On the horizon for ESG: Values-based investing with a behavioral thesis

Nicole Cope, head of advisors at Ally Wealth; Jeff Scafer, CEO and co-founder at CommonGood Capital.

Transcription:

Announcer: (00:07)
We'd now like to welcome our second ESG panel of the series on the horizon of four ESG values based investing with a behavioral thesis, with Chana Schoenberger, Nicole Cope and Jeff Shafer. Thank you.

Chana Schoenberger: (00:50)
Hi everybody. Thanks for sticking with us. I feel like it's sustainable to sit in one seat, so you're really doing the ESG thing proud so yes, Thank you to Nicole and Jeff for joining me up here, I think this is the best track of the whole show, so you've definitely chosen the right one. Okay. We're gonna jump right in here to talk about values based investing with the behavioral thesis. Just tell us real quick who you are and what you do.

Nicole Cope: (01:15)
Yeah. So thank you for having me Chana. my name is Nicole Cope and I'm head of advisors at Ally Invest Wealth Management.

Jeff Shafer: (01:25)
Very good. Pressure's on Jeff Shafer CEO of CommonGood Capital. And, I've been in the business for about 27 years, probably 25 of that has been in the alternative investment space. So I I'm gonna really come to you with that angle as opposed to public ESG.

Chana Schoenberger: (01:47)
Very cool. Okay, let's just start by defining ESG investing. How do you think about it? what does it mean to you?

Nicole Cope: (01:55)
Yeah, I think if you were to ask 10 people, you're gonna get 10 different responses to that, As we just saw from the last panel. Right. and so the way we look at ESG is really we bifurcated into like a product, right? So the ESG product of doing screens for environmental, social and governance. but then we look at the impact side of it as more as the conversation that an advisor could have with their clients really aligning the client's values to particular parts of that ES or G.

Jeff Shafer: (02:28)
Yeah. And I'm gonna, I'll take us back just a little bit here so the way that I would think about this is kind of on a timeline, you have social responsible investing, which really goes back. I mean, you can probably take it further back than this, but let's just be simplistic here and say the seventies and the eighties that really was excluding different equities and potentially bond holdings, because there were some send stock to it.

(02:52)
Negative screening.

Jeff Shafer: (02:53)
Negative screening yeah, Then you have the ESG, which we just heard about, which is really, and you gotta really think ESG in two levels. I mean, MSCI they're up here. All they really care about is data. They're just collecting data and giving transparency and the Trilliums up here. And they're talking about we're using that data and how we make decisions. And you can say, you can use it simply from a risk mitigation. You can use it from and this is where the discussion gets fascinating. You can actually use it from a values based perspective. I've been on mini panels where it gets heated, but the reality is you can use these tools many different ways. And then I would argue the third piece that comes in, and this is about 2006, is this word impact investing? And it actually means something. Now, again all these terms can be intertwined, but impact investing is not just looking at policies and procedures, which is nothing wrong with that. It is about identifying the financial metrics that you will be reporting out and measuring. And it's identifying non-financial metrics that you are actually trying to influence. And obviously in the private world, you have much greater linkage to have control, to try to drive those non-financial metrics.

Chana Schoenberger: (04:09)
Okay. So we've heard a lot about this. I would love to hear any data you have or thoughts you have on how interested are retail investors in ESG. One of the things that is always interesting is the dichotomy between what people say and what they do, which is of course the point of behavioral finance,

Nicole Cope: (04:28)
Right yeah. So there's been a lot of interesting studies on this most recently there was a study between university of Chicago, so Newark and FINRA. And it was really about the awareness use and perceptions of ESG with the retail space. And so what that study was looking at was primarily over half of the retail investor that they looked at here, they said that they believe, and I'm quoting here that investing can be a way to make a positive change in the world. Right. So how they go about that could be different but there is a firm belief from the retail investor that they want their dollars to kind of match their altruistic beliefs of making a positive impact in the world but what was really interesting that came out of that study. So if you're an advisor we often hear from advisor saying, I really need to, like, I'm trying to capture multi-generational wealth. I need to talk to millennials. I need to get the whole family involved in these conversations. And when you look at it through demographics of gen Z, who their age range, now the oldest gen Z's are in their mid twenties. So they're, they're starting to inherit assets, they're starting to build their own their own nest eggs. And then you look at the millennial space and the oldest millennials are 40 now. So I'm feeling really old when I hear that when you look at them, there's a higher preponderance of belief that they would take a social responsibility over profit. So I think that was very interesting when they look at stocks, they would forgo some profit to know that it matched their values.

