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Tesla has been kicked out of S&P Dow Jones’ S&P 500 ESG index. The index maker cited issues including racial discrimination claims and crashes linked to Tesla’s autopilot vehicles for removing the EV maker from its widely-followed benchmark index. CEO Elon Musk criticized the move, on Twitter of course. Still, S&P said Tesla’s lack of published details related to its low carbon strategy or its business conduct codes contributed to its removal.

Australia voted in a new government that has vowed to end decades of inaction on climate change by one of the world’s highest per capita emitters. Anthony Albanese was elected as the country’s new prime minister. The 59-year-old is described as a center-left politician who leads the Australian Labor Party, which is set to form its first government in roughly a decade after picking up seats in Parliament. Albanese takes over for Scott Morrison, who is frequently criticized for failing to take stronger steps to curb Australia’s carbon emissions. Albanese is seeking to push the climate change agenda by committing to reduce carbon emissions in the country by 43% by the year 2030, with an aim for net zero emissions by the year 2050.

Meanwhile, China tripled its investment in solar power projects in the first four months of the year, putting the nation on track to install record amounts of new clean energy capacity in 2022 According to China’s National Energy Administration, investment in solar was 29 billion yuan, or $4.3 billion from January through April, which is about 204% higher than in the same period a year earlier. That compares to 51.3 billion won invested in solar in the first 11 months of last year. China already has the world’s largest fleet of renewables and is rapidly accelerating investments in solar and wind projects as it aims to build a larger and more flexible grid to meet goals to peak carbon emissions before 2030 and zero them out by 2060 or earlier.

WeWork founder and former CEO Adam Neumann has resurfaced and he’s putting some of his money to work on carbon credit trading. Flow Carbon, a blockchain-enabled carbon credit trading platform backed by Neumann, has raised $70 million in its first major funding round, according to Reuters. The company aims to tap into the growing market for carbon credits companies purchase in order to offset their greenhouse gas emissions. The carbon credit market has drawn criticism for being fractured, opaque, difficult to access and quality control issues. Flow Carbon is trying to solve these problems by letting project developers sell their carbon credits through digital tokens, stored and traded using blockchain technology, allowing them to access cheaper funding and scale their projects more quickly. We’re going to keep an eye on that space.

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Meet Malik Sievers

Malik Sievers is the Head of ESG Strategy supporting Schwab Asset Management Solutions (SAMS). He is responsible for the organization’s environmental, social, and governance (ESG) business and product strategy. Sievers has extensive experience in multiple positions throughout his career. Prior to his current role, Sievers worked as senior investment portfolio strategist and managing director of strategy for Schwab Asset Management. Prior to joining Schwab in 2011, Sievers served as a managing principal for Farr Investments, a trading advisory firm, and spent several years as a consultant for McKinsey and Company along with a role as an equity analyst at Prudential Financial.

Sievers earned a Master of Business Administration from Stanford Graduate School of Business and a Bachelor of Science in applied mathematics from Brown University. He is a licensed Chartered Financial Analyst (CFA), and a member of the CFA Society of San Francisco. In addition to his CFA, Sievers also holds a Series 7 license.

What’s in This Episode?

Charles Schwab was one of the original discount brokers that brought investing to the masses in the 1970s, with low-cost trading and a massive array of investing and financial products. Today, Schwab has over $8.4 trillion in assets under management (AUM), making it one of the largest financial services companies on the planet. With so much of our money and our financial lives under its roof, Schwab realized a long time ago that it had to offer more sustainable investing solutions and opportunities to its millions of customers, especially if it wanted to attract younger generations who did not grow up with Chuck. That responsibility falls to Malik Sievers and his team. Malik is the head of ESG Strategies supporting Schwab Asset Management Solutions. He’s responsible for the organization’s environmental, social, and governance, business and product strategy. And welcome to the Green Investor, Malik. Good to have you here.

Malik: Great to be here, Caleb.

Caleb: Great. Let’s talk about Schwab and its approach to ESG investing. It’s not hard to find this on the website, folks, but I went and did it. They got values-based investing, excluding companies or sectors from the portfolio, integration that allows investors to access companies that score well across ESG criteria, and the impact investing part. That involves explicitly deploying investment dollars in an effort to directly achieve a measurable outcome. So you got these three ways of engaging and some products around it. But take us through some of the details—let’s start with the values-based investing, the exclusionary part of it.

