot of interest in is ESG investing, environmental, social, and governance, and also what I formally called socially responsible investing or SRI. We're a little bit different. SRI is like a filter, and it filters out all the bad stuff. So no alcohol, no cigarettes, no gambling, all the things we like to do and all the sin stuff. And at the same time, ESG puts the good things in. So an ESG fund might say, "I'm going to go invest in clean energy sources," or an ESG fund might say, "I'm only going to invest in companies that have good corporate governance."

So I'm kind of an ESG guy more than an SRI guy. I like the E because that involves climate change, like you're talking about, being able to see the Himalayas or air and water pollution or biodiversity or deforestation, water scarcity, energy efficiency. I think those are all important things. The S is customer satisfaction or data privacy, gender and diversity. Boy, big topic we see these days. Employee engagement, human rights, labor standards, being able to pay people reasonable wages. And I'm getting a lot of clients calling me and saying, "How do you invest in good corporate citizens?" Because people are starting to really look at that. That's a lot more important. The Ben & Jerry's of the world or the Starbucks of the world are companies that people look at to say, "Are you being good corporate citizens?"

And then finally is the G. What's the governance of the company? What's the board composition? How do they pay their executives? Are they heavy duty into lobbying? What are their political contributions? So lots involved with this ESG and SRI and even impact investing, Sarah. Big time out there. And the amount of money going in is astronomical. Last quarter, 46 billion went into ESG type investments when 385 billion went out of other investments. People were taking their money out of other places and putting it into this kind of value based investing.

Sara:

That's very interesting. That's great numbers to know. I've been seeing the same things as well with individuals wanting to invest based off of their values rather than their balance sheets. So who do you think should be looking into this ESG investing and how do you think it's affecting individuals?

Leon:

Well, I mean, the number of people getting involved in it has gone up dramatically. And according to a Deloitte study, in 2017, 48% of people were considering ESG type investing. It was up to 75% in 2019. And just the surge in the dollars tells me it's a lot more than that now. I think people who want to have a value tilt, not a value tilt in the sense of financial value, but in the sense of their personal values, that people want to invest within their personal values, should consider ESG. So my daughter is firmly committed to climate change, and so she wants more clean energy in her portfolio.

So I have her portfolio with normal index funds and then some indexes that go toward clean energy. And you don't put everything into clean energy, that's not the right approach, but you put things toward that. And I've explained to her, look, you're doing this and this may not pay off for you. You may have been better off investing in internal combustion engines. And she said, "I don't care. I want to invest in things that go with what my belief system is." And I think if your belief system is strong and you want to change that into your investment policy, that's a good way to look at it.

Sara:

Sure. And you don't necessarily need to give up a lot of performance to invest in what your values are. With all the different diversified funds that are currently being put onto the market, there's more and more every day that we're seeing that are ESG funds and ETFs that we can be investing in. And there's such a broad spectrum of different types of ESG investing, from picking specific stocks within a fund, and Leon, you can talk a little bit more about that, to having diversified mutual funds within the US market, emerging markets, international markets, and everywhere.

Leon:

And you bring up a good point, Sarah. First of all, in the old days when we invested SRI, when we just did the screen and we took out the sin stocks, somebody immediately discovered that the sin stocks were not only fun but they made money. So you could make money owning cigarettes and beer and gambling, and it took your return down. That's not necessarily true with ESG. So I've actually seen ESG investments that have outperformed other indexes, and sometimes it's accidental and sometimes it actually just works by the intention of the ESG. So sometimes having a good value based system works both ways. You get to make more money and do the other part of it. You can go buy individual stocks and you can do that based on your own personal values.

I think generally you want to have enough stocks, they diversify around it, and it's kind of the tricky way of doing it. I generally don't do that. I'm more prone to go with mutual funds or ETFs, and there's plenty of good ones out there. The cost now has gotten so low that I can get basically almost within one basis point or 1/100th of a percent of what I'm going to be able to get on a regular index fund. And I can still have my ESG. And full disclosure, Sarah, in my donor advised fund, I have an ESG based tilt. Mine is all ESG tilted. And I use it on a diversified group of funds that I like within my DAF. So, I like it. I think it's a good way to go. And it makes me feel like my charitable monies are also doing well in terms of the investments that I'm making.

Sara:

Exactly, to do well for the world. So do you see any cons to investing in ESG or SRI?

Leon:

Well, you got to remember. Sometimes it cost money to do that. I mean, windmills aren't necessarily great moneymakers right now, neither are solar panels. So, those might be helping the environment, but aren't necessarily good ways to make money. You have to recognize that. Now, electric vehicles right now seem to be environmentally safe and boy, good way to make money too. So it's a little tougher in there. If you say, "I don't want any tobacco stocks and I'm completely convinced I don't want tobacco stocks," then you can do it that way as well. It's interesting to say, Sarah, there's a SMA that we use called Parametric, and I can parse that down to an individual index. I can make my own custom index that reflects everything from a religious value, to my tax preferences, to my ESG preferences, all the way down the line.

And they have all kinds of ways of quantifying the governance of different companies and giving that quantification. So, I think there's a lot of ways that we can do it. The cons, recognize you might not get the return you would have gotten elsewhere. It's clinically proven that you might be able to make money on some things you don't want to do. Jet planes can make you money sometimes, and tobacco and cigarettes can make you money, and so can oil. But if you want to invest in clean energy or no war, then that's your privilege and your prerogative, and you're still taking advantage of the system and the ability for companies to make money.

Sara:

Sure. That certainly makes sense. Thanks for joining us today, Leon. And thanks to our listeners for joining us on this episode of Sequoia Wealth Builders. If you want to learn more about ESG, email me at [email protected]. Also, please subscribe to our podcast and share on social media. Leave us a comment and let us know what topics and segments you'd like to hear next. Until our next episode, stay well and keep striving to build your wealth.

Disclosure: 
Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.