• Gary Grewal

Could ESG Investing Fit Into Your Portfolio?


Please note that this post on ESG Investing, as with any other content on FinancialFives.com, is not intended to be a financial advice and solely for educational purposes only. Please consult a financial professional before making any financial decisions. See full disclosure here.



Enjoy this post I did with Olaf over at Mile High Finance Guy!



A Collaboration On ESG Investing & An Earth Friendly Lifestyle


Hey friends! Today’s post on ESG Investing is different from usual in that I collaborated

with Gary of Financial Fives to produce it. While we could have gone with the standard

Q/A format, we wanted to try something different.


So, considering that Gary and I both feel passionate about making eco-conscious

decisions, we decided to author a joint post on Sustainable Investing, formally known as

ESG Investing, in the financial world.


We hope you will enjoy it! I will let Gary start the conversation now:


Gary explains why sustainable choices & ESG investing matters


Before the pandemic took over every news outlet and coffee shop conversation, our

social feeds depicted images of plastic garbage swirling in the ocean, cups strewn

across trails, reduced emission pledges, and how the sharing economy would save us.

What happened to all that? Well, it is still there, just drowned out by the ever-evolving

pandemic.


Nowadays, when looking deeper, we hear about the billions of masks piling up in landfills

and littering the streets, not to mention unrecyclable testing kits, disposable gloves, and

PPE.


But why does this matter, you say? Why is it that we’ve been hearing about the plastic

problem, global warming, and pollution in the environment increasingly during the last

decade?


Well, I’d argue because it’s becoming more urgent, and we need to do something about

it. We can’t keep piling up trash on the Earth and thinking it’ll just evaporate.


We can’t enjoy the great outdoors when it’s littered with bottles people used for ten

seconds but take five hundred years to break down.


We can’t keep eating fish as a protein source if they ingest all broken-down plastic

floating in the ocean.


“Something needs to change.”

As with many social issues, what happens when the public clamors enough to change

the overall attitude towards something? Companies and markets respond.


Since 2014, hundreds of companies have begun publishing CSR, or Corporate Social

Responsibility Reports.


Initiatives, such as the Global Carbon Project and Closed Loop Fund, have been

instrumental in helping companies formulate ways to make impactful reductions in their

waste and emissions. Hence, ESG Investing and living were born.


“Consumers like you and me now have more choices than ever before to choose to buy from companies that exhibit social responsibility, offset their emissions, or use recycled materials in their production.”

According to a recent GreenPrint Survey, more than two-thirds of consumers want to buy

eco-friendly products, with millennials leading the way. However, they also mention that

most don’t know how to identify them!


Suppose you take a look at companies that have demonstrated a longstanding

commitment to the environment and carry through with donations to related nonprofits,

such as REI, Patagonia, The North Face, and others. In that case, these companies are

also doing exceptionally well financially, which brings us to the next point.


There is an increasingly significant correlation between social responsibility and financial

performance due to increased brand loyalty and attracting talent.


What does that matter to you? Theoretically, if a company is ahead of the game on

sustainability, which translates to higher profits, you could be rewarded by being a

company’s shareholder.


“ESG Investing isn’t just morally sound, but financially sound.”

In 2015, I moved to Colorado because I learned about the SRI/ESG movement, which

stands for (depending on who you ask) Socially Responsible Investing and

Environmental, Social and Governance. I attended the beloved SRI conference in

Colorado Springs because it blended my passion for sustainability with my skill set in

financial services.


As a result, this led me to discover how socially responsible companies perform ably and

how certain fund companies were making positive social change while also delivering

compelling returns.

A few reasons to consider investing in sustainable companies/funds include

diversification, investing with your values, reducing risk by not investing in dying

industries, and feeling good about using your money in a way that helps solve some of

our global issues.


“Wouldn’t you feel better investing in a company that is pioneering affordable solar energy rather than a company still trying to pump oil from the Earth?”

Morningstar.com, the well-respected research firm with the famous star rating for mutual

funds, came out with a “Globe Rating” system for funds based on sustainability metrics.

Now you know, ESG Investing isn’t a fad!


If you are looking to incorporate sustainability into your everyday life, you know, to do

your part in keeping our planet clean, then here is some good news for you. Sustainability

is outstanding for your wallet!


How is that possible, you ask? Aren’t the more chic, sustainable options more expensive?

While it’s true in some instances that items that are made with more durable materials or

sourced responsibly, such as recycled cotton down jackets or sustainably sourced facial

moisturizers, cost more, that’s not always the case.


However, it’s good for your wallet in so many ways. If you no longer buy disposable items,

such as bottled water, paper towels, Ziploc bags, and wastebasket liners, isn’t that money

saved if it no longer serves a purpose? Isn’t that gas saved if you take the most efficient

route to a dinner party?


“Once you adopt a mindset of using less and throwing away as little as possible, it permeates your thought process and later becomes an automatic frame of mind.”

Sustainability has also become the trendy thing to do among educated urban dwellers

and the general public. Instead of the quintessential Starbucks coffee cup as a status

symbol while walking down the street, now the head-turners are people carrying

HydroFlask bottles.


