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Special Coverage Wealth Management

Unpacking the Controversy

Presented by Jay Durand

The topic of environmental, social, and governance (ESG) investing has become increasingly popular over the last two to three years, sparking many discussions and questions. What is, at its core, a simple attempt to make better investment decisions has surprisingly caused quite a bit of controversy. So, what are we talking about when we discuss ESG investing, and what is fueling the debate?

 

The ABCs of ESG

First, let’s start with the basic ESG standards themselves. Environmental, social, and governance standards can certainly all be interpreted as politically oriented, but why? Taking them out of order:

• Corporate governance means being responsive to shareholders. This is what any investor should want.

• Social means taking account of a business’ impact on society. This certainly affects the appeal of that business to customers and, therefore, can also affect the financial results.

• Environmental also has a perception impact, as well as an impact on whether the business can be run sustainably over time. For example, slash-and-burn agriculture may be more profitable in the short run as long as there is always more jungle. But properly managing farmland is more sustainable — and likely more profitable over time.

ESG doesn’t replace the financial metrics, but gives a more complete picture of them. There’s nothing here that implicitly should be a problem, as they are simply analytical tools.

Jay Durand

Jay Durand

“The worry seems to be that asset managers are running their businesses with a goal to change the world in certain ways. This appears contrary to what investors see as the goal: to do whatever is maximally profitable.”

The Debate

Once we understand the basics, the question often raised is, how are these tools being used? The worry seems to be that asset managers are running their businesses with a goal to change the world in certain ways. This appears contrary to what investors see as the goal: to do whatever is maximally profitable.

Investors seem to have two complaints about ESG investing. The first one is that investors are suffering as companies are being forced by institutional asset managers to run their companies in a suboptimal way. On the contrary, asset managers typically get paid based on a percentage of the asset value they manage, so they have a significant incentive to get the highest returns they can. Those same asset managers are, as fiduciaries, subject to legal requirements to do the same. So the asset-management industry is motivated to seek out the best possible financial returns by both potential rewards and potential negative consequences.

To believe that asset managers are not trying to maximize returns is to conclude that they are willing to hurt their own paychecks and take meaningful legal risks to change the world. Does this seem likely? Think about this: with billions of dollars on the table, if there was any real evidence of asset-manager slanting, wouldn’t there already be lawsuits in play?

The second complaint is that institutional asset managers are forcing companies to drive outcomes that the investors don’t support. That’s not to say some fund managers aren’t trying to change the world; some are. But those funds are typically very explicitly marketed as such to investors looking for that kind of impact. Since those funds are looking for a specific type of investor, asset managers have a clear incentive to make their orientation obvious — and their self-interest and fiduciary requirements point very clearly in that direction.

For the remainder of the industry, ESG may be a marketing strategy or simply incorporated in their standard investment practice. This makes sense for purely financial reasons, as we noted when we covered the basic standards. Those products are out there and, for those who want them, are easy to find.

 

Is There Reason to Worry?

ESG investing is a set of analytical techniques designed to further inform the financial analysis and investment decision. Those tools can, of course, then be used to implement value-based judgments and to drive desired impacts from that investment, just as with other value-based investment processes. Investment managers should use all the tools available to improve their results, but they have clear incentives (both positive and negative) to disclose both how they are applying those tools and the results.

Is this something to have on your radar? Yes, for reasons both positive and negative. As always, please reach out to our office to discuss your current plan and any concerns.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including loss of principal.

Environmental, social, and governance criteria are a set of non-financial principles and standards used to evaluate potential investments. The incorporation of ESG principles provides a qualitative assessment that can factor heavily into the security selection process. The investment’s socially responsible focus may limit the investment options available to the investor. Past performance is no guarantee of future results. Please contact your financial professional for more information specific to your situation.