Malik: You might have a client who wants to divest or reduce exposure in areas that might be personal to them. Perhaps the client may have had someone in their family with a tobacco illness, so they might want to exclude companies that have exposure to tobacco or some area that they care passionately about. That’s probably the most common place where we see clients wanting to incorporate some kind of values-based approach in how they select their investments.

Warning

The Green Investor podcast is for informational and educational purposes only and does not constitute investment advice. We will not make recommendations to buy, sell, or hold a particular security or asset, although we may discuss financial products with our guests. Some of our guests may invest in securities mentioned on this podcast. Some of our guests may sell or market securities mentioned on this podcast, but all listeners should do their own research or consult with a financial advisor or broker before making any investment decisions.

Caleb: So Schwab is not an activist investor. You rarely hear about the money manager loading up and trying to make change at some of the big companies, especially some of the fossil fuel companies. You’re managing a lot of money on behalf of your clients. About 357 billion of that is invested in ESG funds. That’s a big number, Malik, relatively small given the $8.4 trillion in assets under management. What are your expectations for growing that pie over time?

Malik: Clearly, ESG has been a space that I would say has been evolving rapidly. I would say that, to your point, it’s a pretty big number, but it can get a lot bigger. I mean, 2020 was certainly a huge catalyst for growth. With everything happening with the pandemic, racial justice issues, climate concerns—I think that’s all helping to drive much more attention from clients and wanting to express their views with respect to investing. If we take a step back, I mean, I still think and I think our firm still believes we’re in the early days when it comes to broad adoption of ESG. I think assets in US sustainable funds reached about $244 billion in 2020 in the U.S., which was a growth rate of over 25% since 2015. And I know there are some companies like Bloomberg Intelligence that are projecting that by 2025 we’re going to see assets exceeding $53 trillion. So I think all roads point to the number getting bigger. And I guess the last thing I’d point to is, we did our Q1 retail client sentiment report, and what we found is that nearly a quarter of our clients said they wanted to—or they currently make—investment decisions today in accordance with their values and areas of interest. And there were another one in five that said they’d like to do so more in the future. So we see this increasing, and so we want to set ourselves up to be able to help clients meet their objectives and preferences.

Caleb: Malik, to that end, you’ve launched a new ETF with Ariel Investments. I want to talk about that, but you’re also now partnering a little bit closer with MSCI on their ESG ratings. Folks, if you remember on this podcast, we’ve had MSCI to talk about those ratings and what they measure and what they don’t. Let’s talk about that partnership first. Why is that important? Why is that important to your customers?

Malik: So it gets back to Schwab really taking a holistic approach to helping clients with ESG and trying to make sure our offerings are rapidly evolving with the ESG space. Specifically, we are really focused on providing clients with resources, with guidance, and investment choices. So providing clients with MSCI ESG ratings is really just part of our strategy of providing more resources and guidance to our clients. Giving clients an easy way to review a company’s ESG rating during their research process is something we know many investors find useful. That’s really just the latest example of Schwab’s overall commitment to helping clients personalize and customize their investment portfolios based on their own goals and objectives.

Caleb: Part of the educational journey, and that’s something we really believe in here at The Green Investor, because this is an area where there’s a ton of learning to do. The ratings are changing. There’s an alphabet soup of acronyms going on there. But what’s being measured is super important. I want to get Schwab’s take on this, especially from your perspective. Some MSCI ratings or some ESG ratings, whether it’s MCI or Morningstar or Sustainalytics, they’re measuring different things. Are you wanting your clients to be able to measure the impact of ESG on these portfolios, on the bottom line of these companies and then investment performance, or basically how they score in a climate-related risk world? What’s it actually measuring when you look at those ratings?

What You Need to Know

ESG rating agencies are becoming a major force in the financial markets. The managers of one-third of all professionally-run assets globally, equivalent to over $20 trillion, now use ESG data to inform their investment decisions, according to a report from Sustainable Insight Capital Management. Not only are ESG rating firms potentially influencing the returns on an ever-expanding pool of retirement savings, university endowments, and other investments, they are also affecting companies’ strategic decisions: some 33% of companies say inquiries from sustainability analysts have shaped their overall business strategy. Furthermore, 73% of professional investors say they take ESG factors into account, while an additional 28% say their company offers training on ESG-related issues, according to a June 2015 survey conducted by the CFA Institute.

