3 Strategies for Sustainable Investing

strategies for sustainable investing

As climate change disasters such as wildfires, floods, and intensifying storms seem to be increasingly common, many people are looking for a way to encourage companies to enact positive change, while casting a “vote” against the worst offenders. Enter the world of sustainable investing options, which have steadily grown in popularity over the last decade.

According to Barron’s, U.S. ESG mutual fund and ETF assets have soared to a record $400 billion in 2021, up 33% from the year before. Despite this strong growth, the overall market share is still small, at just 1.4% of total U.S. mutual fund and ETF assets. 

With the huge market potential, it’s hard to know where to start. Here are three things we have incorporated in building a sustainable investment option for Uplevel clients. 

 

Prioritize and Focus  

There is no one true, universal definition of ethical investing. This is why it can be so confusing to understand and interpret. There are still many gray areas. 

Environmental, Social and Governance (ESG) investing is a framework you can use within ethical investing to evaluate investments and put your money to work with companies that strive to make the world a better place. In addition to financial factors, ESG investing also considers non-financial factors to measure an investment or company’s sustainability.

Here are some of the things each category may incorporate:

 

Environmental

Social

Governance

  • Carbon emissions
  • Air and water pollution
  • Deforestation
  • Green energy initiatives
  • Waste management
  • Water usage
  • Company gender parity
  • Diversity and inclusion efforts
  • Company sexual harassment policies
  • Human rights and fair labor practices
  • Diversity of board members
  • Executive pay
  • Internal corruption
  • Lobbying
  • Transparent accounting practices

ESG investing relies on independent ratings that assess a company’s behavior and policies in these various categories. Currently, there is no standardized approach to these measurements. ESG metrics are also not part of a company’s mandatory financial reporting, although many companies are voluntarily making disclosures or creating standalone sustainability reports. 

Designing a sustainable portfolio for Uplevel clients starts with values. We let our clients, prospective clients and combined 35+ years of experience guide us in defining the sustainable problem we are trying to solve: Climate change. Without this focus, it’s hard to have transparent reporting and results. 

“If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution.” Likely said by a Yale professor but often attributed to Einstein. 

Given our location in Portland, Oregon, it’s common to have clients who are interested in a sustainable way to invest. What we like about focusing within the “E” bucket and climate change specifically, is that we can rely on science to identify and pinpoint the primary contributor to climate change–greenhouse gas emissions. Also, the data on greenhouse gas emissions are widely available for public companies. 

 

Look Under the Hood  

It’s imperative to look beyond ESG branding when evaluating the viability and quality of various funds. Worth mentioning again is the absence of a universally accepted definition of sustainable investing, which gives way to broad interpretations and approaches to ESG investing. The components of ESG considered in an investment strategy, variables by which they are measured, and the method of incorporation can lead to a range of investment outcomes. 

Put another way, a company’s ESG rating is very subjective and there is often a lack of focus on what’s actually being measured. Even the ratings providers themselves can’t seem to agree with one another. The OECD assessed different rating providers and found ESG scores to vary widely.

From the graph below, we can see the variability of ratings. Take Johnson & Johnson, which is given a score in the low 40s by one provider and 90 by another. Not only is this significant difference hard to decipher, but it  raises important questions about reliance on any one rating and can lead investors to wonder if they are having the impact they think they are.  


 

 

 

 

 

 

 

 

 

Source: The OECD

 

Rather than rely on generic, and heavily opinion-based ESG ratings for building our clients’ sustainable portfolios, we turn instead to assessing the availability, quality and objectivity of data and transparent reporting. 

In our analysis, we found Dimensional Fund Advisors’ (DFA) approach to be the most robust. Their sustainability strategies are designed to have a clear focus on climate change. 

The process begins by screening out the worst emitters of greenhouse gasses–including “in the air” and “in the ground” emissions–from the portfolio. DFA utilizes carbon emissions data and scales it by a company’s sales to determine how much carbon is emitted to produce a dollar of sales. This carbon emissions intensity represents 85% of the score. 

DFA is mindful to not exclude certain sectors, as they all need to decarbonize. Instead, they go sector by sector and overweight the companies that are the most sustainable, and underweight the companies that are the least. This is important, as removing sectors entirely is shortsided. It takes the entire economy to run the world, and removing components would decrease the diversity of the fund.

Eventually, kicking out sectors could also leave you with an overweight of large cap technology companies. Their practices are to exclude or reweight, but not concentrate. The remaining 15% of the score screens out companies for other considerations, including palm oil, child labor, factory farming, etc. 

 

Set and Manage Expectations 

While it’s important to note there currently isn’t a known or evidenced based return premium for investing in a sustainable fashion, it also doesn’t need to cause underperformance. The evidence shows we can still own high-quality investments with returns similar to a non-ESG fund, provided we do it right and stick to sound investment principles like diversification, lost cost, low turnover, etc. 

