How Green Is Your Money?

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Wow! The FWIW subscribers keep rolling in and we would like to thank everyone who is sharing and referring people to FWIW. To everyone who has joined us in the past few weeks, welcome! If you are new, here are a few links to resources and past stories that you might find interesting:

• Unpacking the ESG Alphabet Soup (including a link to our ever-growing glossary of common terms)
• How to Research ESG Stocks and Funds
• Investing in Women, a Gender Lens Guide
• How to Practice Faith-Based Investing

​​Happy Thursday!

It’s getting warmer in the United States, which means it’s proxy season! We know you were thinking spring, awards, baseball…but even though it doesn’t generate as much excitement and debate, proxy season is an important time for many shareholders. Here’s why.

Most companies hold their annual shareholder meetings around this time of year, and it’s when investors get to vote (without being present or via proxy) on big company decisions, like executive compensation and the appointment of board directors. They also weigh in on recommendations made by other shareholders. If you’re wondering how this process works, we've got you.

Investors increasingly want corporate boards and executives to consider what’s in the best interests of all stakeholders (employees, customers, the environment, etc.), alongside – and in many cases, in alignment with – making profits. And it works. A study from BlackRock showed over 90% of ESG shareholder proposals which garner over 50% support from shareholders are fully implemented.

2022 looks like it is on track to be a record year for shareholder proposals, with environmental and social issues a key driver. We’ve already seen Apple investors demand a civil rights audit. Soon Pfizer and Moderna shareholders will vote on whether they should share vaccine technology to get more lifesaving doses to poorer countries. When Amazon meets later this spring, at least 17 shareholder proposals will be on the table, covering areas like plastics use, pay gaps, paid sick leave, and the use of facial recognition technology.

Even outside of formal annual meetings, investor pressure on companies to act responsibly continues to build. For example, the responses of many organizations to the war in Ukraine are being scrutinized to a degree we’ve rarely witnessed before, and, as discussed in last week’s edition, investor demand has propelled the SEC to force firms to come clean about their role in climate change.

If you’re interested in learning about how you can exercise your proxy power as a shareholder, we have a quick explainer – and make sure to keep reading FWIW for more insights, analysis, and updates.

News you can use

• Nice guys (and girls) finish last deliver higher profitability, higher workforce engagement, and lower levels of corporate risk. That’s the research finding behind the new ROC (Return on Character) ETF focused on the behavior of CEOs and senior execs. A little over 100 companies made the cut – see them here.

• The Biden administration wants to ensure shortages don’t slow down the clean energy and electric vehicle trend. The president is reportedly considering invoking the Defense Production Act to ramp up domestic output of critical minerals used in large batteries. Related funds like Global X Lithium & Battery Tech ETF (LIT) and Amplify Lithium & Battery Technology ETF (BATT) are charged up on the news.
• McDonald’s, Wendy’s, and Kroger are being confronted by investors about the treatment of pigs in their supply chains. Despite the burger chain’s best efforts to exclude it, a shareholder proposal about gestation crates will come up at Wendy’s next annual meeting. Meanwhile, billionaire investor Carl Icahn, who first targeted McDonald’s on this issue, has now turned his attention to Kroger.
• Missing the office is so 2021. Fewer than half (48%) of fully remote US adults want to go back, with enthusiasm to return fading since January last year. Morning Consult says “the remote option has become cemented in work culture,” which means employers will need to develop hybrid and flex options to survive a tight labor market. Microsoft Office is already getting a revamp in preparation.

Banking on (and for) a better world

Americans had about $18 trillion in their deposit accounts at the end of last year, and this isn’t money sitting Gringotts-style in underground vaults surrounded by lava and dragons. It’s out in the world, driving the national economy with bank loans to businesses and individuals. This is why where your money is deposited can make a difference, and it’s important to know you have options! For some values-focused investors, choosing a bank with sustainable lending goals is a way to have a positive impact so we’ve identified a few key issues, practices in this field, and resources you can consider.

Environment

Paperless statements are great, but the biggest banks in the world also use the money deposited in their accounts to fund new projects in a wide range of industries, including fossil fuels. Investors, regulators, and banks face a conundrum because, while climate experts recommend no new funding in these projects, soaring energy prices have led to calls for short-term increases in output to keep energy affordable and address humanitarian needs.