People are so willing to spend with their values regarding sustainability that an idea I had

turned into a profitable business.


When I was in college, the sight of rain-soaked cardboard boxes piling up against the

dumpsters after dorm move-in days was very disconcerting to me. How could students

walk by this scene and act like it’s no problem?


At that point, I realized there is no “away” when you “throw it away.” I wish I had taken a

picture of all the boxes and bubble wrap, but this was pre-smartphone, at least for me

(2009, the good old days).


I never really thought about the process of moving to be wasteful since most people

move after years, whereas we eat and drink multiple times a day. Still, there had to be a

better way.


A few years later, I heard about a company in Canada renting out reusable moving

boxes made out of plastic, and I knew I had to do the same thing in my hometown.

Thus, California Box Rental was born.


“If you’re still skeptical that sustainability is the future, do me a favor and try it. I’m not going to tell you to grab a big trash bag and carry everything you throw away for a week but try just one swap.”

Create a reminder in your phone to put your reusable bags in the car (or better yet, bike

bag) each week before grocery shopping. When going to the store, take them out and

lay them on the console or seat next to you, so you don’t forget.


Start keeping a “go bag” for a day outside the house, complete with your water bottle,

mug, and reusable utensils. Like any habit, give yourself time. You won’t be perfect right

at the beginning.


But, with time, you’ll start to eschew buying disposables as much as possible, obtaining

joy from second-hand purchases, and rethinking the kind of home/car you want. All of

these steps, combined with a sustainable portfolio, might lead you to a fulfilling,

meaningful FIRE life.


Olaf crunches the

numbers to see if ESG

Investing makes

financial sense!


Gary makes a compelling argument for ESG investing and sustainable living, as there are

always costs beyond your wallet: the environment.


But, Gary also said that ESG investing could be financially rewarding. Not just for your

saving habits, but for your investing ones, too.


How will we do that? By comparing the performance of ESG and non-ESG investments, of

course!


So, the first step is to compare apples to apples. However, while ESG Indexes and the S&P

500 are similar, they are not identical. But, to me, the chosen funds are like Red Delicious

and Granny Smith apples, so close enough.

(I chose iShares since they have longer-running ESG index funds, which are essential for

comparison purposes.)


IVV – iShares S&P 500 ETF

•Exposure to the largest U.S. companies through an indexed based approach

•0.03% Expense Ratio

•509 Stock Holdings


SUSA – iShares MSCI USA ESG Select ETF

•Exposure to large and medium U.S. companies with leading environmental, social, and

governance practices through an indexed based approach

•0.25% Expense Ratio

•186 Stock Holdings


5, 10, & 15-Year Comparisons

5-Year Comparison


23.81% SUSA & 21.77% IVV annualized returns

5-Year Winner: ESG Investing


10-Year Comparison


28.32% SUSA & 30.25% IVV annualized returns

10-Year Winner: Ordinary Investing


15-Year Comparison


20.07% SUSA & 20.56% IVV annualized returns

15-Year Winner: Ordinary Investing


What do the numbers above regarding ESG

Investing mean?


So, ESG Investing beat out the S&P 500 during one of the three periods, which happened

to be the most recent span. Will this trend continue where ESG lags over the longer term?

Or will ESG Investing continue its current trajectory and outpace the S&P 500? I don’t

know, and no one else does. But let’s take a step back.


Over the period of 15 years, both investments grew from $10,000 to $40,100.96 (ESG

Investing) and $40,840.67 (Ordinary Investing) respectively. Therefore, you gave up

$739.71 in potential growth to know you are being more mindful.


Zooming out to more substantial starting sums of $100,000 and $1,000,000, you would

have lost out on $7,397.10 and $73,971.00, respectively. However, you still would have had

$301,009.60 and $3,010,096.00 in growth by using ESG Investments.


Not bad at all, but these results beg a bigger question:


“What level of growth is enough? Are you willing to accept less for more? Where less means a lower (potential) growth rate and more represents a grander impact?”

Only you can answer those questions, but the growth ESG Investing provided is not

dismissable, as the returns have been substantial.


Nevertheless, remember, the past is no guarantee of the future. So, ESG Investing could

outpace ordinary investing. It could also lag. But, nobody knows, which is why you should

diversify your holdings.


In the future, if you choose to implement an ESG Investing strategy, consider using

broader-based funds for increased diversification.


For example, Vanguard offers several ESG funds with exposure to the U.S., International,

and Bond markets, all at a lower cost and more extensive holding base, likely lowering

the performance gap.


However, any ESG Investing should be accompanied by sustainable daily habits in your

life because both pieces go to the same puzzle of solving the pollutant crisis.


Vanguard funds to

consider for ESG

Investing


Below are three Vanguard funds to consider, which are not recommendations. Instead,

they are simply options you can look into:


ESGV – Vanguard ESG U.S. Stock ETF

•1,545 Investment Holdings

•0.12% Expense Ratio


VSGX – Vanguard EST International Stock ETF

•5,180 Investment Holdings

•0.12% Expense Ratio


VCEB – Vanguard U.S. Corporate Bond ETF

•2,245 Investment Holdings

•0.12% Expense Ratio


Questions/Answers

Between Olaf & Gary


Olaf: First of all, thanks for joining me in putting together this post! It is a fantastic way to


drive awareness of the options to invest with sustainability and live with eco-

conscientiousness!


