Explore the Thinking behind our investment approach

The white paper for Investments and Wealth Monitor by Jeff Gitterman and author/consultant Paul Ellis titled “ESG Data Drives Demand for Sustainable and Impact Investing” was recently released.

It’s time for advisors to “get off the sidelines” when it comes to ESG investing. The world has changed. New data sets are needed to understand how investments may perform over the long-term. While myths persist with respect to performance, ESG is not the socially responsible investing of years ago. In this Barron’s piece, Jeff explains why “we use the global positioning system analogy: 25 years ago, you took a road trip, you used a map. Today, you get in your car, and you turn on your GPS, and it’s a three-dimensional view of the trip. The 10-K is very one-dimensional. It gives you stale data of the company you’re investing in. You need to wait until the next quarter to get new data.” ESG topics and data provide additional insights into corporate performance that just are not available via traditional financial metrics. Advisors who are still not incorporating ESG into their practices are missing out on both potential performance and risk mitigation, as well as an increasingly large client base of individual investors who want to know how their investments are contributing to a better world, or not.

The earth aware days have arrived. April 22, 2020 will mark the 50th anniversary of Earth Day. Just as active managers use shareholder resolutions to address corporate governance, social, and environmental change, on the other side of the trade are individuals driving the demand of goods and services. Understanding your personal metrics and carbon footprint amidst this symbiotic relationship is an empowered act. I grew up in Texas, and as a tomboy, spent much of my energy in nature catching horntoads and building tumbleweed forts. My wildcatter grandfather, “Big Jim,” as he was known, was no stranger to risk-taking and betting on shale deposits. He navigated through multiple boom and bust cycles in the oil business during his 50-year career, including OPEC disruptions and the Texas Recession of the 80s. How I went from a Texas wildcatter family to a climate advocate frames the value of advocacy and impact as a mechanism to direct capital towards a regenerative economy. In college, my interest in the natural world grew with the discovery of wind and solar energy, and I will never forget my first advocacy engagement with my grandfather. He stood 6’4, listened more than he talked, and was what you would call “a man’s man” when it came to business. One day, over breakfast, I proposed he earmark a portion of operating profits towards research and development of alternative energy, to which I received thunderous laughter in response. He replied that building was cheap, energy was cheap, and alternatives were not only impractical, but start-up costs for wind and solar prohibited it from becoming a viable industry any time soon. Regardless, I was undeterred and my desire to birth a low carbon (CO₂) revolution continued to grow. After college, I established a career in financial services, seeing it as a great sector for women to make a difference. In 2008, when WT Crude topped $149 a barrel, I again reached out to my grandfather. “What about now?” After a pause and no laughter, he said that while plenty of oil is left, all the easy oil is up, and so alternative energy now made sense. Just as my grandfather never envisioned Crude topping $149 a barrel, I don’t imagine any of us anticipated the recent FRSB Economic Letter¹ related to climate change or the recent Mercer report: Investing in a Time of Climate Change – The Sequel, which called climate change the existential threat of our time: “The last time the global mean surface temperature was comparable to today was more than 100,000 years ago. The last time CO2 concentrations were as high as today (over 400 ppm) was three to four million years ago.”² Earth Day underscores the importance of personal carbon examination for all of us, and here are three easy things we can do right now to better understand our carbon footprint and make strides towards a net zero world: Measure: Establishing our baseline Our carbon footprint describes the amount of carbon that is emitted as a result of our choices. This footprint is influenced by the mix of utilities in your area. For example, the State of Washington, where I reside, is a leader in the country deriving 44% of energy from renewable sources, second only to Oregon.ᶾ The amount of hydroelectric energy produced at the Grand Coulee Dam on the Columbia River produces electricity for 2.3 million households per year, accounting for 25% of U.S. production.⁴ To learn more about your state, click here. ⁵ There are several other pieces of personal information that can also be helpful to know: Home: A recent utility bill Transportation: Vehicle type, MPG and mileage/any transit usage/ flight mileage Food Consumption by category: Breads/dairy/fruits/meat/vegetables Services: Average monthly spending (i.e. healthcare/education/entertainment) Goods: Average monthly spending (i.e. Amazon Prime /Costco/Home Depot/Staples) Establishing our carbon footprint helps to form awareness. Any number of websites offer free carbon footprint calculators and comparison tools alongside educational resources. Type “climate footprint” or “carbon footprint” into any search engine and try a couple out. Here are a few of my favorites: CoolClimate Network – CoolClimate Calculator is research based out of UC Berkeley CarbonFootprint.com – UK-based free calculator with loads of tips and carbon credit offsets The Nature Conservancy – Arlington, VA-based charitable environmental organization Redirect: Knowledge is the gateway to reducing CO₂ emissions The average US resident creates 20 tons of CO₂ emissions annually, according to an MIT study. whether a person can live climate-neutral is a question of lifestyle choices and making improvements over time. Consider adopting these actions to reduce your footprint. Replacements naturally occur in the life of items around the house as daily habits shift. Save Energy: Retrofit your house, travel less, and use efficient vehicles and appliances. Clean Energy: Switch from gas and oil to electricity. Food: Eat less meat and dairy, waste less food. Buy locally, it is thousands of miles fresher. Goods: Employ a refuse-reduce-reuse-recycle mindset and buy locally produced goods. Offsets: Purchase Carbon Credits for remaining unavoidable emissions A carbon offset compensates for our emissions by funding an equivalent CO₂ savings elsewhere. It is important to remember that when we buy these offsets, we are paying someone to cut emissions so we can keep ours. To effectively address climate change, individuals, businesses, and government organizations must take responsible steps to curb CO₂ emissions as much as possible before seeking an offset solution for any remaining unavoidable emissions. When a balance is struck between emissions and offsets, one is said to achieve “carbon neutrality.” In accessing carbon credits today, most are verified by a third-party standard. The acronym VALID is loosely used as a guide. Projects must abide within the following parameters: Verifiable – The offset uses a robust audit process like Gold Standard or Kyoto Protocol. Additional – Would it occur anyway without the investment raised by selling offset credits? Leakage avoidance – This means the emissions are not moved elsewhere beyond the boundary. Impermanence –The project is sustainable; the reductions are not reversible. Double-counting – Carbon reductions are claimed only once, not counted multiple times. A few other tips to keep in mind when buying carbon offsets: Rather than buying trees and promised emission cuts which are often thin on independent research, consider giving to Gold Standard-approved wind or solar energy projects instead. You can find Gold Standard VER projects on the Gold Standard website and you can buy Gold Standard CERs directly through the UN’s platform. DIY carbon offsets related to educational projects are another interesting opportunity at Skeptical Science. Thirty years ago a proliferation of horntoads sparked my curiosity about the natural world. Today they are a threatened species bred in captivity.⁶ With the increase of drought- prone areas, our kids and grandchildren will inevitably find more tumbleweeds for building forts. Given the consensus of expert, peer-reviewed scientific literature as undisputed, the easy days of “climate” are over. What lies ahead requires planetary cooperation to shift towards a low-carbon economy. What are you doing with the next 365 days of your life on planet earth? Here’s to making it count.