As with most things FWIW, we recommend you go to the data to guide your decisions. If you are looking to reduce your indirect carbon footprint, the first thing to do is check your bank’s climate record. Many have adopted eco-friendly policies, like avoiding drilling in the Arctic and coal, and Bank.Green can help you learn more about your bank’s practices (they’ll even help you break up with it if you want). Last year a handful of US banks committed to aligning their portfolios with net zero emissions by 2050; however, a new report released this week shows it hasn’t made a big dent yet. While some reduced their funding in 2021 (Citi, Bank of America), others increased it (JPMorgan, Wells Fargo). It’s a worthwhile read for anyone looking to understand the link between climate and major banks. Investors can also find completely fossil-free banking options at Mighty Deposits, which lists 13 banks and 10 credit unions whose deposits don’t fund fossil fuels at all, and Bank for Good.

It is always important to also note that some banks offer services that others do not (something we remembered when we had to find an ATM the other day) so decisions may not be cut-and-dry.

Financial inclusion

There are also options for investors interested in prioritizing racial and gender equity. Minorities have historically had poor access to financial services, which perpetuates the wealth gaps in society. Sixty-four percent of the country’s unbanked households are Black and Latinx, and the main reasons include high minimum balances and fees, and “banking deserts.”  Discriminatory practices are common, like far fewer refinancings approved for Black homeowners, and less access to capital for women and non-white entrepreneurs.

In 2020, big banks made racial equity pledges to change how they do business; you can read their plans online. Some, like JP Morgan and Citi, have even started to allow outsiders to audit their actions and those reports, expected later this year, will help confirm they’re following through with their promises.

As these firms start along the path to meet their commitments, investors can also consider putting money in one of the 1,000 community development financial institutions (CDFIs) that are in these often overlooked communities. CDFIs are credit unions and loan funds supporting underserved communities and women. You can see a list of those certified here. Mighty Deposit lets you filter by CDFIs, women or minority-owned, big lenders for housing and small businesses, and other factors.

This may motivate you to make a change in where you bank, or it may drive you to start talking to the folks at your current bank about their policies. Like everything at FWIW, your values-aligned investing choices are personal as they depend on what matters to you and what you prioritize when making financial decisions. Whatever your choice, always make sure to do your homework and check details like fees, interest rates, and whether your deposit will be insured by the federal government before making any decisions to move money.

Bond basics

Often ignored as the less interesting sibling to stocks, bonds have come a long way, from funding wars in the 1600s to electric vehicles and renewable energy in the modern day. These days the financial news is focused on what they’re telling us about the future of the economy and we think FWIW readers will benefit from better understanding the often mentioned, yet overlooked, world of bonds.

What is a bond? A bond is a type of security or investment asset that is sold by governments and companies to investors when they need to raise money. Essentially it’s a loan given by investors, and the borrower pays interest twice a year until the bond “matures” and is fully repaid. It’s considered a relatively safe investment because you earn a steady stream of income and, in most cases, can expect to receive your entire original sum back. Like stocks, bonds are also often included in ETFs and mutual funds.

Bond types vary based on factors like:

• Issuer – federal government bonds are known as US Treasury Securities or “Treasuries,” and bonds sold by states, cities and other government bodies are municipal bonds or “munis.” Investors also buy corporate bonds.
• Length of term – Most bonds have a fixed term ranging from around one to 30 years.
• Interest or “coupon” rates – Most bonds pay a fixed rate, but some have floating rates that move with a benchmark.
• Risk of default – Bonds can be investment-grade or high-yield “junk bonds,” depending on the likelihood of an issuer failing to pay the interest or principal on time. The bigger the risk, the higher the interest.
• Purpose – When issuers promise the proceeds will be used on projects that will benefit the environment or society (e.g., funding the decommissioning of a power plant and building a wind farm), they’re labeled green, social, or sustainability bonds. As we transition to a greener system, governments and companies, including giants like Apple and Ford, are using “green bonds” to fund new innovation and infrastructure with bonds. Here’s how bonds become green (with pictures!).

What is the bond marketplace? Like stocks, investors strategically trade bonds to maximize profits and benefit their portfolios. A bond’s price is based on demand, which can change based on factors like Federal Reserve interest rates, upgrades/downgrades by a risk rating agency, or corporate earnings and announcements.

What’s happening to bonds right now? The price of existing bonds has an inverse relation to interest rates. When interest rates start going higher, like they are now, old bonds with fixed rates see their value drop since newer bonds will have higher interest rates. That’s why we may now be in a bond bear market.

Bad omen? Yield is the anticipated return on a bond, and it’s higher when the bond is cheaper to buy. When short-term bond yields start to climb above those of long-term bonds, it contributes to a situation known as a yield curve inversion. Some in the financial sector say we are close to this point now and investors are watching carefully, given that experts say this often precedes a recession.

Before you go -

An internet-famous tabby cat that escaped Ukraine with his human (and has been described as “pure vibes”) has raised $10,000 for animal charities in the war-torn nation.