Jeff Shafer: (06:07)
Let me add to that you'll see multiple studies on this. You're gonna get this basic idea from most of them. So when asked millennials about 86% say they would align their values with their investing women, regardless of age is about 84% less. You think men or a bunch of pigs, which maybe we are, but it still comes in the mid sixties, ironically, that they would do that. Now, are they doing it is the other question, look institutionally it's. I mean, I think a third of the assets in the world have some ESG kind of mandate on it at the retail individual investor level. The numbers are much, much lower than that, but I'll tell you anecdotally, as somebody who switched from traditional alternative investments eight years ago, and have been headlong in trying to educate and bring real solutions to advisors the momentum is picking up steam quickly. And I've seen it specifically and again this has been a journey, but COVID, I think that absolutely played into it. I think there's this idea of, Hey, we are, we're not gonna live forever. We saw death a little bit more, we saw how connected not to make a political statement, but what somebody ate in China in theory affected what happened here. You see the political unrest, the social unrest. And so what you're hearing from a lot of people is if I can be a part of that solution and make money and understand everything that I'm talking about up here is I have not turned off my brain of investing that I was brought up in now I will tell you, you can find in my world impact investing where it is concessionary, the mistake that Americans assume is that all impact investing is concessionary, which is clearly not the case, so the last comment I'll give to you is I've been shocked over the last eight years to hear and watch especially the discussions between generation G two and G three, oftentimes that it's this dialogue right here is the predominant thing they want to talk about because it's not only integrating what they wanna do on the philanthropic side, but now they're saying, oh my gosh, if I can actually do this on the other side of the balance sheet.

Nicole Cope: (08:23)
Yeah, and I think to add on to Jeff, what you were saying too if we look at some of those unrepresented parts of our society that we've been trying to get investing, right? If you look at women, if you look at African American individuals, they actually have a higher propensity to hold ESG So in my mind it's fascinating way of bringing bringing more investors to the table, if you will especially speaking to something that matters dear to them.

Chana Schoenberger: (08:52)
So, it's interesting because I don't remember if I told you guys this story when we spoke recently, but I was recently editing an article for a magazine that we publish here called asset securitization report, which is a magazine that covers asset securitizations.

Jeff Shafer: (09:06)
It sounds riveting.

Chana Schoenberger: (09:08)
Yeah, it's riveting. But it very well read by people who care about these things. And I was editing a story about a deal for an asset securitization. And it was a consumer lender that was doing its first social securitization. So I said to the writer, what is the social purpose of this? This is really cool. I've never heard of this before. And she did some reporting and she came back and she said, well they're lending to rural underrepresented low income populations. I said, yeah they're a consumer lender. That's literally their whole business model. And she said, yeah, but it's considered a social bond. That's an ESG thing. So this company was able to simply repurpose its existing business model, which is in no way socially ESG, anything to it fits within some guidelines and some very smart person at that company figured out that they could get this label and they didn't do anything wrong. It's just a matter of how you define it. And I feel like that the sort of labeling issues are a big one for retail investors because they don't know if something is truly saving the world or if it just happens to not be an oil company.

Nicole Cope: (10:16)
Yeah, that's to me is like fascinating, cuz part of that nor study also was like, for those who weren't aware of VSG, they asked them to define it just like you started our session and about a quarter of investors that they talked to I think it was like 3,500 investors about a quarter of them said it stands for earning stock and growth.

Chana Schoenberger: (10:37)
That's very reasonable if you don't have much of a financial education.

Nicole Cope: (10:41)
Yeah, So to your point where we can kind of change, maybe the conversation change the conversation yeah. That some smart marketing person at that company.

Chana Schoenberger: (10:51)
So, another thing that I find fascinating and I was talking to someone in the exhibition hall about this before there are a couple of companies that are engaging with this issue is there, as the last panel said, there's been a lot of talk about ESG as being a liberal or leftist idea. And of course it's not, it's simply the idea that you're looking at a company's environmental, social and governance metrics. Those metrics can be whatever you want them to be. You can screen for companies that represent a number of different value sets whatever they happen to be. And of course, half of Americans generally think on the right the other half generally think on the left and you can find ESG screens that represent your views your religious views, your values, views, whatever they are. So how is there a way to sort of move this conversation away from it only being a progressive idea?

