Posted on May 9, 2024 by Katherine Fox.

Everything Inheritors Need To Know About Impact and ESG Investing

Welcome to this week's episode of planning for inheritance. I'm Katherine. I'm a CERTIFIED FINANCIAL PLANNERTM and I'm a wealth manager for millennial and Gen Z inheritors at Sunnybranch Wealth, a fee only investment advisory firm based out of Portland, Oregon, working with clients nationwide. 

On this week's episode, we're going to be talking about everything you need to know about impact and ESG investing.

At Sunnybranch, my work focuses on helping clients who want to create positive impact with their wealth. 

And one of the most important areas where I'm always looking to help my clients create positive impact is in their investment portfolio.

Can you make money investing in companies that are doing good?

And there is this toxic, pervasive myth that the only way that you can make money and have a positive return and grow your wealth is by investing in companies that are doing bad things, polluting the environment, discriminating, providing weapons, supporting warfare, crushing civil liberties. 

And that if you invest in companies that are trying to do better, that you aren't going to be able to make money. You aren't going to be able to grow your wealth. You're basically giving money to companies and you're not going to see any return on that. 

And that just isn't true. There are always going to be issues that we have to work around. There are always going to be compromises that need to be made when you're investing, especially in the public markets. 

But for people to just throw their hands up and say, I can't create impact, I might as well put all my money in Exxon, it just denies so much agency to investors who actually have now more than ever a huge amount of choices about how they can invest their wealth and what kind of impact they want to create with their wealth. 

On this week's episode, I'm going to be talking about the basics of ESG and impact investing and helping you understand how you can build those things into your investment without making major sacrifices on returns. 

I want to start by giving a really basic overview of what all these terms mean. The impact investing landscape is a confusing alphabet soup. And for people who aren't experts in this space, it can feel impossible to get started because you have...

You have acronyms flying at you, SRI investing, ESG investing, you have impact investing, creating a positive impact. You don't know what any of those things mean. Are they all the same? Are they all different? Is there one you like more than another? I'm gonna help you navigate that landscape to figure out what speaks most to you and how you can get started bringing positive impact into your portfolio.

Everything Inheritors Need To Know About Impact and ESG Investing

What is ESG investing? 

The first place I'm going to start is with environmental social governance investing. This is what's called ESG investing. It's a terrible name, right? Environmental social governance investing doesn't tell you anything about what it's trying to do, but it's just important to know when someone talks about ESG investing, that's what they're talking about. And at its core, ESG investing is about screening the worst actors out of a portfolio of stocks.

So say that you have one issue that really matters to you. Say that that issue is climate change. If you're investing in an ESG portfolio that's focused on climate change, then what you're doing when you look at the stocks, the companies that you hold in your portfolio, is that you're trying to screen out the companies that are the worst offenders. 

So what are the worst polluters that are contributing the most to greenhouse gas emissions, that are using the most fossil fuels. And that doesn't mean that you're not gonna have some companies left in your portfolio that are still doing those things. Those are really common things, right? 

But it does mean that you are deciding, I wanna take out the top five, 10, 20, whatever limit you set, percent of bad actors. And so the companies that are the worst offenders when it comes to the global effects of climate change, I don't want to own those

ESG investing is a tool to screen out investments in companies whose business practices you don't agree with. 

And there are a variety of ways that you can actually do that screening. It's not something that you would probably do yourself because it's a huge amount of work. It's incredibly labor intensive. You could do it by buying an ESG climate focused fund. 

So this is a fund that is doing that work for you. They're looking at a universe, probably an index fund of individual companies, and they're using their own fund methodology to identify, which of those companies are the worst actors at advancing climate change. And then they're removing those companies from the portfolio and then selling it to you as a climate -focused ESG fund. 

What is “greenwashing” in ESG investing? 

As a side note, when people talk about greenwashing, this is what they're talking about. They're talking about ESG funds that aren't actually really focused on creating positive impact at all. So say we talked aboutthat climate -focused fund. 

So you have a really strong climate -focused fund with an investment team that's really focused on ESG investing, on protecting the climate, on protecting the environment. And then say you have another company that really just wants to cash in on the fact that people are excited about ESG investing. They might also open an ESG climate fund. 

And so then it becomes very confusing for consumers because at the face of it, what you're seeing is that you have two ESG climate -focused funds. You might not know that, you know, on team A, you have people that are really invested, that are really, really committed, that have put, you know, a lot of thought and effort into which data sets they're using, which corporations they're excluding. 

And over here, you have a fund company that's kind of slapped an ESG logo on something that may or may not actually be doing what you would want as an investor who's very focused on climate. 

