Biden’s Executive Orders, ESG Investing & Your Portfolio | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #46

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Episode Summary

President Biden wasted no time making international news. With the third executive order of his new administration, President Joe Biden put the US back into the Paris Agreement. President Biden also pledged $2 Trillion toward creating a clean energy future. In tandem, Christina Figueres, the creator the Paris Agreement joins the board of Impossible Foods.

With companies and governments focusing on climate change, how should that impact the way you invest?

Research shows the answer could mean higher returns with less risk. Sound too good to be true?

Listen in on this week’s AWM Insights, as Erik, Brandon and Justin dive into what is ESG Investing, how it can potentially drive higher returns and what Biden’s future plans may mean to your portfolio.

 

Episode Highlights

  • (03:49): Justin defines ESG Investing

  • (06:34): Erik discusses how, where, and what we invest in goes far beyond financial returns.

  • (10:12): Research shows there's no financial trade-off in returns and actually demonstrates lower downside risk when implementing ESG Investing.

  • (12:56): Do you have a purpose of how we're deploying your family's capital?

  • (17:04): The advice you deserve. Evidence based.

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Erik Averill: LinkedIn

Brandon Averill: LinkedIn

Justin Dyer: LinkedIn

+ Read the Transcript

Erik Averill (00:01): Hey, everyone. Welcome back to another episode of AWM Insights. It's your power three, two CPWAs and a CFA. We are Erik, Brandon, and Justin, and each week we cover what you need to know to capture the returns that you deserve and invest like a pro. And last week, what a historic week it was. We saw President Joe Biden sworn into office and Kamala Harris become the United States first female vice president, the highest ranking official ever elected for office in the United States. And also the first African American and first Asian American vice president. And as three dads of young daughters, I know that we are excited for the future of our country. And President Biden also wasted absolutely no time making international news. With the third executive order of his new administration, President Joe Biden put the US back into the Paris Agreement, which initially was finalized in 2015. The climate change accord saw 143 countries including the United States agree to limit the global temperature increases to less than two degrees celsius. But before we get into how this should or could impact the investment markets, there're some other news we want to make sure to be able to cover with you guys.

Brandon Averill (01:27): Yeah, absolutely, Erik. There's no shortage of news hitting the waves right now. We started off hot with treasury secretary, Janet Yellen announcing even more stimulus. Markets absolutely took that news and reacted positively. So we've seen no indication at least of a slowdown of support for the economy and stock market so far is taking that in stride. We also saw on the individual company front, some really interesting news, Microsoft joining up with GM to help be their cloud partner. And I think more importantly, potentially bringing a whole bunch of capital to the game to help them in this transition towards the autonomous driving, towards converting to more electric vehicles. So some pretty interesting stuff there. On the personal front or the AWM front, we saw some great news with Hims now being listed on the New York Stock Exchange. So that SPAC acquisition being closed up and them now trading as a public company, that started on Thursday. So some pretty exciting stuff there. And kind of sticking with that, we've talked about Impossible Foods for a while. They've made some big moves and announced that they've hired the former UN, the head of climate for the UN and really she's credited with being the creator of the Paris Agreement that you referenced on the introduction. So some pretty interesting stuff there, kind of maybe it leads to, hey, part of this carbon emissions reduction might extend beyond the cars and solar and all the things that we've talked about or thought about when we're talking about this stuff and may get into food and agriculture, which is kind of cool. And let's not forget the Bitcoin conversation. I think we've hit on it every week for the past six weeks or six insights, but we're going to continue it again because we just saw that jaw dropping kind of extreme volatility take hold again. But I think the other big deal that's hitting the news is Biden's pledged two trillion dollars to creating a clean energy future. And I know we certainly want to hit on that today.