Nicole Cope: (11:43)
Yeah. That's the million dollar question, right. and so when we look at it, so when we are looking at some research on this predominantly whether people identified as liberal or if they identified as Democrat or Republication what the preponderances have either said was that they really value ethics. So if you think about governance looking ESG, governance and ethics is part of the governance screen. So to your point, it's that confirmation bias that we can find something for whatever our beliefs affirm to but I just found that fascinating that like, it's not really, if you look behind the curtain, it's really not a progressive stance. It's are people just doing the right thing?

Chana Schoenberger: (12:28)
Right, Whatever you believe the right thing is.

Nicole Cope: (12:31)
Yeah.

Jeff Shafer: (12:33)
That's where it gets tricky. But I actually, I'm gonna go on the other side and go, I absolutely think that values and belief and worldviews come into play here. because that's what people do. They take the data and then they analyze it through that. And I'd ultimately argue, that's not bad. That's fine. But I would give you an example is quite it's comical. So we, deal with a group who does renewable energy in east Africa. And so when I talk to the left and I'll use the rights here too, when I talk to the left, it's like it's green energy. It's gonna save the world. You can't lose money. And you're like no, that's not the case. You go to the right and they go, oh my gosh, that's just a green new deal. I want nothing to do with it. The reality is that in this case there's 600 million Africans who don't have access to power. And guess what the most logical and happens to be good for the environment option in this case is small scale renewable, it could be run of the river, hydro it could be solar or wind. And so it's actually a fun discussion to have with them to go. I don't care why you invest in this, ultimately, whatever your belief is, but it needs to be a good investment thesis and if it aligns with your values. Wonderful. But in like, that's a great example. There isn't a value play behind that, but you sure can make one.

Chana Schoenberger: (13:57)
Right. It is whatever you say it is. So another really, and I guess this is sort of the basic thing with behavioral finance is how do you save people from themselves? How do you rescue investors from all the biases, all the heuristics that we know that data shows us affect their everyday investing choices. Yeah.

Nicole Cope: (14:18)
Well, I think we have to start with the advisors. Like I'm just being honest. Yeah, sure when you look at like, there's some really interesting, I know Dr. Daniel Crosby speaking tomorrow he's been working in some interesting research of like, how do identify your own basis as an advisor. Right. So I think it starts at home.

Chana Schoenberger: (14:34)
We all have them.

Nicole Cope: (14:34)
Right we all have them. And so it's identifying your biases as an advisor to spin that into the ESG side. That same study that if you haven't read that study, it is like a treasure trope of like cool wonky information. And this won loved it when folks were not in ESG, of course they're asking, well, why not? Like why not? And the large percentage of folks said there were just, there was an awareness, but a small, but alarming percent in my mind said my advisor recommended against it. So I think like going into it yourself is you, you go back to this whole kind of, How do we help clients from themselves? Well, first we as advisors have to identify, there may be our own biases we're bringing to the table and just awareness is a great thing. And then the second part of that really in my mind is helping people connect. so we do this really neat thing in ally where we help people connect to their earliest memories of money to how that influences them today. And so you think about it, like in most homes, there is a memory of money, right? It could be a positive or a negative memory, but most people have a memory of money, like an early memory of money. And it's fascinating. Like I love sitting in with the advisors as they're talking to clients, especially about this, to see kind of switch in their head going, oh my gosh, I never connected the two. Right? Like I never connected that. So to, before you could start identifying biases, you have to help clients understand when and where they will exhibit them. And that money story is really gonna help advisors do that. then the second part of that is really around. There's some interesting research out there now around values. If you ask a hundred people and my advisors in the room are probably cannot along to this, if you ask a client about their goal, you usually get like a deer in a headlight look, right. So you have to massage it out like it's growth or retirement. Right, But if you start asking people about what they value and then help them align goals to that value.

Chana Schoenberger: (16:29)
Goals based investing.

Nicole Cope: (16:30)
Goals Based investing, right. It becomes different, and it becomes a much easier conversation. It helps the clients also self-identify when biases might be brought to the table, it helps advisors understand or know that this is gonna trigger that client. So, they could be aware of it and either help the client overcome or draw awareness to, or get around that particular bias or heuristic.

Chana Schoenberger: (16:55)
And what are you doing at ally to help advisors in this way?

Nicole Cope: (16:59)
Yeah. So I'm the head of advisors so, yeah. We're doing a lot of training our advisors are getting certified in behavioral finance, which is kind of cool thing to do, and we are working pretty closely with a couple cognitive psychologists also to understand how people look at money and think about money. So we're bringing that into our consultation process.

Chana Schoenberger: (17:23)
Very cool.