And so that can be why it's really helpful to have an investment advisor who's very focused in this space, who understands the nuances of those two things and can help you avoid that greenwashing effect of that fund over there that says that they're really focused on screening out the worst actors in terms of climate change, but they're only really doing it at a very perfunctory level.

How can you use direct indexing with ESG investing?

Then another way that you can focus on ESG investing if you have a higher level of wealth is through what's called direct indexing. And direct indexing is similar to the fund approach, but the difference is that it is very customizable. 

And so you as an investor can say, okay, I'm focused on climate, but I'm focused on, you know, sort of these three areas of environmental preservation, you know, preserving like clean water, air pollution, and maintaining forests.

And so you can put more specific screens on your portfolio based on your particular index. And then instead of just buying kind of an off the shelf fund, you're going into a more bespoke investment that lets you have a greater degree of control and impact over the type of screens that are being put on in your investment

That's really the basics of ESG investing. You can go a lot deeper into it.

And if you're interested in doing that, please send me an email, look at the show notes. I'll have all my contact information there below. There's more deep dives you can do, but really as a basic overview, that's what you need to know about ESG or environmental, social and governance investing. 

What is impact investing? 

The next thing I want to talk about is impact investing. 

And the primary difference that you're looking at when you're talking about ESG investing versus impact investing is, ESG investing, as we've talked about, is really about screening out those worst actors. 

So the companies that are really the worst offenders when it comes to the areas that you care most about. Whereas when you look at impact investing, you are focused on putting money into companies that are creating positive impact. 

So instead of screening out negative externalities, what you're looking for is companies that are really doing good work. And so you are focused on companies that you feel like are really creating a positive impact when it comes to the issue that you care about. 

And as you may or may not be able to imagine, this is actually something that's a lot harder to do than ESG investing, especially when you look at the public market space. So when you're talking about the universe of companies that are available to buy in the publicly available stock market, it can be hard, especially if you're talking about big companies.

To find a company where you feel 100 % sure that their work is really creating positive impact. Because it may be that they are really focused on positive impact in one area, but they have other areas where they have a lot more negative externalities to their business. Or it may just be because of the pressures of responding to shareholders and competing in the marketplace that they aren't able to create as much positive impact as you would like to see in your portfolio. That's not to say that it can't be done, but, it requires a much more specific process. 

And oftentimes what's gonna happen is you could find maybe a handful of companies that you really like, that you're really excited about, that you feel like are creating positive impact. But then if you just own those companies, what does it mean for the overall rate of return of your portfolio overall? Are those companies sort of gonna be keeping up with the marketplace or are they appropriately diversified? 

And so where I often encourage my clients to look as it's appropriate when they're talking about impact investing is to start looking towards private markets. 

Because when you look at real estate, alternative investments, et cetera, you can get more focused into individual companies or individual funds that really are about impact. 

And a great example of this is investing in affordable housing. 

If you're an accredited investor and it's appropriate in your portfolio, you may be interested if you're really focused on access to housing, housing equity, in investing in buildings that are creating more affordable housing, especially in big cities. 

So take a city like Seattle, for example, where housing affordability is at an all -time low, there's not enough housing. There are companies that are focused on building affordable housing in Seattle. 

And so you may have an opportunity, depending on who your advisor is and again, how it fits into your portfolio to invest in an affordable housing building in Seattle, in a specific building and put money into that specific building. 

And so there are a lot of examples overall about impact investing. Affordable housing is one where you can directly invest in something that's having a positive impact. 

Another good example of impact investing is if you want to invest in sustainable agriculture, especially sustainable agriculture that's run by native or BIPOC or women run farms, small local farms that are really focused on regenerative agriculture and protecting the soil, protecting the sanctity of the ecosystem itself while they're farming.

These are just a couple of examples of more impact focused investments. So instead of looking at screening out investments, really looking to make investments in things that have a positive impact. 

And when you see them, when you talk about them, it's really clear to understand what positive benefit that investment is creating.

Where can you learn more about impact and ESG investing? 

That is the most basic overview I could give of impact and ESG investing and the differences between the two. If you are interested in learning more, please reach out to me. All of my information is below in the show notes. 

I'll also link to a bunch of blog posts, some other podcasts I have on this topic. I just really want to encourage anyone who's made it this far in the podcast to listen and to understand that you can create positive impact with your wealth while still earning a market rate return.

It's not an either or. And if you're a person who is values aligned, who wants to be doing better with your wealth and who doesn't want your wealth to be supporting industries or practices that you don't agree with, that option is available to you. 

You can always send me an email or reach out to me wherever you found this podcast to learn more. 

I'll see you on next week's episode of Planning for Inheritance. 

Let’s take the next step together

Understanding how to create positive impact with your wealth is not easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you use impact and ESG investing to create positive impact with your wealth.