Explore the Thinking behind our investment approach

According to Fidelity, “ESG investing is far from a passing fad.”1 It won’t surprise you that we agree with this statement, but even we are (pleasantly) impressed by this year’s fund flows. While 2019 saw net inflows into U.S. sustainable funds of $21.4 billion – over four times higher than in any preceding year – by the end of Q3 2020 inflows had already reached $30.7 billion.2However, many advisors and asset owners still find themselves on the sidelines, unsure how to integrate sustainable investing into their businesses. Alleviating this confusion is why we focus so much of our attention on education. And, why we were grateful to be asked to share our experiences in Fidelity’s recent whitepaper, “ESG Investing: An Advisor’s Guide to Strategies, Paths, and Approaches,” which provides practical tips to help financial professionals navigate their own, authentic path.The sustainable investing landscape has evolved so much in the last decade. From the evolution and increased adoption of standards and protocols to the propagation of new data sets, there are more ways to create an ESG portfolio than ever, and this is unlikely to slow down. So, knowing where to start to diligence the universe is a big task in and of itself.Fidelity suggests getting philosophical as a first step and poses these questions2:Why do you want to offer ESG investing as a firm, and what goals will it achieve?Do you want to add an offering to stay relevant to evolving investor needs?How does it align with your firm’s existing philosophy and approach?How will you define success with respect to your firm’s ESG strategy?These may seem obvious but, given the myriad of exciting ways to implement ESG investing, asking the right questions at the outset will help ensure strategic alignment. We also recommend ensuring everyone on your team is using common definitions of all terms. While “ESG,” “sustainable investing,” “impact investing,” and “socially responsible investing” are often used interchangeably, even small nuances in how each person understands these terms could result in challenges when moving to implementation.We define ESG as the GPS of Investing® and consider it a foundational data set upon which all our sustainable investing portfolios are built. It is both connected to, but can be distinguishable from, values-based investing and impact investing.Once you’re clear on your internal positioning, subsequent decisions that determine your approach should be easier to resolve. Fidelity suggests the following questions2 to help clarify how you will create your offerings:Where does your firm see itself on the ESG spectrum: Will you outsource ESG investing, use a do-it yourself approach, or help investors make a direct impact?What resources will you need to be successful? (Presumably, you will need more resources and expertise if you are not working with a third party.)Are you willing to hire more staff, train and educate them differently, buy new data sources, etc.?What is your time frame for launching even a “minimum viable product” ESG offering?How will you measure success?When you’ve clarified your philosophy and laid out your plan, communicating to clients takes center stage. As Jeff Gitterman shares in Fidelity’s paper, it’s important to understand why and how ESG investing may resonate with your clients, as well as articulating why it resonates with you. Discussing these topics can be a great way to connect with your clients and bring new prospects into your firm.

Despite an increasingly polarized political landscape, one area where there is bipartisan support for governmental intervention is climate change. A Pew Research survey in June of this year found that “a majority of U.S. adults want the government to play a larger role in addressing climate change”, with around two-thirds saying that “the federal government is doing too little to reduce the effects.” Unsurprisingly, given the proliferation of wildfires, hurricanes, drought, extreme heat, and other impacts, most Americans “continue to say they see the effects of climate change in their own communities.” For those actively focused on climate change, the last few years have been devastating when it comes to U.S. climate policy. Pulling out of the Paris Agreement and the rolling back of regulations have put the country further and further behind the progressive efforts of other regions. However, 2020 has also brought some glimmers of hope, one being a report published by the Market Risk Subcommittee of the Market Risk Advisory Committee (MRAC) of the Commodity Futures Trading Commission (CFTC) in September. The CFTC, which regulates the U.S. derivatives market, was not the most obvious messenger of the seminal work, Managing Climate Risk in the U.S. Financial System. Jeff Gitterman recently interviewed Bob Litterman, founding partner and Risk Committee Chairman of Kepos Capital, and chair of the CFTC’s subcommittee, to discuss the process. The subcommittee, a diverse group of participants ranging from agricultural and energy companies, NGOs, academics, and financial services firms, “voted unanimously 34-0 to adopt the report” and its 53 recommendations. This bipartisan consensus was achieved by focusing on where they could secure agreement among the participants. One of the primary conclusions is the simple statement that climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.” As a result, the most critical recommendation is that a price on carbon that is “fair, economy-wide, and effective in reducing emissions consistent with the Paris Agreement” is the “single most important step to manage climate risk and drive the appropriate allocation of capital.” Litterman notes that carbon pricing is “an inevitable policy response” to climate risk and that once appropriate incentives are established, the financial system will go into action. However, the report did not go as far as to suggest what that price should be, as this, and the mechanics of the policy, are the role of Congress. As a risk manager, Litterman advises that “time is a scarce resource” when you’re managing risk. The longer the U.S. waits to take decisive action, the more likely it is that we face a “disorderly transition” and sudden devaluation of assets. While many would prefer climate action to be driven solely by an intrinsic motivation to steward the Earth, progress to date suggests this will never happen. We agree with Litterman that changing behavior requires changing incentives – whether those be tax credits, regulations, subsidies, or other policy levers – and we are well beyond the time to act. We hope that the work of the CFTC’s subcommittee along with positive signals from the incoming Biden Administration will incentivize climate action underpinned by an exciting new era of U.S. innovation.