Malik: So another point that has some nuances to it. So as many investors may be aware, different rating companies all have different approaches to rating. And it’s often not too surprising, but unfortunately, you have many scenarios where a company might have the highest rating within one rating agency, say, MSCI, and then the very lowest in another company. So the way we look at it is, we are providing one rating. It’s not necessarily the only rating, but we do think that providing this rating, it is giving clients at least some measure of a company’s resilience to long-term industry material ESG risk. I mean, MSCI has over 10,000 companies that they’re rating. They use a rules-based methodology to identify who are the leaders and laggards based on exposure to financially-relevant ESG risk, and also how each company compares to their peers. So, I think we certainly believe that this gives clients another data point that they can incorporate within their research process.

Caleb: Folks, you got to remember, it’s E, S, and G. So there’s the environmental part of it, there’s the social part of it, and then there’s the governance part of it. And companies are going to rank differently depending on where you’re measuring them. So, Tesla, for example, an EV maker, electric vehicle maker, obviously is going to do a little bit better on the E part of it, but on the social and governance part, it doesn’t score so well. And to wit, the company was just kicked out of S&P ESG Index because of the governance part of it. So all companies are going to measure things differently. I think that’s why it’s so important to have these ratings. So let’s get into the Schwab Ariel ESG ETF. We’re big fans of Ariel Investments here. You’ve teamed up with Ariel to launch an ESG ETF. What I find interesting about that is traditionally ETFs tell the public what’s in the portfolio. This ETF does not. Why not? Why doesn’t transparency apply to this ETF?

Malik: Well, I do think transparency applies to this ETF. What happens with this particular ETF is it’s called semi-transparent. And all that simply means is they build in a delay in terms of when they provide the complete transparency into their holdings. So the way this works quarterly, Ariel does release all of the holdings and someone can look at it very similar to how it works actually with a mutual fund. The specific reason why we chose this particular approach is because Ariel operates within a small to mid-cap space, and so some of the proprietary research they do, they really want to make sure that they are not in a position where someone who’s larger may want to come in and try to front run some of their positions. So by delaying the disclosure of the actual holdings, it gives them sufficient time to be able to take the positions that they want without someone else being able to jump in in the middle of that process. So we ultimately believe transparency is really important. And another positive about Ariel is they’ve been in the space almost 40 years now. And what I like to say is they were doing ESG before it was even called ESG. So we’re very, very excited to be partnered with them, given their long history and very well-established approach to ESG investing.

Caleb: First class firm. Like I said, we’re big fans and I’m glad you brought it up because these are smaller stocks, smaller to mid-cap stocks. It’s not like they’re buying some of the biggest large caps out there where front running really is not going to matter that much because they’re so widely held. And when you look at what’s in the portfolio today, folks—I’ll link to it in the show notes—you’ll see a bunch of companies you’ve probably never heard of and I’ve never heard of, and I follow this very closely. All right, let’s get into some of the myths around ESG investing, because we know it’s relatively young when you look at the investing space, but there’s a lot of myths out there and they start with performance. So why don’t you give me the three or four biggest myths that are circulating around ESG, and then you and I can myth-bust together.

Malik: The most common myth that we come across in talking to clients, is, a lot of clients have this belief that ESG investments will hurt their performance. Now, of course, past performance is not a predictor of future results, but I would say that our data shows investors who choose ESG funds end up having performance very much in line with investors who choose non-ESG funds. Now, of course, there may be some sector differences that can have an impact. If you think about recently, energy has been pretty strong. So if you’ve got a strategy that removes the energy sector, then of course there’s going to be some impacts there. But I would say very typically and what we’ve seen from our research is that ESG funds really rank in the middle of their respective categories when you look at performance. So we like to say it is completely possible to do well while doing good.

Caleb: I love that expression. And you’re right, they look a lot like the stock market because when you look inside a lot of the ESG products out there, they contain some of the largest stocks in the S&P 500 for various reasons. Again, there’s the E, there’s the S and there’s the G. Doesn’t mean you score well across all of them, but if you score well enough across some of those categories, you’re probably going to wind up in those funds.