Over 13 years, this type of sustainable approach has had very similar performance to a more traditional DFA portfolio. As the data provided by DFA below demonstrates, returns of their US Sustainability Core 1 Portfolio have been remarkably similar to their “traditional” US Core Equity 1 Portfolio going back to 2008, illustrating that investing sustainably doesn’t have to mean sacrificing long-term performance. 

Source: Dimensional Fund Advisors

We also make sure clients understand that it’s imperfect to compare “traditional” portfolio performance to “sustainable” investment performance by using the same indices as benchmarks. By intentionally screening out the worst offenders from our sustainable portfolio, there will be periods of time when the portfolio deviates from the market by design.  

For example, in the first quarter of 2022, the energy sector did remarkably well. Oil prices spiked to record highs due to supply chain issues and geopolitical events. Exxon Mobil Corp stock, the biggest public energy company in the world, was up over 30% year to date. At the same time, big tech companies were approaching a market correction. Given the underweight of energy companies relative to technology companies in an Uplevel sustainable portfolio, it has faced some headwinds so far this year. 

Regardless, we believe long-term sustainable investors have many reasons to be optimistic about the future. Seven out of the ten largest pension funds in the world invest in sustainable funds, which will continue to pressure big corporations to make positive changes.

Additionally, the Securities and Exchange Commission just proposed new rule changes requiring companies to report their greenhouse gas emissions and details of how climate change is affecting their businesses. We’re confident markets will work better with more standardized information, and the new SEC disclosure should help drive better outcomes. 

While it’s not always easy, our message remains consistent—much of investing requires taking the good with the bad. Remaining focused and disciplined, regardless of ESG strategy, is what leads towards future rewards in the long run. 

Do you need help understanding sustainable investment options? Reach out to us at Upevel. We’re here to help. 

 

3 Ways to Uplevel Your College Planning

THERE’S NO SINGLE, right way to legally crack the college admissions and financial aid systems. It’s up to teenagers and their parents to do the necessary work.

Still, it helps to have a tour guide—which is what you get with The Price You Pay for College, the new book from New York Times financial journalist Ron Lieber. Lieber’s book discusses why college costs so much, digs into the allure of elite schools, uncovers hacks that may not really be hacks, and talks about how to plan and pay for college. Here are three key ideas that I took away from the book:

1. Families need to talk. Teenagers and their parents should discuss money, core values and priorities. That’ll help students identify what they want from their college experience.

Sprinkled throughout Lieber’s book are thought-provoking questions. For example, what’s your definition of success? What is college for? Is it about learning? Building connections? A means to a job? If a college education is a means to a job, at what price? What can the family afford? Where will the necessary money come from?

If the value of a college education to your family is a job, you might wonder just how important an elite school is for obtaining a more coveted position. Lieber’s research suggests it’s not as critical as you may imagine, with alumni from top schools obtaining between 13% and 58% of prestigious jobs, depending on the occupation. What’s apparent is the benefit of the doubt accorded to applicants who have the most selective schools on their resume. Certain gatekeepers have a vested interest in continually building and promoting their own networks, which can often start with their alma mater.

Lieber doesn’t pretend to have a formula that calculates the actual value of any given college experience. Instead, he encourages us to reflect on how our feelings influence such an important and expensive decision. In his decades of reporting, Lieber “has never come across a consumer decision that inspires more confusion and emotion than this one.”

2. The devil is in the details. Once you outline what you’re looking for from the college experience, start digging for data. Lieber’s book offers resources to help uncover the data that does exist. One problem: The numbers aren’t standardized across schools and aren’t always easy to come by or interpret. For example, mental health is becoming more top of mind for many families, with nearly a quarter of new undergraduates now classified as disabled, largely due to a mental health diagnosis such as depression or anxiety. Campus resources may be very important to these families, so it’s worth determining how long it takes to schedule an appointment for counseling, who the providers are and what type of support organizations are available.

The clearer you are on what success means for your child and family, and what value a college offers, the more you can cut through the clutter and eliminate details that aren’t a priority. In a decision that’s anything but easy, the more noise you can eliminate, the better.

3. The game has changed. It’s probably not that surprising—and yet still alarming—to learn that consultants play a big role behind the scenes. They help colleges to find students, to determine what to charge them and to prod families to follow through. Discounts to attract students are often offered in the form of merit aid.

It’s tough to understand the financial aid system, let alone predict how much merit aid you’ll receive—assuming, of course, you get in. Merit aid doesn’t consider your financial situation, like need-based financial aid does, so it’s entirely possible for wealthier families to be offered discounts, provided the student has what the college is looking for. Colleges use algorithms to predict what kind of discount is needed to get a particular student to say “yes.” This is all guided by consultants, who “help schools leverage information about your family to optimize your discount,” Lieber writes.