Justin Dyer (03:49): So yeah, let's jump into this whole topic of ESG investing really, because it relates to everything we're talking about with the Paris climate accord, Biden's pledge for clean energy future and how that potentially impacts portfolios and our approach certainly. So first and foremost, let's define it, right? ESG is an incredibly broad topic or term. It's generally is environmental. So think green really lines up with a lot of what we're talking about right now, the Paris climate accord, et cetera. Social responsibility, so that's more in terms of diversity representation, how partner factories are manufacturing, are treating their employees, et cetera, et cetera. And then governance. The final G is governance. And that's really how the board structure is set up to govern the actual entity. So it's a really broad topic in and of itself. I kind of don't like that at all lumped into one. It is, I guess, an easier mouthful to think about. And in the past we've used different terms for it. SRI, socially responsible investing is another term that's been bantered about not so much anymore. And even going back to, I think around the turn of the 2000s, there was something called CSR, corporate social responsibility. So it's not new at all. It certainly is making much more headlines recently and certainly on the environmental side of things. So how we think about this specifically is we actually do engage in some sort of sustainable tilting within a decent number of our portfolios. Not all of our portfolios. We do have certain flavors if you will, within portfolios, but we do have an overlay of a sustainability screen to see what the overall impact and minimize the overall impact from a sustainability/environmental standpoint. And we do really both believe in that from a value standpoint, but also from a go forward rate of return standpoint, right? Plenty of very high powered influential individuals are basically saying that this is here to stay, right? Companies are taking it into account in almost everything they do on a go-forward basis. So it certainly is going to be, if not a driver of returns, certainly a point of discussion around all investments going forward.

Erik Averill (06:34): Yeah. And I love this topic. I think one of the things I like to do when we start to have this conversation is take a step back and zoom out and really ask the why. Why is this even important? And for us at AWM, we've shared this, I think every single time we're on here, that our mission is to help unlock the full potential of our client's wealth for maximum impact first on their families, the community, and the world at large. And so we strive to help our clients gain that clarity on what impact means to them personally. And then ultimately, we distill that down into some clear priorities. We architect a plan to help them maximize both their financial and human capital, and then hopefully to efficiently deploy those resources towards achieving those priorities, which creates that impact that they've desired. And so how and where we invest our money is as important a part of that process. And it has tremendous implications on the impact that we're going to achieve. So how, where, and what we invest in goes far beyond financial returns. And one of the other things that we have here at AWM is this motto of owning your wealth. And we understand that we're owners of companies and therefore we own the responsibility of the impact that the dollars generate in the world. And so our investment philosophy, yes, it's absolutely to pursue these higher expected returns, but it's also to maintain the alignment with the social priorities and the philosophies that are so important to us. And so I always like to set that table as before money is impact, wealth is impact, and it isn't just about achieving some financial return for the means of a financial return. And so this starts at the very base level of our client's priorities all the way into how we deploy capital.

Brandon Averill (08:32): Yeah, Erik, I think that's a fantastic point. And I think we're in this golden age a little bit too where it used to be the case that all these screens, and if you wanted to gain some sort of sustainability or social responsibility within your investment portfolio, you had to give something up. There was often just the trade off, right? If I want this, I know I'm going to give up return. And what we've seen is that that's just no longer true. And you really can have that really good investment experience, still expect the returns, the higher expected returns and allocate your portfolio in a way that's going to support your values and what truly matters towards that impact. And quite frankly, we've actually even seen that with, especially when you're looking at carbon emission reduction specifically, that whole concept has... Those tilts have created an expectation of higher returns. And I think as we look at these new cycles and we see how the economy is changing, it's hard not to think that that's going to continue to show up in the data. We're going to see more and more investment into these areas. So we certainly never undermine the client investment experience. We still want the returns that we deserve, right? We'd never jeopardize that by tilting a portfolio in a way that we wouldn't still expect that, but it's really neat to see the data starting to show that you can have both worlds. And I know we're all personally excited about that, and clients are certainly benefiting from it.

Erik Averill (10:12): And just to reference the research report, and then I'll let you go on, Justin, is just head over to awminsights.com. We've put a link in there. There's this really cool research report done that looks at the performance of over 11,000 mutual funds from 2004 all the way to 2019. The first part is cool because it shows that there's no financial trade-off in the returns, but then something showed up that I don't think anybody actually expected that it actually demonstrates lower downside risk. So you're not jeopardizing on the returns and you're actually seeing less volatility in the underlying funds. And I think we could probably talk about maybe why that shows up, but it sounds great in the sense that I can get same returns, lower risk, and my money can be making an impact the way that it positively should be.

Justin Dyer (11:03): Right. And so I'll touch on the risks side of things. And logically, it kind of actually makes sense if you start to take a step back where companies behaving badly, let's just broadly say that, right? Within ES and/or G, right? There's a cost to that conceptually, right? If a company has really, really poor governance, that's going to catch up with them at some point in time, right? And so there're riskier companies and capital or markets are kind of waking up to that, if you will. You could make some arguments around the environmental side of things and how you truly define it and measure it. And to Brandon's point, we're getting a lot better at that. And then in terms of how we implement this concept, I wanted to touch on that a little bit, and that is we're able to do it nowadays by tilting portfolios but still really broadly diversifying across the marketplace, right? We're not taking crazy concentrated risk in solar companies, as an example, if we're doing this within portfolios. And there's concentration risk there, and there's risk inherent in that. And we don't generally subscribe to that within a portfolio construction philosophy, right? So we're able to take broad based exposure, get that good diversification benefits around the world, but then look at companies that are doing things in a better fashion and favor them within the portfolios versus those that are not doing it. So it's a really nice blend of that general philosophy of staying invested, keeping exposure to global asset classes, but doing so with this lens or filter/tilt to these better business practices basically.