The story surrounding California Public Utility Pacific Gas and Electric (NYSE: PCG) is a case study of the nuanced implications of different sustainable investing strategies. PG&E filed for bankruptcy after estimating a $30 billion liability from two years of wildfires, becoming one of the largest utility bankruptcies in history, and one of the first to be tied directly to climate change. 1 Despite investigators having already determined PG&E’s equipment to be liable for at least 17 major wildfires in 2017, and disclosing climate related risks at length in the financial disclosures and annual reports, the traditional rating agencies, S&P, Moody’s, and Fitch all rated PCG as an investment grade company through the first half of 2018. 2,3 Why didn’t markets price in these risks? To some degree they did, by demanding higher premiums for greater risk in lending, and through tools like insurance and credit-default swaps; however, markets don’t always price every kind of risk correctly, and research suggests that this is often the case with issues related to climate change. A recent Bloomberg article by Nir Kaissar titled “PG&E Exposes the Pitfalls in Virtuous Investing” builds a case against ESG investing’s efficacy to mitigate risk when relying on overall scores from ESG databases. Kaissar cites that PG&E’s environmental, social, and governance scores from several major data providers, such as RobecoSAM and Sustainalytics, were above average in 2018.1 In reality, Sustainalytics rated PG&E 71 out of 100, designating it as an average performer, but if you looked deeper than their top line ESG score, the data told a different story. 4 Did ESG Funds Hold PG&E? The stringency of ESG criteria varies widely among fund managers. Some funds only buy stocks with overall ESG scores in the top 20% of their industry, while others will buy a stock as long as the overall ESG score is above the industry average. In the case of PG&E, Sustainalytics’ score of average overall performance may have been enough to trigger some passive ESG funds to buy the stock. Out of 2,008 ESG strategies globally, analysis from Morningstar Direct shows that only 75 funds held PG&E. Meaning that only 3.7% of ESG funds held PG&E. 4 While this is a low percentage, Kaissar’s article does propose an interesting question: if ESG investing is supposed to mitigate event-based risk, then why were any ESG funds invested in PG&E? The answer is materiality. Investors focus on different ESG data points as material at the sector and industry level. Staying with the example of Sustainalytics data, under their newer risk rating framework, PG&E scored dead last out of its entire universe of 2,952 companies when it comes to product governance, a category that encompasses quality and safety events. This led Sustainalytics to mark PG&E as “severely risky” as this was a data point that it had deemed very important to its business model. The current state of ESG data is far from perfect, but the data made it clear to investors that PG&E was not operating safely.4 What types of ESG funds held PG&E? This can be answered by investigating the diversity of ESG fund strategies, such as passive ESG ETFs, ESG-integrated funds, and/or thematic funds, commonly based on the United Nations Sustainable Development Goals (SDGs). Let’s start by defining passive ESG ETFs and index fund strategies, as these made up 52% of the ESG funds in the sample that were holding PG&E stock. Passive ESG funds embody the concept Kaissar described, they often buy stocks based on the overall ESG score that their chosen database provider assigns to each company. 4 Funds that looked through a more thematic lens for impact picked up PG&E for other reasons. In contrast to ESG ETFs, index funds, and ESG-integrated funds, thematic funds designate a target theme that takes precedence over ESG data. Therefore, a thematic fund can hold stock in a company that drives revenue through promoting a theme, such as one of the United Nations Sustainable Development Goals, even if the ESG score for that company is low. In terms of thematic funds, PG&E is an interesting company, because while its safety score is low, it plays a large role in facilitating California’s transition to a low carbon economy. California’s Renewable Portfolio Standard Law requires utilities such as PG&E to supply 60% of power from renewable sources by 2030. Given PG&E’s vast domain, serving roughly 6 million Northern California residents, it is one of the country’s most renewable utilities. Thus, a fund that is mandated to focus on United Nations Sustainable Development Goal #7, “Affordable and Clean Energy,” may hold stock in a utility company such as PG&E due to its role in the renewable energy sector, and regardless of its low ESG safety score. 2 “Additionally, PG&E’s recently-published 187-page 2018 Corporate Responsibility and Sustainability Report. Sustainability is explicitly called out in the company’s mission, vision, and values. Board committees are in place; ESG materiality assessment has been done, ESG is incorporated in the company’s financial incentive plan, and the organization has a dedicated Chief Sustainability Officer, along with an outside advisory group. They also have $34.5B worth of renewable energy contracts, which is more than the average utility.” 3 Conclusion In our view, thorough ESG-integration goes much deeper than selecting stocks based on their overall average ESG ratings. A more active strategy merges financial analysis with granular aspects of ESG data to identify specific areas of risk within a firm. Gitterman Wealth Management tends to stay away from passive ESG investing, instead opting for human analysis and active management through ESG-integrated investing. This is because many of the ETFs that have come to market do not have an institutional quality construction methodology for all the reasons discussed above. While the jury is still out on which ESG analysis type is best, the ESG-integrated investing approach we utilize certainly helps to build a case for its validity, as our investors were relieved not to be holding PG&E. If you have any questions about our ESG analysis or how we can help you manage your sustainable investments, please feel free to contact us for more information.