Gary: I agree, Olaf. Often, we don’t take enough time to realize the big picture and how

our daily actions add up!


Olaf: True. I have tried to incorporate sustainability into my life, and I find that it pairs well

with the FI movement. With that said, where do you think ESG investing will go with the

future in mind?


Gary: I think it will only become more widespread. More people are thinking about their

impact and how their purchases/investing either contribute to the problem or help solve

it. The biggest share of those interested in ESG, millennials, will inherit an obscene amount

of money over the next few decades, which many will use to invest in alignment with their

values.


Olaf: When we chatted before, you mentioned that there is evidence ESG outperforms

ordinary investments. Can you talk more about this?


Gary: In my experience researching my retirement investments, index funds with an ESG

lens outperformed their index averages. ESG funds may be slightly more expensive, but

there’s evidence that suggests ESG funds will continue to outperform.


Olaf: It’ll be interesting to see what the future holds. On the flip side, due to an uncertain

future, do you think it would be better to maximize returns by just investing in ordinary

investments and donating the excess?


Gary: I don’t think so, in my opinion. If I worked as a sleazy salesman and made more

money but then donated it to charity, should I feel better about that? Not that it’s a direct

comparison, but you have to consider what you are enabling your money to do. Not only

can you say you are part of the solution, but follow the money, and you’ll see just what a

difference is possible when supporting investments that align with your goals. How do

you feel about focusing on returns only?


Olaf: As with all things in life, you can reach a level of enough and accept lesser of

something. If I don’t agree with something, I don’t put dollars ahead of my beliefs. That is

one of the reasons why I quit my last job because I disagreed with the change in

direction the organization was taking, despite a six-figure salary. However, how do you

know the sustainable funds you choose aren’t just greenwashing?


Gary: That is a good point and a valid question. There are analytical tools such as the

Morningstar Globe Ratings and Sustainalytics. However, you can also look at the portfolio

or holdings of basically any fund. If there are questionable companies in there, I choose

an alternative. Additionally, there are also tools like Fossil Fuel Free funds As You Sow, the

latter of which has a great tool to screen for deforestation or guns.


Olaf: Interesting, I haven’t heard of those tools before.


Gary: Yeah, they are great resources! Now, I have a facetious question for you: can I use

even more disposable stuff if I invest sustainably?


Olaf: Haha, no! That is backward thinking to placate and justify poor actions. If you

genuinely disagree with something, your efforts should reflect that.


Gary: Well put.


Olaf: A good question nevertheless. Recently, the WSJ ran an article on Sustainable

Investing and ESG, saying that they don’t produce the desired results effectively and that

with increased smaller-cap stocks, you have wild portfolio swings. What strategies can

investors deploy to avoid taking on excess risk and entering a bubble due to pop?


Gary: As with anything, you have to diversify. Now it’s easier than ever to find ESG funds,

including Vanguard ETFs, iShares, and Fidelity. You’ll find many of the biggest drivers of

traditional index funds, like Google, Apple, and Microsoft, are also on the sustainable

funds because of the nature of their investment philosophies. What’s been your

experience when researching ESG options for your portfolio?


Olaf: Actually, this post is my introduction to the topic! Before we started this article, the

only other time I had delved into the subject was when reading a post by Mr. Money

Mustache. However, when researching various options, I found plenty of investments with

sound diversification and an ESG focus. Now, you mentioned earlier in the article that

sustainable choices in your life extend beyond investing. Besides the obvious choices,

what other ways can you avoid not trashing the Earth?


Gary: Think to yourself with every action or purchase. Is this going to make a difference in

a month or a year from now? If you forget to bring your reusable water bottle once, fine.

When shopping online, ask if you need that purchase and all that packaging. Can you

deal with the discomfort of biking once a week to do errands instead of driving to have

another $1,500 in savings? If you can do without it, such as shunning a free hot chocolate

station at the hotel or buying multipacks of trail mix for your camping trip, it will gradually

make you feel better. Use what brings value to your life, consume less, and reuse what

you have. You’ll be impressed with the things you start thinking of on your sustainability

journey!


Olaf: I couldn’t have put that better myself. While I am new to sustainable investing, I am

versed in consuming less and reducing waste. I enjoyed your perspective on the ESG

movement and hope others will weigh it for their portfolios. It has been awesome having

you on Mile High Finance Guy, Gary. Do you have any closing thoughts to offer readers on

Sustainable Investing and living?


Gary: Try one thing at a time, and be kind to yourself. Don’t overcommit and get

frustrated because you keep forgetting your bags when going to the grocery store. Try

one thing per day or week and see if environmental cues or reminders nudge you to

change your ways. Have fun with it! What about you, Olaf? Any hot tips or strategies

you’ve learned that you’d like to share?


Olaf: If you are genuinely passionate about something, don’t let money be the end-all.

Instead, weigh the pros and cons of the various options and find a way to chase your

passion, whether sustainability, happiness, or whatever! And as always, have a great day!

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