Over the last several years, ESG data has become increasingly rich and sophisticated. However, the “S” has presented more challenges in terms of data as “social principles have gotten far less representation in portfolios than environmental and governance issues.” This is because the “S” covers such a wide range of topics and because broader sustainability reporting, although progressing at speed, has not yet resulted in commonly adopted standards and best practices. However, “[t]his dynamic is changing, as asset managers, advisors, and investors demand information and flex their shareholder muscle, and as more mutual funds find effective ways to sharpen a social focus.” Read more in Barron’s to learn how Jeff Gitterman and Adam Bernstein see the change in the market when it comes to the “S” in ESG, and which mutual fund families and products are leading the way.

Evidence of climate change has been growing for decades, but as physical risks manifest with more frequency and potency, the markets are fast waking up to a vastly different future. Climate change will affect all regions, sectors, and industries, albeit to varying degrees and in diverse ways. “Yet, it is still not widely considered to be a major imminent threat to portfolio success.” We foresee that climate change effects will be increasingly part of valuations as new and better data sets are created, and as market participants deepen their understanding of climate risks, specifically physical risk, and transition risk. “Advisors need to understand how climate change may affect the investments they offer to their clients, as well as how climate change may impact other aspects of a client’s overall net worth.” Read more in Forbes for tips on how to “engage with…providers and other experts to better protect client capital.”

If you are a client who lives in the state of New York and purchased a life insurance or annuity contract, on March 20, 2020, the New York State Department of Financial Services (DFS) adopted an emergency regulation that provides relief to certain policyholders who can demonstrate financial hardship as a result of COVID-19. For more information, please click here.

There’s an old story about a Zen master who goes to a town. All the villagers run out to meet him because they want to become enlightened. The Zen master says, “If you can focus your complete and undivided attention for 24 hours, you will find enlightenment.” You can probably guess how many people were enlightened by the end of the day. Webster’s New World dictionary defines attention as “a mental concentration or readiness,” but this does little to convey the power of attention as it relates to our daily lives. We talk about paying attention. We need attention. Someone popular is at the center of attention; someone needy is always trying to get your attention. Attention, as intangible as it may seem, is the currency of countless transactions we engage in every day. Why is attention so powerful? Because what we put our attention on is where we direct our energy in all its forms—including our time, creativity, and money. More simply put, where attention goes, energy flows. And yet there are so many things vying for our attention that most of us have lost the ability to control where it goes, and so it’s no wonder we often feel so scattered and fragmented throughout the day. Sometimes I ask people in the seminars I offer to give me an image that describes their mind. “A six-lane highway, or an endless to-do list” are common types of responses. Other images people come up with include an orchestra without a conductor, a jigsaw puzzle with only some pieces joined together, and a traffic jam at a busy intersection. Almost without exception, people come up with images that represent chaos, confusion, fragmentation, complexity and lack of integration. The good news is that we can regain control over our attention, and not just so that we will feel better at the end of the day. In essence, this is one of the main purposes of meditation. When I use the term meditation, I don’t just mean sitting cross-legged on a cushion, but rather participating in any deliberate activity that teaches us to disengage from a compulsive relationship to our stream of thoughts. There are numerous books that have been written over the years on meditation, how to disengage from the thinking mind or, more simply put, how to stop listening to the voice inside our head. Although traditional forms of sitting meditation are probably the most direct and effective ways to practice focusing our attention, there are many other methods, and given that we are all unique, each of us should find what works best for us. For some people, it will be a meditation cushion. For others, it might be a nature walk, kickboxing class, jogging, gardening, reading a book, or perhaps doing a jigsaw puzzle. What we do is not nearly as important as how and why. Here are two simple exercises you can try if you would like. These exercises are forms of meditation, and are very simple, but if practiced with sincerity over a period of time can have dramatic results: 1. Body Scan. Sit somewhere quiet, close your eyes, and focus all of your awareness on your body. Slowly “scan” your attention from your head down to your feet, and see if you become aware of any areas of tension or discomfort. Usually, I find that there’s some particular area that is storing tension—a knot between my shoulder blades or in the pit of my stomach. As soon as I locate it, I can’t believe I hadn’t noticed it before. Part of my body is crying out for my attention, but I’ve been too distracted to hear. Try this exercise yourself, and notice also how much energy is released when you give your body the attention it wants and learn to release the areas of tension. Just try focusing on the area and imagine yourself breathing into the tension and releasing it. 2. Hold Focus! Here’s a very basic exercise for paying attention. Choose a particular object close to you. It might be a picture on the wall, a candle flame, a coffee mug, or even your own hand. Now put your attention on that object. Don’t just stare at it vacantly, but try to direct all of your awareness toward it. Notice the color, texture, size, and how it makes you feel. Now see how long you can hold that focus before something distracts you. The benefit of learning how to disengage our attention from our thought stream is that we can then apply our minds more readily towards the things that are most important to us, such as accomplishing tasks, connecting with other people, and/or discovering our true life’s purpose. Meditation helps to create a space within us—an opening that allows more energy to flow into us. In this seemingly paradoxical way, having more space in our mind allows us to be much more available to ourselves and to those around us.