The current market downturn and volatility we are experiencing is obviously a big change from the behavior of the market over the past 10 years. In my 28 years of experience as a financial advisor, I’ve found that the most important thing to do during a down market cycle is to call my clients before they call me. The reality is that more clients leave their advisor due to lack of communication and service, as opposed to market performance and return. Calling your clients first lets them know that you are not hiding or panicking. There are 5 things that I have highly recommended to all of the advisors in my firm as we navigate the ups and downs of the current market cycle: Take a deep breath. It is vital that you do not panic during challenging market cycles. Fear is contagious, but so is confidence, and whatever you portray to your clients is going to have a great effect on them. Pick up the phone and call your clients before they call you. Assure them that market cycles are normal. While every client might hope the market never drops, every advisor knows that that the market does not continually go up forever, but over the long term, the trajectory of the market is upward. Review your client’s risk tolerance in light of the current volatility. For many clients, risk tolerance in a bull market differs greatly to risk tolerance in a bear market. Rebalance their portfolios when appropriate. Hopefully, the portfolios that you’ve designed were appropriate for your client’s risk tolerance when the markets were going up, and are still appropriate now given the market volatility that is currently taking place. If you would like to learn more about our ESG (Environmental, Social, and Governance) focused portfolio strategies, and/or would like a complimentary analysis of your current strategies, please feel free to contact Penelope Jackson at pjackson@GittermanWealth.com or 828-707-2079.

We are very proud to announce that Gitterman Wealth Management co-founding partner Jeff Gitterman has been named RIA “Thought Leader of the Year” at the 2018 WealthManagement.com awards. The award was given on Thursday, September 13th, at a black tie gala event at the Ziegfeld Theater in NYC. Now in its fourth year, WealthManagement.com hosts the only awards program to honor outstanding achievements by companies and organizations that support financial advisor success. This year, judges presented 67 awards to 59 companies from a pool of 156 finalists. A record number of nominations were submitted this year—nearly 600 entries were received from 156 companies. Jeff was recognized for his innovative work in the Sustainable, Impact, and ESG Investing arena, which has included the creation of the firm’s SMART (Sustainability Metrics Applied to Risk Tolerance)® Investing Services for Individuals and Financial Professionals, as well as for his role as the lead host of the 2016 and 2017 NYC Sustainable Investing Conferences, and the 2018 Sustainable Investing Conference at the United Nations. For more information about our work in the ESG / Impact arena, please feel free to take a look at this recent interview with Asset TV, and/or this recent interview with well.org.