Jeff Shafer: (17:25)
Yeah. Just one comment I'll add is that from my experience and I've had the unique advantage point of well, I know you do as well. I mean, I've talked to thousands of RAAs and advisors around the United States will last 27 years. And there's no question that and this is not to blame them because but there is a need for education, a need to figure out how to talk about this stuff. The last thing advisor wants to do is to look silly in this. Although I would tell you when they get through that cuz then you get into the values discussion and one of the values to be very clear, it may just be about risk. And so that's fine too, but I have watched how and I'll give you an example personally. So we've invested in mobile home communities and affordable housing and during the pandemic obviously those things were impacted but because I cared about it, cuz my wife cared about they actually in this case reduced some of the income cuz the rents were coming down but it one I had to hold it cuz it's the way it is, but I was gonna hold it regardless. So I think there's also this perception that cuz you tend to sell when you should and that kind stuff when you actually care about something and generally most people would agree hold stuff longer. I actually think when you're tied to it, you're gonna hold it longer typically which is kind of counterintuitive. The other comment I'll make is we act like emotions and values aren't in people's plans and in their heads there totally are. So to me, acknowledge it and say, okay, fear and greed is real how do we bring in some of the positive emotion? And let's find some stuff that you'd be passionate about investing in.

Nicole Cope: (19:08)
Yeah, there's interesting research that supports that Jeff coming out of Europe, some neat academia work going on about individuals who hold ESG or ESG type products or however they define ESG that they hold it longer and there's a lot of social proof around it. So they talk about it more and as an advisor, I think that would be a pretty cool thing when people are that engaged and embedded in the products and services that you're providing them, that they're talking about it, they're holding it on longer you're doing the right thing for the client.

Jeff Shafer: (19:39)
And they're talking about it, not just about return.

Nicole Cope: (19:41)
Right? Exactly Yeah. They're not hiding at the cocktail party when the market turns.

Chana Schoenberger: (19:47)
Right? No, it's interesting too, because just as a journalist, when I hear or we write a lot at American banker about financial inclusion and financial literacy and there are of course a ton of banks and credit unions who are trying to move and FinTech as well, who are trying to move into serving the underserved various communities in various ways. Some because their regulators tell them they have to and others because they think it's a good market, but there's always a little bit of weariness because generally when someone goes after a market that no one else has gone after they're gonna charge 'em a lot of money. Like the fees are gonna be really high if people are unprofitable as a group, they're probably always gonna be unprofitable as a group unless they move out of that group, which means that it's tempting to see all of these innovations as wow, they're really gonna serve these folks, but it's gonna cost them a lot of money to do it, you know? And the consumer may not be well served. How do we sort of think of that as, as ESG investors we wanna serve these people. We wanna get them the help that they need.

Jeff Shafer: (20:51)
Well yeah, I mean I have real life examples. I have my own capital in financial inclusion investments in Africa for, for example, so from an ESG perspective you just making sure you have the process of procedures and stuff in place, ultimately but I think there's a, it's actually a really fascinating discussion because one needs to ask what is fair, right? So I'll give an example. apple comes out, making it up. Apple comes out tomorrow and says profit margins are now 65%. They were 50%. Everybody goes, yes, that's awesome. Is it, is it awesome? Think about how many people can't and I'm not arguing that this is good or bad, but you have to at least ask the question even of those corporations these same things. So I do think, but immediately people ask the question of, you're gonna take advantage of somebody. And you're like, well it doesn't necessarily the case. So that is ultimately where I would argue having this head and heart infuse going, Hey we need to create a win-win and by the way, some of it's not even heart. Some of it is just the reality. If you treat these these borrowers well and give them a normal, a healthy rate or a good rate that they're gonna continue to do this. so it is absolutely an issue, but I can tell you point blank, we've invested in, or I personally have invested in stuff out of use Africa as an example performance have been phenomenal. I get a report every quarter and you would be amazed at what the impacts having and a chunk of it is because these bigger players don't want to take the risk to go do it. And it's messy. So, yeah it's a great question. But I think it's something we should ask across B of a you name it.

Chana Schoenberger: (22:40)
Yeah, definitely.

Nicole Cope: (22:41)
Yeah. I know one thing at ally. So we are part of ally bank nd ally bank was one of the first digital banks to come out and eliminate overdraft fees. That's true. So exactly supporting those communities, like what we're serving, we want to serve a community, but yet we keep like hurting them because of these overdraft fees. So, they decided that it was much more in their interest, not only as an organization to eliminate them. Right. It was our ethos to do right by the client.