Malik: So I think related to the performance question, we often get clients who talk about ESG investments having a different risk profile. And so there are usually two basic camps that clients will come from. You have folks who are proponents of the argument that focusing on ESG lowers risk because you’re typically considering governance factors more heavily, or maybe you’re eliminating undesirable industries. And so that, they believe, is reducing the risk in your holdings if you focus on that. But then on the other side of the spectrum, people who are more opponents of that will say, you know what, incorporating ESG factors results in a less diversified portfolio—because you’re excluding certain companies—and that could actually increase your risk. So this is another one where, as we’ve looked at the data historically, it really has shown that at least if you look at standard deviation of returns, it’s been pretty similar for ESG and non-ESG funds. So again, we would put this into the category of not-necessarily proven out in history.

Caleb: Okay, I like that one. Let’s take another one. Give us another big myth and let’s swat it out of the sky right here.

Malik: The third really big one that I think is worth talking about is just this idea—and it comes back to what we were talking about earlier—Caleb, in terms of ratings. I think there is definitely a certain segment of clients that have what I would call an overreliance on ratings. They have this belief that all highly-rated ESG securities must by definition, then be good ESG investments. But as I mentioned earlier, ESG ratings for the same security can vary pretty wildly between different rating companies, and often times the rating providers themselves are actually measuring the same data items, but they could be assigning a different weighting to some of the factors. So what we really try to do is to help clients realize that, rather than exclusively focusing on just picking highly rated securities, it’s far more important that clients or investors choose and select investments based on their own values and goals. You gave a perfect example earlier about Tesla. A lot of people will talk about Tesla being really positive because of all of the electric vehicle work they do. But then again, from more of a human capital perspective and some of the lens around governance, maybe they don’t rate so well. So whether a client likes or dislikes Tesla will really depend on what their area of focus is and how they want to incorporate that into their portfolio.

Caleb: Great point. And Schwab is one of the biggest names in this personalized direct investing, giving investors the steering wheel to put together their portfolios that they want, or dive into the hundreds of thousands of different investing products that it offers. But this is where it’s going. Back in the day, we used to call it the Burger King rule: have it your way. And that is what investors want these days, especially in this area. What about climate and the environment? What are some of the main products or focuses or features that your team is working on, that are around climate risk, around climate change, the very ‘E’ part of the ESG equation, really?

Malik: Yes. So I would say very broadly, we are focused on providing clients with resources, with guidance within sites. I would say if you detangle the E, S, and G, we are seeing most interests around the environmental side of it, but I would say there are a lot of social themes and interests coming up as well. As you just mentioned, climate change is a really big focus. Obviously, there’s a lot of industry news about firms making commitments to net zero. You’ve seen investors and regulators also really focused on disclosure and transparency. So I think our approach is really about providing clients with choice, allowing them to get some of that transparency into some of their holdings so that they can make those decisions and reflect what is important to them from a values or beliefs perspective.

Caleb: I know you follow the industry very closely—that’s your job, but what would you like to see on the regulatory front or what don’t you want to see on the regulatory front in the coming months or years that are going to help make this pathway a little smoother for investors? Because, as we know, still a lot of confusion, a lot of acronyms out there, a lot of uncertainty about which way the industry is going, especially in the commodity bull market. But what are you looking for on the regulatory framework?

Malik: You really hit the nail really solidly there. And when you think about it, as an industry, we’re still navigating how to define and measure ESG. So what I’d like to see is improvements to making how we talk about it more consistent, and even how we measure what’s material. As we talked about earlier, if the rating agencies and the so-called experts can’t agree on what makes a good ESG investment, then I think it’s a huge ask for our clients to be able to make that assessment.

Caleb: Every single guest we’ve had on the Green Investor has said the same thing. We’ve got to come together and agree on what we’re talking about because if we don’t agree on what we’re talking about as an industry, how are our customers going to get it? But I know if anyone can do it, Schwab can do it. It is so big and you guys have been in this game a long time. Malik Sievers, he is the head of ESG Strategy supporting Schwab Asset Management Solutions. Thanks so much for joining the Green Investor. We appreciate it.

Malik: Thanks, Caleb. It was a pleasure to be here.

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