 

This article was authored by Brad McMillan, CFA, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network, and presented by James E. Durand, CPA of MountainOne Investments, where he analyzes the financial markets and researches stocks, mutual funds, and other investments. He is also responsible for managing many of MountainOne Investments’s fee-based investment accounts. Durand holds his FINRA Series 4, 7, 24, 63, and 86 securities registrations as an investment adviser representative of Commonwealth Financial Network. He earned the Chartered Financial Analyst designation in 2003. He has also served on the board of directors for the Northern Berkshire United Way since 2005; (413) 664-4025; [email protected]

 

The financial advisors of MountainOne Investments offer securities and advisory services through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency. MountainOne Bank is not a registered broker-dealer or registered investment adviser. MountainOne Bank and MountainOne Insurance are not affiliated with Commonwealth. Insurance and investments are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Funds are subject to investment risks, including possible loss of principal investment.

Wealth Management

ESG Investing

By Josh Bedell, CFP, CIMA and Sylvia Callan, CFA

 

As with any new investment trend, a rise in popularity can give way to bad actors.

ESG (environmental, social, and governance) investing is not immune. Recent articles from the Economist, Barron’s, and the Wall Street Journal focus on the rise of ESG investing, and the perhaps predictable attempt by some to capitalize on this trend in a disingenuous and unscrupulous manner.

However, they leave investors who are socially conscious without a way forward in seeking to decipher the good from the bad.

The need couldn’t be more pressing, with ESG investing slated to rival traditional forms of investing in the next several years. With this potential surge in demand, concerns have arisen about how seriously the ESG criteria are being considered.

“Some mutual funds and portfolio managers have taken to slapping an ESG title on a fund or portfolio without doing much of anything to truly incorporate ESG factors into the investment process. This practice of attempting to woo well-intentioned investors, while not actually striving for change, has even earned a sardonic title: ‘greenwashing.’”

Indeed, some mutual funds and portfolio managers have taken to slapping an ESG title on a fund or portfolio without doing much of anything to truly incorporate ESG factors into the investment process. This practice of attempting to woo well-intentioned investors, while not actually striving for change, has even earned a sardonic title: ‘greenwashing.’

Josh Bedell

Josh Bedell

Sylvia Callan

Sylvia Callan

The good news is that the SEC has taken notice, and has proposed some rules that would create consistent standards and disclosure requirements. In addition, the Principles for Responsible Investing (PRI), a globally recognized institution for sustainable investing, tracks the development of regulatory policies in sustainable finance that support ESG investment principles. Over the past year alone, the PRI identified more than 200 new or revised policy instruments that support, encourage, or require investors to consider long-term value drivers in ESG — the main elements of socially responsible investing.

Understanding the evolving landscape in ESG can feel like a daunting task, especially if you have many other things on your plate, like a job, family, and normal day-to-day responsibilities. The good news is, there are some relatively easy steps investors can take to ensure their portfolio aligns with their values.

For starters, mutual-fund families that focus exclusively on ESG and/or socially responsible investment (SRI) funds are more likely to utilize stringent criteria than a traditional fund family that has added one or two ESG funds in recent years. Further, actively managed funds, which incorporate at least some degree of qualitative analysis, tend to evaluate companies more thoroughly than index funds, which simply track a list of ‘approved’ holdings from a third party, though there are exceptions.

Investors without the time or inclination to do this research on their own can turn to a trusted asset manager who takes ESG investing seriously. Dedicated ESG portfolio managers do extensive work in the field, often talking to mutual-fund managers directly, visiting corporate offices, analyzing lists of underlying holdings, and obtaining advanced credentials related to ESG investing.

Ultimately, it pays to have a healthy dose of skepticism. It certainly helped our firm when we decided to offer an ESG strategy for our clients. It required an added layer of scrutiny to ensure that ESG investment principles were clearly defined, closely monitored, and reported in a timely manner.

It could be an encouraging sign that increasing numbers of investors are seeking to effect positive change while also generating competitive — or possibly even superior — returns. A shift of this magnitude is bound to encounter some hiccups along the way.