Chana Schoenberger: (23:11)
Yeah, that makes a ton of sense. But then it's the double edged sword is that as an advisor, it's your job to make money for your advisory clients. And so, you want them to invest their values, but you also want them to make a good return. Right. If they have to, otherwise they're gonna take their business somewhere else.

Jeff Shafer: (23:27)
Well, ultimately though, if they're not getting a good return, chances are on either side that that's gonna go, that opportunity goes away, so there is a built in mechanism into the markets, hopefully that come into play that if it's not meant to be it's gonna get destroyed.

Chana Schoenberger: (23:49)
Yeah, definitely, one thing that you'll see a lot of these fintechs in the exhibition hall and this is a big it was a financial planning, did a big cover story on this recently direct indexing. So directing indexing has, has been sort of floated as a way for people to sort of have an index of things. Only the things that they care about very specific. I only want to invest in companies in Ohio. I only wanna invest in things that aren't in fossil fuels. Is, is there a way for this to really change how, how individuals invest?

Nicole Cope: (24:22)
Well, I think it goes back to that conversation of matching, helping clients match their values to how they invest. Right. And if it keeps them invested during tumultuous markets, regardless if it was the highest return or not the highest return, they are better off because they remained invested. Right. And so in my mind, I look at it that way now, other scalability conversations around direct indexing and how low can you go? Like how low to the retail investor can we bring it? But that is for bigger, better minds than the FinTech room to solve.

Jeff Shafer: (24:54)
Yeah. I mean just the trends that I see this is not even whether it is good or bad, it will continue to grow, cuz because of this behavioral component, people do care and I think will continue to care more about what they invest in. So yeah, I do think it's gonna take off.

Chana Schoenberger: (25:15)
Okay. So last question. We have time for here because we're talking about behavioral finance. Let's talk about the role of emotion and investing right at the most basic level, the investor is a human right. And the advisor is a human so they have both thoughts and feelings. How do you navigate that?

Nicole Cope: (25:32)
So I would encourage every advisor to bone up on behavioral finance. Right. I think it has lived for too long in academia because I think a lot of people struggle to bring it from academia into application. And we are human. Like you said, we are human. We are a rational human beings being forced to look at a rational system. And I can argue that it's really not a rational system either, but mostly rational. Yeah. So I would always encourage advisors, the more they can read about it, there's amazing research that's going on around cognitive psychology and how that impacts the way we make decisions. Marketers have figured this out a long time ago. So I haven't financial advisors, right? There's a whole concept. Like if you talk to a good marketer, they know how people make buying decisions. There's a ton of research out there on how individuals make buying decisions. It doesn't matter if I'm purchasing this pen or I'm purchasing a home, I'm gonna go through the same buying cycle where I get hung up is gonna be a little bit different based upon the risk and the size but it's the same. And so I think the more advisors can become aware of that, recognize it in themselves recognize it in their clients, start talking to their clients, almost like marketers. It's a different conversation.

Chana Schoenberger: (26:54)
Advisors as marketers, that's kind of a scary thought, it's not what they know how to do for the most part.

Jeff Shafer: (27:02)
Yeah. I think I would rephrase the question and say, when are we gonna be okay to acknowledge that emotions don't mean you necessarily have to make bad decisions, that's the imply, Think about it. All we ever hear is wall Street's driven by fear and greed. So that's why you gotta keep your emotions out of it. And I think what you're gonna see the next is to say, no, you actually can engage and you still can keep your head engaged and you don't have to go down this, this negative path. One, quick story. My mom, unfortunately my mom and dad after 46 years got divorced maybe six, seven years ago. And I went to the advisor, her advisor, a woman advisor, obviously's done a very good job and she was really helpful in the transition but I sat there. My mom wanted me to go just to kind of observe and that she put her plan across the table and talked about what moves she made and kind of the risk. And here's my risk alies. Here's where we are. And my mom is, she's not, she's smart, but she's not into that. And I'm watching this stuff go like this And, what my mom wanted to know was, am I okay with my cashflow today? And how am I doing, not running outta money? And I can tell you if she would've had the advisor say, and by the way, Judy cuz this wasn't in her portfolio, although I've put some stuff, cuz she's wanted me to. And Judy, by the way, let me just remind you. There's two things that you own in here one is affordable housing and one is whatever, my mom would've gone out and be like my money's good. And I'm helping people. Yeah and she would've been she would've been loving life. Ironically. She left that advisor. Yeah.

Chana Schoenberger: (28:41)
Yeah. Wow. Okay. And on that note, thank you very much for coming and we thanks to our panelists.