Erik Averill (12:56): Yeah. And I think one of the things that strikes me as we're having this conversation, it actually is very much undergirded by the way that we talk about, should you invest in Bitcoin or should you invest in Tesla, or should you invest in real estate, or private equity and venture capital? It all starts back with you of who you are as a client. I think one of the things that we say is it's totally irresponsible for us to give you financial advice or tell you what to invest in if we don't actually have a relationship with you, we don't understand what are your values? What are your priorities? What are the risks that you're willing to take? And because it's all about creating a customized, personalized plan so that we're putting the best investment strategy that's going to align with who you are and what you want to achieve. And unfortunately, I think a lot of times we stop that conversation at, okay, based off that this is how much stocks you should have, and this is how much bonds you should have, and this is how much cash or maybe alternatives, that we don't take that step further to say, okay, let's actually talk about those companies. Let's talk about, do you care where your dollars show up at the end result? And we've seen some incredible movements in the power of humanity when we stand up and push things aside. It's awareness of human trafficking month right now, right? We've seen collectively that we agree as humanity these are not good practices, child labor laws and these types of things. And this is where we get to take that step further and say, as we deploy capital, you actually get to vote with your dollars. And we hear this. So we go to Whole Foods and we buy organic food. It's no different with your investments. And so I encourage you to sit down with your certified financial planner and your team and ask the hard questions and say, "Are we just going after some arbitrary number or are we actually having an intent and a purpose of how we're deploying my family's capital?"

Brandon Averill (14:56): Yeah. Erik, I think that's a fantastic point. I think what we're seeing, right? Is the more and more people that are coming in the doors, this is something that's really, really becoming a want and a need from the marketplace. And I think this is evidenced by certainly how policies are being set. Everybody is becoming more and more aware. I was talking with another advisor at a really respected financial group here in Southern California. And they had mentioned that they hadn't had a new client in about a year that hadn't come in and wanted to make sure that their investment portfolio reflected their values. And it was just a really neat conversation to have. And so we learned quite a bit about implementing those conversations with our clients, but it's just, I think it's a really fun time to be in this business because you're allowed to implement solutions in the way that Justin was mentioning where your values are going to align with the higher expected returns that you deserve. And that just hasn't always been the case. So it's a fun topic.

Justin Dyer (16:02): Yeah. And I would just add kind of in closing on this is we're not just blindly doing this, right? We've kind of hit on it at time and time again. We're still seeking highest expected returns within this framework, right? We're able to tilt, we're able to influence the allocation of your capital to match your values. And that's really, really, really powerful, but we're always going to be looking at it, right? If for some reason the trend gets too expensive or it doesn't seem to work anymore, hey, we're going to have the conversation with clients and say, "Hey, this might not make sense anymore given what's going on in the marketplace." I just want people to understand that we're always looking at this. We're always measuring how it potentially impacts expected rates of return, your overall financial structure and your values, right? It's not this, hey, set it and forget it type approach. It's always in conjunction and in concert with each other.

Erik Averill (17:04): Yeah. And in closing, I think that that's so important that you have heard us speak about on this podcast for the last year is when we say it's capturing the returns you deserve, it's stuff that is evidence-based, that is backed by the smartest academic research that's available. And we've seen it be persistent. It's been pervasive. It's shown up over time that we can say, "Hey, with high confidence, this is the best situation you can be in." And so every week, it's the same way that we're encouraging you, imploring with you to not take your hard earned dollars and put them in things that academic evidence just flat out says is not going to work over the long-term. And so we apply that same rigor on every part of your investment portfolio. And we encourage you to make sure that your advisors are doing that for you. And you can access all this information over at awminsights.com. This is a massive topic that we could not do justice and distill down in a 10, 12 minute conversation. So please reach out, provide the questions. If you want to know exactly how we build out these portfolios, what are the resources to turn to learn more about it, we would love to hear from you. And until next time, stay humble, stay hungry, and always be a pro.