Far from a reason to abandon the initiative altogether, greenwashing concerns offer an opportunity to further investor engagement, advance regulatory reform, and promote endeavors to improve ESG reporting and investing standards with the potential to benefit us all.

 

Josh Bedell is a financial planner and investment advisor, and Sylvia Callan is a portfolio manager, for Gage-Wiley. Callan has earned the CFA Institute certificate in ESG investing and leads the firm’s ESG efforts. Securities offered through St. Germain Securities Inc., a FINRA member. Gage Wiley is a d/b/a of St. Germain Securities Inc.

Environment and Engineering

Taking the Industry Lead

As part of its commitment to environmental sustainability, Eversource Energy announced an industry-leading goal to be carbon-neutral by 2030. The energy company plans to achieve this aggressive goal through a series of targeted steps across its operations to reduce carbon emissions while also continuing to support regional economic growth and maintaining safe and reliable service for its approximately 4 million customers.

While the goal to be carbon-neutral is limited to the energy company’s own corporate emissions across all departments and operations, Eversource will continue to work with state leaders to reduce emissions from energy supply for customers in accordance with state and regional regulatory requirements. 

“As New England’s largest utility, we are proud to partner with our states and communities to achieve regional clean-energy and carbon-reduction goals,” said Eversource Chairman, President, and CEO Jim Judge. “Today, we are going one step further by setting a goal for our own operations to help demonstrate that carbon neutrality is achievable.”

With its goal set for 2030, Eversource would become the first investor-owned utility in the nation to be carbon-neutral. In order to achieve this, the energy company will take a series of targeted steps across corporate operations, gas distribution, and electric transmission and distribution. These include reducing energy use by improving the efficiency of its 69 facilities and reducing fleet emissions of its 5,200 vehicles, continuing to enhance the electric transmission and distribution system to reduce line losses, reducing sulfur hexafluoride (a potent greenhouse gas) in gas-insulated electric switchgear, and replacing remaining bare steel and cast-iron natural-gas distribution main lines to improve safety and help prevent methane leaks.

“The business community has an important role to play as we pursue clean-energy and carbon-reduction goals, as environmental sustainability and economic development go hand in hand,” said Dan Moon, president and executive director of the Environmental Business Council of New England. “As one of the nation’s leading energy companies, it’s encouraging that Eversource is proactively setting its own goals and demonstrating its commitment to a cleaner-energy future.”

Eversource has already significantly reduced its own carbon emissions through a series of steps, including the divestiture of all its remaining fossil-generation facilities in 2018. The company is also helping the region in achieving carbon-reduction targets that have been set by state and regional requirements with its clean-energy initiatives, such as the offshore wind partnership with Ørsted, award-winning energy-efficiency programs, solar development, innovative battery-storage projects, and electric-vehicle-charging infrastructure.

“We are excited to set an ambitious goal with our own corporate operations to lead by example,” Judge added. “Today’s news reinforces our position at the forefront of environmental sustainability and builds on our efforts to help our customers and communities reduce their carbon footprint.”

Green Business

A Hot Topic

The Center for EcoTechnology has carved out a significant legacy over the past four-plus decades by promoting green energy, waste reduction, and a host of other environmentally friendly initiatives — partly because it effectively conveys how such practices are good for not just the planet, but the bottom line. Two new solar-access projects — one for homeowners, one for businesses that use a lot of hot water — are no exception.

After decades of connecting businesses and homeowners with renewable-energy solutions, the Center for EcoTechnology in Florence keeps coming up with new ones.

Take, for example, a solar-access program specifically for middle-income homeowners, making it possible for qualifying families to procure solar panels and heat pumps with no upfront costs.

“A lot of middle-income homeowners have not been able to take advantage of owning their own solar arrays,” CET President John Majercak said. “They can make a fixed payment for electricity to somebody who owns the equipment, but there are many more benefits to owning the panels.”

To introduce more households to those benefits, CET has worked with UMassFive College Federal Credit Union on a loan product that not only makes it easier to purchase solar panels — CET actually makes the first six payments on the 10-year loan — but includes a warranty on all equipment and labor for the life of the loan.

