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Harvard’s big announcement last week made us stop mid-scroll and gasp, “Veritas?!” After facing years of pressure, America’s oldest and most prestigious university declared it will fully divest from fossil fuel companies. It promised no future investments, directly or indirectly, and the ones that remain are being wound down.
This is a huge win for the climate effort. The $42 billion endowment fund is by far the largest (the average size is less than $1 billion) and sets the tone for the rest. Last year, Harvard was the first to commit to making its portfolio net-zero greenhouse gas emissions by 2050, and many followed its lead. Trends in endowment allocations are closely watched because the over 700 colleges and universities in the US manage more than $600 billion in endowment assets and can have a real impact, like the South Africa anti-apartheid divestment campaign. Despite a growing body of data showing strong returns in sustainable investing, a survey says most managers aren’t convinced responsible investing can deliver competitive returns, a must for any endowment fund.
That helps explain why Harvard’s divestment right now feels so monumental – it’s a statement from one of the most revered asset managers in the world not just on the importance of responsible investing, but also on the possibilities of it. Endowment funds are the lifeblood of higher education. Proceeds from these tax-free pots of wealth fund essentials, like financial aid, scholarships, and research, for posterity. Harvard, which consistently delivers among the highest earnings of its peers and depends on its endowment for over a third of its revenue, has presumably punched the numbers and decided it can manage well without “dirty” energy. A bold move that raises eyebrows and hope.
Buying an ETF? Read the fine print
It’s undeniably exciting to watch meme stocks on a rollercoaster ride or discuss the hottest biotech or EV company, but sometimes the devil is in the details. When investing, it’s easy to focus on returns, but don't forget about those sneaky fees and the end value after paying them.
For ETFs, there are two potential fees: A commission to your broker when you buy or trade, which can be avoided on many online platforms these days, and the expense ratio fee you pay on an ongoing basis.
The expense ratio is the maintenance fees charged by the manager of your ETF for things like administration, salaries, etc., and you’ll find it in the fund’s prospectus. For example, an expense ratio of 0.69% means you would pay $0.69 a year for every $100 you put into it. Divide this amount by trading days in a year to know what is deducted daily from your investment value. The average expense ratio for passive funds, which most ETFs are, was 0.45% last year.
This brings us to a bit of bad news – ETFs that focus on specialty areas or complex strategies, including ESG or sustainability, tend to cost more. Some say this is because they require more research and curation. Others claim managers attach a higher fee when something’s trendy.
Whatever the reason, it’s important to compare expense ratios and make sure what you’re paying is worthwhile to you (sort the highest ESG-rated US-traded ETFs by expense ratio here.) If you plan to buy and hold ETFs, the fee can dramatically eat into your returns since it takes out money that would have compounded. The chart above shows what can happen to an investment of $10,000 over 30 years. Like the extra fees on your delivery app takeout, you might not notice these charges at first, but they have a very real impact on your wallet.
Driving more diversity data
Companies with higher rates of gender and racial diversity among their staff and leadership tend to outperform — leading more investors to be increasingly interested in opportunities to invest in their work. Meeting investor demands for transparency is driving many companies to make their diversity data available. To date, 37 of the largest 100 companies in the US, including PayPal and Bank of America, share at least some of their diversity data with the public, and another 31 have committed to doing so.
Getting the data is the first step. The next one is figuring out how the data can inform investors and hold companies accountable — and this is where things can get tricky. Diversity data often gets diluted in an ESG score, where many diversity-related factors fall under the “S” umbrella and others — like the diversity of a company’s board — fall under the “G”. For the growing number of investors who prioritize diversity, current ESG score systems bury the lead.
Would an ESGD score ensure diversity gets the attention it deserves? In a piece out yesterday, our founder Jean Case explains why that additional letter could keep the diversity data disclosures coming and help set an appropriately high bar for companies to clear.
Beyond the ratings
Once somebody learns what socially responsible investing is, their next question is usually, well, “How do I do it?” ESG is a good framework to think of corporate behavior, and investors rely on ESG labels or ESG ratings to know about a firm or fund’s performance across many themes. They also tend to go with their gut sometimes, relying on a brand’s image or messaging to make a decision.
No method is perfect right now in the absence of good standards and regulations and, as noted above in "Driving more diversity data," sometimes it is hard to pull out data on key characteristics that you value. While not always favored by financial advisors, you can supplement ESG ratings with your own research on specific issues to screen out bad actors or pick the best. Here are four free resources to do that:
1. 2021 Fortune 100 Best Companies to Work For – If you want to invest in organizations that support their employees and community, every year Fortune and analytics firm Great Place to Work publishes a ranking. Sixty percent of a firm’s score was based on confidential employee feedback and the rest on pandemic programs. You can also find rankings for best places to work for millennials, parents, women, etc.
2. AFL-CIO’s CEO-to-Worker Pay Ratio and Median Worker Pay – Find out the pay difference between the top boss and the typical employee at almost any public company. You can also sort by CEO pay ratio, median worker pay, and CEO pay. Last year, the average S&P 500 company’s CEO pay ratio was 299-to-1, the highest being 5,295-to-1 and the lowest being 6-to-1.
3. JUST Capital Corporate Racial Equity Tracker – This independent nonprofit tracks company commitments/actions to address racial equity. This is not a ranking, but it does allow you to easily look up whether a company has a certain policy in place that may help people of color, like a harassment grievance mechanism or prison-labor ban, and if it discloses racial pay gap data.
4. CDP – For over two decades this nonprofit has run a global database for environmental disclosures. It evaluates, scores, and ranks based on this data. Companies get an “F” if sufficient information is not provided and a spot on the list of shame.
Before you go -
A record 150 members of the S&P 500 index mentioned “ESG” during their earnings call last quarter. For comparison, just 2 companies discussed “ESG” during the same period in 2017.