He gives us valuable hints about how to uncover more about merit aid than the basic information listed on a school’s website, and it starts with a school’s Common Data Set. The easiest way to find this information is by Googling “common data set” and a college’s name. Among other items, look for the number of people who received merit aid, despite no financial need, and the range of test scores for admitted students. If your student’s scores rank high for a particular college, there’s a greater chance of merit aid. Schools claim their award-giving process is based on more than test scores and other data, and it likely is. Still, checking the numbers gives families a shot at determining how a college’s algorithm is likely to rank their prospective student.

Want to talk more about your specific situation? Reach out to us today.

This article first appeared in HumbleDollar.

 

 

Did You Receive a Child Tax Credit in July? Here’s What You Need to Know

You may have noticed an unexpected deposit in your bank account (or check in your mailbox) last month from the Federal Government — the first installment of six advance Child Tax Credit payments to come. Congress increased the credit from its previous level of $2,000 per child to a maximum of $3,600 per child. 

Key takeaways of the Child Tax Credit:

  • The increased Child Tax Credit amount is only for 2021 and advance payments will only be made through December, so be prepared for deposits to stop January 2022.
  • The amount of Child Tax Credit your family receives is based on the number of children you have, their ages, and your income.
  • Be aware that the Child Tax Credit may impact your taxes when you file in 2022, potentially reducing your refund or increasing the amount of tax you owe. 

Tax credits for families with children are nothing new, but this year’s advance payments have some unique nuances. 

Families can expect to receive five more payments before the end of the year, which represent half of the estimated total credit owed. Any remaining credit will be determined once taxes are officially filed for 2021. Payments are being sent to the bank account on record with the IRS (where your refunds have been sent) or mailed if an account is not on file. 

 

How was my Child Tax Credit calculated?

The first consideration is a child’s age, with each child 5 and under eligible to receive a maximum tax credit of $3,600, and children ages 6-17 receiving up to $3,000. 

Here is how this breaks down:

  • A monthly payment could be as much as $300 for a child 5 and under ($3,600/2 = $1,800, split into 6 equal payments of $300) and/or
  • $250 for children ages 6-17 (same calculation using a $3,000 maximum credit).  

 

Why was the Child Tax Credit I received so much smaller?

The Child Tax Credit is subject to income phase outs, meaning higher income households could receive reduced payments or none at all. The estimated payments are based on household income reported on the most recently filed tax return. 

There are two levels of phase outs based on income–the first can reduce 2021’s “special” one-time Child Tax Credit and the second can reduce the regular $2,000 Child Tax Credit. The phase outs can be confusing, so here’s a breakdown:

 

Filing Status MAGI Subject to Phase Out 1 (additional 2021 credit) MAGI Subject to Phase Out 2 (regular $2k credit)
Single $75,000 $200,000
Married $150,000 $400,000
Head of Household $112,500 $200,000

 

Each phase out level reduces the Child Tax Credit by $50 for each $1,000 by which income exceeds the threshold for a given tax filing status. For example, a married couple earning $250,000 would probably not receive any additional Child Tax Credit for 2021 but would still qualify for the regular $2,000 credit, receiving a portion of it through upfront payments.

 

Is the Child Tax Credit going to impact my taxes?

Because the Child Tax Credit is an estimated upfront payment, you may be in for a surprise when it comes time to actually file your 2021 tax return. 

If this year’s income ends up higher than 2020’s, you could end up paying back some or all of the credit when it comes time to file, resulting in a smaller refund than expected or even owing money to the IRS. 

The converse also holds true. If you experience a drop in income this year but receive a smaller Child Tax Credit based on 2020’s higher income, you’ll receive a larger credit amount when tax time rolls around.

For many families, income levels for the remainder of the year may still be unclear. If you’re concerned about potentially exceeding last year’s levels and want to minimize the risk of a surprise at tax time, we recommend opting out of Child Tax Credit prepayments. 

To opt out, use the IRS’s Child Tax Credit Portal, which involves setting up an online account with the IRS and verifying your identity. Be prepared — the process requires uploading a copy of your driver’s license or passport and can be rather glitchy. Also, if you are married, both you and your spouse will need to unenroll from advance payments to shut off the tap completely. 

 

Help for Families

With nearly 1 in 7 children in the U.S. living in poverty, this year’s increased Child Tax Credit will be a lifeline for many struggling families. For those in a more fortunate position, having an understanding of how you might be impacted and the steps you can take to avoid a surprise at tax time is valuable. 

Want to talk more about your specific situation? Reach out to us today.