“This product makes it possible for a homeowner to own the solar panels and heat pumps,” he explained. “We set it up to make sure what they pay on the loan is less than what they’re paying now for heating and cooling, so they see immediate savings, and after 10 years, they own the system outright, so the heating and cooling, when powered by solar panels, is essentially free after that.”

Then there’s a new program that works with businesses that use a lot of hot water — think breweries, hospitals, laundromats, and many others — and connects them with incentives for solar hot water.

Andrew Mankin (pictured) and Gary Happ recently had a solar hot-water system installed

Andrew Mankin (pictured) and Gary Happ recently had a solar hot-water system installed at their business, Barrington Brewery.

“That’s a program available to any business or farm in the state — including multi-family buildings and nursing homes — that use a lot of hot water year-round. It’s a great technology where we use solar panels to heat water, as opposed to make electricity,” Majercak explained. “For folks who use a lot of hot water in their business, it’s a really economic way to make hot water. It’s technology not a lot of people know about, compared to solar panels that make electricity. So we’re doing a lot of outreach and hand-holding, getting businesses to look at the proposals, the free technical assistance, and the incentives available from the state.”

In both cases, CET partners with state agencies like the Department of Energy Resources (DOER) and the Massachusetts Clean Energy Center (MassCEC) to bring the economic and environmental benefits of solar energy to customers who might not have considered them before.

“If we can help someone’s life be better or their business perform better at the same time we’re helping the environment, it just makes so much sense,” he said. “So we’re always pushing harder to make more of it happen.”

Home and Business

In the case of solar hot water for businesses, CET provides solar hot-water installers to get the project done, information on grants and rebates to help cover costs, and step-by-step guidance through the whole process, Majercak said, adding that other businesses that might benefit include hotels and restaurants, car washes, and community centers and resorts with large indoor swimming pools — any business, really, with year-round use of heated water in large quantities.

A solar hot-water system essentially captures heat from sunlight and circulates the thermal energy to a water tank. Solar hot-water systems reduce reliance on traditional water-heating fuels, such as oil, electricity, or propane, saving consumers money on their energy bills. These systems can provide up to 80% of domestic hot-water needs. Incentives of up to $100,000 are available for qualifying projects, Majercak said.

“The technology has been around for a long time — for decades, really — but it’s improved over the past five to 10 years, and word hasn’t really gotten out how effective it is,” he noted. “We’ve helped a variety of different businesses and been very successful saving them a ton of money — things like a multi-family building that has central hot water, or a farm that has a cheese-making factory on the side. It doesn’t cost anything to have us come out and do an assessment and see if it would be a good match for you.”

John Majercak

John Majercak presents information about CET’s impact during the organization’s annual meeting.

Business owners Majercek has spoken with are often surprised at savings they didn’t know existed, he noted.

“There’s so much information out there, but people don’t always think of their energy costs as something that’s controllable — they say, ‘oh, wow, it costs a lot of money to heat hot water, but what can I do?’ They think of it as the cost of doing business, rather than something they can improve on by using new technology.”

The same is true in the residential market, to some degree, he said, but to those who have signed on, the benefits are evident, including, again, step-by-step guidance through the program from CET, the 10-year warranty on equipment and labor, and a reduction in energy costs right from the start along with increased home value — not to mention a 30% federal tax credit and a 10% tax credit from the Commonwealth for solar installation.

While most homeowners know what solar panels do — convert sunlight into electricity to power a house without any pollution or carbon emissions — heat pumps aren’t as commonly understood, Majercek said.

Rather than burning fossil fuels to produce heating and cooling, heat pumps move heat from one place to another — bringing heat into the home in the winter and removing heat in the summer. Advancements in the technology now allow for excellent performance even on the coldest and hottest days of the year.

“This is a great new program,” he told BusinessWest. “The state specifically targeted middle-income homeowners, helping them get financial help and hands-on assistance from us to take advantage of these two technologies — solar photovoltaic panels and heat pumps, which are becoming much more commonplace.”

Even so, he said, many homeowners have been reluctant to pay the up-front costs for energy-efficient technology, which is why the loan product CET is using — ensuring that their costs don’t rise from what they’re already paying — is so attractive.

Some of those who believe in solar power but fear the initial costs sign onto power-purchase agreements with solar-panel owners, he added, “and that’s OK, but they don’t get the benefits of ownership — the tax credits, the renewable-energy credits. They’re missing out on one of the best parts. This program helps them take advantage of that, and it’s affordable for them right from the start.”

A Green Legacy

Connecting individuals and businesses with green energy solutions is a large part of CET’s mission, but that mission has taken many forms since the organization’s mid-’70s inception.

At first, CET focused on energy conservation, in particular partnering with utility companies on the relatively new concept of ‘energy audits,’ whereby a consultant visits a home or business to talk about ways in which their building or operation could be revamped to save on energy costs.

Other early initiatives included the development of a passive solar greenhouse at Berkshire Botanical Garden and Project SUEDE, a program that taught solar energy, energy-conservation theory, and carpentry to unemployed people, who then installed 31 solar space-heating systems in low-income households.

CET still conducts energy audits, helping homeowners and businesses understand the value of sustainable systems and educating them on the incentives available to make changes. But the organization has become much more, expanding its mission into a host of new opportunities, from composting to food-waste reduction.

Paulina Alenkina, a CET employee

Paulina Alenkina, a CET employee, says she’s glad she took advantage of the solar-access program.

Through a program called RecyclingWorks in Massachusetts, CET offers technical advice and assistance to companies regarding recycling and composting waste. In doing so, it has worked with companies ranging from small shops to large entities like Big Y and Titeflex.

Another success story at CET has been EcoBuilding Bargains, which began life as the ReStore in 2001 before undergoing a move and rebranding seven years ago.

In its first incarnation on Albany Street in Springfield, the ReStore dealt in recycled building materials, with the twin goals of saving builders and do-it-yourselfers money while reducing the burden on landfills. A move to Warwick Street in 2011 involved a $900,000 energy retrofit on the existing building on that site — a good example of CET practicing what it preached.

CET is also making an effort to raise up the next generation of green innovators, through a fellowship program it launched seven years ago. Five fellows per year — recent college graduates from across the U.S. — are chosen to work with CET for one year and receive training in environmental science, energy efficiency, waste reduction, and other aspects of green business. They’ve gone on to work at similarly minded nonprofits, and also corporations looking to go green.

Meanwhile, with utility incentives making energy-efficient technology more affordable for Massachusetts businesses, the Center for EcoTechnology continues to works with Columbia Gas and Berkshire Gas to help companies navigate the incentives and options available.

“The state has goals for how much renewable energy it wants to create, and it wants to address climate change and access all the benefits these technologies and services provide,” Majercek said. “Those goals align closely with our mission. We’re trying to bridge the gap between what we’d like to happen and what’s actually happening in the world.

“If we can come in and provide some education and hand-holding to make it simple for people,” he went on, “the technology can ensure that people get benefits, and the environment gets benefits, too. We’re helping people be more comfortable and save money — and saving the planet. It’s a triple bottom line.”

All Aboard

Businesses can also boost the new solar-access program for middle-income homeowners simply by letting their employees know it exists, he added. “Many businesses have lots of employees that fall into the middle-income bracket and would be able to benefit from the program. We can provide information for companies: newsletters, posters, lunch-and-learn presentations for employees and staff. Businesses can help employees go green and save money; it’s an easy thing to promote, and a win for any employee who would qualify.”

Such initiatives have been a win for CET as well, which not only reached but surpassed its program goals in the most recent three-year period.

“That’s exciting,” he said. “Everyone who works here is extremely motivated by our mission and the impact we can make.”

Joseph Bednar can be reached at [email protected]